PROSPER MARKETPLACE, INC - FORM 10-Q - August 10, 2018

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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, 2018
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 (or for such shorter period that the registrant was required to file such reports), 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 (§232.405 of this chapter) 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, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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 6, 2018, there were 70,381,991 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.
 
 
 
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, and Prosper Healthcare Lending LLC (“PHL”), 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.


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, the 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 occur, 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, 2017 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 website at 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, 2018
 
December 31, 2017
Assets
 

 
 

Cash and Cash Equivalents
$
58,652

 
$
45,795

Restricted Cash
134,552

 
152,668

Available for Sale Investments, at Fair Value
34,841

 
53,147

Accounts Receivable
3,539

 
683

Loans Held for Sale, at Fair Value
116,817

 
49

Borrower Loans, at Fair Value
277,361

 
293,005

Property and Equipment, Net
16,081

 
18,136

Prepaid and Other Assets
7,776

 
7,796

Servicing Assets
15,644

 
14,711

Goodwill
36,368

 
36,368

Intangible Assets, Net
1,177

 
1,377

Total Assets
$
702,808

 
$
623,735

Liabilities, Convertible Preferred Stock and Stockholders' Deficit
 

 
 

Accounts Payable and Accrued Liabilities
$
14,652

 
$
11,942

Payable to Investors
112,580

 
132,432

Notes at Fair Value
277,425

 
293,948

Warehouse Line
103,553

 
—

Other Liabilities
13,718

 
12,669

Convertible Preferred Stock Warrant Liability
143,676

 
116,366

Total Liabilities
665,604

 
567,357

Commitments and Contingencies (see Note 17)


 


Convertible Preferred Stock – $0.01 par value; 444,760,848 shares authorized; 214,637,925 issued and outstanding as of June 30, 2018; and 444,760,848 shares authorized; 214,637,925 issued and outstanding as of December 31, 2017. Aggregate liquidation preference of $375,952 as of June 30, 2018 and December 31, 2017.
323,793

 
323,793

Stockholders' Deficit
 

 
 

Common Stock – $0.01 par value; 625,000,000 shares authorized; 71,317,926 shares issued, and 70,381,991 shares outstanding, as of June 30, 2018; 625,000,000 shares authorized; 71,226,934 shares issued, and 70,290,999 shares outstanding, as of December 31, 2017.
228

 
228

Additional Paid-In Capital
141,463

 
136,653

Less: Treasury Stock
(23,417
)
 
(23,417
)
Accumulated Deficit
(404,801
)
 
(380,806
)
Accumulated Other Comprehensive Loss
(62
)
 
(73
)
Total Stockholders' Deficit
(286,589
)
 
(267,415
)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit
$
702,808

 
$
623,735

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,
 
2018
 
2017
 
2018
 
2017
Revenues
 

 
 

 
 
 
 
Operating Revenues
 

 
 

 
 
 
 
Transaction Fees, Net
$
37,988

 
$
35,423

 
$
69,343

 
$
62,291

Servicing Fees, Net
7,487

 
6,793

 
14,671

 
12,947

Gain (Loss) on Sale of Borrower Loans
4,163

 
3,803

 
7,512

 
3,485

Fair Value of Warrants Vested on Sale of Borrower Loans
(20,633
)
 
(16,887
)
 
(35,912
)
 
(20,194
)
Other Revenue
1,015

 
1,415

 
2,367

 
2,135

Total Operating Revenues
30,020

 
30,547

 
57,981

 
60,664

Interest Income
 
 
 
 
 
 
 
Interest Income on Borrower Loans
14,556

 
12,007

 
26,916

 
23,507

Interest Expense on Notes and Warehouse Line
(11,471
)
 
(11,177
)
 
(22,200
)
 
(21,855
)
Net Interest Income
3,085

 
830

 
4,716

 
1,652

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
(1,430
)
 
70

 
(572
)
 
(24
)
Total Net Revenue
31,675

 
31,447

 
62,125

 
62,292

Expenses
 
 
 
 
 
 
 
Origination and Servicing
9,192

 
8,873

 
18,013

 
17,278

Sales and Marketing
20,907

 
20,131

 
39,735

 
39,687

General and Administrative
18,151

 
18,758

 
36,865

 
39,473

Restructuring Charges, Net
271

 
647

 
595

 
572

Change in Fair Value of Convertible Preferred Stock Warrants
(3,998
)
 
22,416

 
(8,602
)
 
22,817

Other Expenses (Income), Net
(258
)
 
1,930

 
(500
)
 
7,629

Total Expenses
44,265

 
72,755

 
86,106

 
127,456

Net Loss Before Taxes
(12,590
)
 
(41,308
)
 
(23,981
)
 
(65,164
)
Income Tax Expense
9

 
97

 
19

 
262

Net Loss Applicable to Common Stockholders
$
(12,599
)
 
$
(41,405
)
 
$
(24,000
)
 
$
(65,426
)
Net Loss Per Share – Basic and Diluted
$
(0.18
)
 
$
(0.59
)
 
$
(0.34
)
 
$
(0.94
)
Weighted-Average Shares - Basic and Diluted
70,362,716

 
69,691,841

 
70,333,145

 
69,436,365

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,
 
2018
 
2017
 
2018
 
2017
Net Loss
$
(12,599
)
 
$
(41,405
)
 
$
(24,000
)
 
$
(65,426
)
Other Comprehensive Income (Loss), Before Tax
 

 
 

 
 
 
 
Change in Net Unrealized Gain on Available for Sale Investments, at Fair Value
27

 
(1
)
 
12

 
16

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

 
—

 
—

 
(12
)
Other Comprehensive Income, Before Tax
27

 
(1
)
 
12

 
4

Income tax effect
—

 
—

 
—

 
—

Other Comprehensive Income, Net of Tax
27

 
(1
)
 
12

 
4

Comprehensive Loss
(12,572
)
 
(41,406
)
 
(23,988
)
 
(65,422
)
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,
 
2018
 
2017
Cash flows from Operating Activities:
 

 
 

Net Loss
$
(24,000
)
 
$
(65,426
)
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
572

 
24

Depreciation and Amortization
5,334

 
6,270

Gain on Sales of Borrower Loans
(7,501
)
 
(6,532
)
Change in Fair Value of Servicing Rights
6,538

 
5,742

Stock-Based Compensation Expense
4,584

 
6,812

Restructuring Liability
595

 
412

Fair Value of Warrants Vested
35,912

 
21,677

Change in Fair Value of Warrants
(8,602
)
 
22,817

Impairment Losses on Assets Held for Sale
—

 
6,319

Other, Net
(358
)
 
199

Changes in Operating Assets and Liabilities:
 
 
 
Purchase of Loans Held for Sale at Fair Value
(1,324,100
)
 
(1,245,826
)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value
1,207,916

 
1,246,358

Accounts Receivable
(2,856
)
 
25

Prepaid and Other Assets
1,448

 
(4,637
)
Accounts Payable and Accrued Liabilities
2,540

 
(3,696
)
Payable to Investors
(19,852
)
 
17,967

Other Liabilities
(9
)
 
(1,774
)
Net Cash (Used in) Provided by Operating Activities
(121,839
)
 
6,731

Cash Flows from Investing Activities:
 
 
 
Purchase of Borrower Loans Held at Fair Value
(91,075
)
 
(106,940
)
Principal Payments of Borrower Loans Held at Fair Value
90,963

 
99,482

Purchases of Property and Equipment
(2,715
)
 
(2,485
)
Maturities of Short Term Investments
—

 
1,280

Purchases of Short Term Investments
—

 
(1,263
)
Purchases of Available for Sale Investments, at Fair Value
(5,448
)
 
—

Proceeds from Sale of Available for Sale Investments
—

 
16,163

Maturities of Available for Sale Investments
24,000

 
8,600

Net Cash Provided by Investing Activities
15,725

 
14,837

Cash Flows from Financing Activities:
 
 
 
Proceeds from Issuance of Notes Held at Fair Value
90,693

 
106,506

Payments of Notes Held at Fair Value
(91,525
)
 
(100,274
)
Proceeds from revolving debt facilities
103,097

 
—

Payment for debt issuance costs
(1,428
)
 
—

Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock
18

 
18

Repurchase of Common Stock and Restricted Stock
—

 
(64
)

9



Net Cash Provided by Financing Activities
100,855

 
6,186

Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
(5,259
)
 
27,754

Cash, Cash Equivalents and Restricted Cash at Beginning of the Period
198,463

 
186,244

Cash, Cash Equivalents and Restricted Cash at End of the Period
$
193,204

 
$
213,998

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Paid for Interest
$
22,252

 
$
22,121

Non-Cash Investing Activity- Accrual for Property and Equipment, Net
$
325

 
$
169

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

10



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 PMI, “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, 2017. The balance sheet at December 31, 2017 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 US 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, 2017. There have been no changes to these accounting policies during the first six months of 2018 other than the changes noted below.
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.
Restricted Cash
Restricted cash consists primarily of cash deposits and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors or Prosper has on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown in the condensed consolidated statements of cash flows:


11



 
June 30,
2018
 
December 31,
2017
 
June 30,
2017
 
December 31,
2016
Cash and Cash Equivalents
$
58,652

 
45,795

 
$
34,667

 
$
22,337

Restricted Cash
134,552

 
152,668

 
179,331

 
163,907

Total Cash, Cash Equivalents and Restricted Cash shown in the consolidated statements of cash flows
$
193,204

 
$
198,463

 
$
213,998

 
$
186,244

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.
Debt
For debt instruments carried at amortized cost, the Company defers specific incremental costs directly related to issuing debt or entering into revolving debt arrangements. Debt issuance costs associated with revolving debt arrangements are presented as an asset and subsequently amortized over the term of the revolving debt arrangement.
Revenues
Revenue primarily results from fees and net interest income earned. Fees include transaction fees for our services performed on behalf of WebBank to originate a loan. We also have other smaller sources of revenue reported as other revenue, including referral fees and securitization fees. For more information about Prosper's revenues, see Note 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2017.
Transaction Fees
Prosper has a customer contract with WebBank to facilitate the origination of all Borrower Loans through Prosper’s marketplace. In exchange for these services, Prosper earns a transaction fee from WebBank that is recognized when performance is complete, which is upon the successful origination of a Borrower Loan and which is similar to the recognition prior to the adoption of ASC 606. The transaction fee Prosper earns is determined by the term and credit grade of the Borrower Loan that is facilitated on Prosper’s marketplace, and ranges from 1.00% to 5.00% of the original principal amount of such Borrower Loan that WebBank originates. Prosper records the transaction fee net of any fees paid to WebBank because Prosper does not receive an identifiable benefit from WebBank other than the Borrower Loan that has been recognized at fair value.
Other Revenues
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 successful referrals of customers from our marketplace. The transaction price is a fixed amount per referral and is recognized by the Company upon a successful referral which is similar to the recognition prior to the adoption of ASC 606. Securitization fees represent fees Prosper earns to facilitate securitizations for purchasers of Borrower Loans and is recognized as other revenue when the securitization is completed which is similar to the recognition prior to the adoption of ASC 606. In some instances Prosper may also provide a guarantee, which requires us to first determine the fair value of the guarantee and allocate the remaining transaction price to the securitization performance obligation.
As of June 30, 2018 Prosper had no material contract assets, contract liabilities or deferred contract costs. As of June 30, 2018, Prosper had no unsatisfied performance obligations related to transaction fee or other revenues.

12



Recent Accounting Pronouncements
Accounting Standards Adopted In The Current Period
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. Prosper adopted the requirements of the ASU as of January 1, 2018, utilizing the modified retrospective approach. Transaction fees, securitization fees and credit referral fees are included in the scope of the new guidance, while servicing fees, net interest income and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing or ASC topic 310. The impact of adopting the ASU did not result in a material cumulative effect adjustment upon the date of adoption. Additionally, the impact of adoption on the Consolidated Financial Statements for the current period is insignificant.
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. Prosper adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact 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. Prosper adopted the standard effective January 1, 2018, the adoption of this standard did not have a material impact on Prosper’s 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. Prosper adopted the standard effective January 1, 2018. Prosper had $134.6 million and $179.3 million of restricted cash on its consolidated balance sheet as of June 30, 2018 and June 30, 2017, respectively, whose cash flow statement classification changed to align with the new guidance.
In January 2016, the FASB issued ASU 2016-01, "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. Prosper adopted standard effective January 1, 2018. The adoption of this standard did not have a material impact on Prosper’s consolidated financial statements.
Accounting Standards Issued, To Be Adopted By The Company In Future Periods
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. We do expect that this guidance will have a material impact on Prosper's consolidated financial statements. As of June 30, 2018 Prosper had a total of $35.9 million in non-cancelable operating lease commitments.
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 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.
In June 2018, the FASB issued ASU No. 2018-07, "Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." The ASU is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718, Compensation-Stock Compensation, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned.

13



This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year and early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. 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,
2018
 
December 31,
2017
Property and equipment:
 

 
 

Computer equipment
$
14,785

 
$
14,499

Internal-use software and website development costs
21,372

 
19,910

Office equipment and furniture
3,010

 
3,010

Leasehold improvements
7,078

 
7,078

Assets not yet placed in service
1,893

 
1,216

Property and equipment
48,138

 
45,713

Less accumulated depreciation and amortization
(32,057
)
 
(27,577
)
Total property and equipment, net
$
16,081

 
$
18,136

Depreciation and amortization expense for property and equipment for the three months ended June 30, 2018 and June 30, 2017 was $2.4 million and $2.7 million, respectively. Depreciation and amortization expense for property and equipment for the six months ended June 30, 2018 and June 30, 2017 was $5.1 million and $5.2 million respectively. These charges are included in general and administration expenses on the condensed consolidated statements of operations. Prosper capitalized internal-use software and website development costs in the amount of $1.4 million and $1.0 million for the three months ended June 30, 2018 and June 30, 2017, respectively. Prosper capitalized internal-use software and website development costs in the amount of $2.5 million and $2.1 million for the six months ended June 30, 2018 and June 30, 2017, 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, 2018 and December 31, 2017, are presented in the following table (in thousands):
 
Borrower Loans
 
Notes
 
Loans Held for Sale
 
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
Aggregate principal balance outstanding
$
280,852

 
$
296,668

 
$
(284,011
)
 
$
(300,922
)
 
$
117,028

 
$
59

Fair value adjustments
(3,491
)
 
(3,663
)
 
6,586

 
6,974

 
(211
)
 
(10
)
Fair value
$
277,361

 
$
293,005

 
$
(277,425
)
 
$
(293,948
)
 
$
116,817

 
$
49

At June 30, 2018, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 32.32%, and had various maturity dates through June 2023. At December 31, 2017, outstanding Borrower Loans had original maturities of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 32.32%, and had various maturity dates through December 2022. 
Approximately $0.6 million and $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 ending June 30, 2018 and June 30, 2017, respectively.
As of June 30, 2018, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.6 million and a fair value of $1.1 million. As of December 31, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.5 million and a fair value of $1.3 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of June 30, 2018 and December 31, 2017, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0.3 million, respectively.
5. Loan Servicing Assets and Liabilities

14



Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains and losses recognized on the sale of such Borrower Loans for the three months ended June 30, 2018 was a gain of $4.2 million and a loss of $20.6 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium (as defined in Note 16). The total gains and losses recognized on the sale of such Borrower Loans for the six months ended June 30, 2018 was a gain of $7.5 million and a loss of $35.9 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium. The total gains recognized on the sale of such Borrower Loans were $3.8 million during the three months ended June 30, 2017, which included rebates provided to members of the Consortium prior to the closing of the Consortium transaction 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 recognized on the sale of such Borrower Loans were $3.5 million during the six months ended June 30, 2017, which included rebates provided to members of the Consortium prior to the closing of the Consortium transaction 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.
As of June 30, 2018, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.9 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through June 2023. At December 31, 2017, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through December 2022.
$21.6 million and $18.2 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, 2018 and June 30, 2017, 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.

15




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 . 
The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of June 30, 2018 and December 31, 2017, are as follows (in thousands): 
June 30, 2018
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed maturity securities:
 

 
 

 
 

 
 

Treasury Bills
20,668

 
—

 
(23
)
 
20,645

US Treasury securities
14,232

 
—

 
(36
)
 
14,196

Total Available for Sale Investments
$
34,900

 
$
—

 
$
(59
)
 
$
34,841

December 31, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed maturity securities:
 

 
 

 
 

 
 

Treasury Bills
$
34,014

 
$
—

 
$
(36
)
 
$
33,978

US Treasury securities
19,207

 
—

 
(38
)
 
19,169

Total Available for Sale Investments
$
53,221

 
$
—

 
$
(74
)
 
$
53,147

A summary of available for sale investments with unrealized losses as of June 30, 2018, and December 31, 2017, 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, 2018
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

Treasury Bills
$
20,645

 
$
(23
)
 
$
—

 
$
—

 
$
20,645

 
$
(23
)
US Treasury securities
$
14,196

 
$
(36
)
 
$
—

 
$
—

 
$
14,196

 
$
(36
)
Total Investments with Unrealized Losses
$
34,841

 
$
(59
)
 
$
—

 
$
—

 
$
34,841

 
$
(59
)
 
 
Less than 12 months
 
12 months or longer
 
Total
December 31, 2017
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

Treasury Bills
$
33,978

 
$
(36
)
 
$
—

 
$
—

 
$
33,978

 
$
(36
)
US Treasury securities
$
19,169

 
$
(38
)
 
$
—

 
$
—

 
$
19,169

 
$
(38
)
Total Investments with Unrealized Losses
$
53,147

 
$
(74
)
 
$
—

 
$
—

 
$
53,147

 
$
(74
)


16



There were no impairment charges recognized during the six months ended June 30, 2018. 
The maturities of available for sale investments at June 30, 2018 and December 31, 2017 are as follows (in thousands):
June 30, 2018
Within 1 year
 
After 1 year through 5 years
 
After 5 years to 10 years
 
After 10 years
 
Total
Treasury Bills
20,645

 
—

 
—

 
—

 
20,645

US Treasury securities
14,196

 
—

 
—

 
—

 
14,196

Total Fair Value
$
34,841

 
$
—

 
$
—

 
$
—

 
$
34,841

Total Amortized Cost
$
34,900

 
$
—

 
$
—

 
$
—

 
$
34,900

December 31, 2017
Within 1 year
 
After 1 year through 5 years
 
After 5 years to 10 years
 
After 10 years
 
Total
Treasury Bills
33,978

 
—

 
—

 
—

 
33,978

US Treasury securities
14,947

 
4,222

 
—

 
—

 
19,169

Total Fair Value
$
48,925

 
$
4,222

 
$
—

 
$
—

 
$
53,147

Total Amortized Cost
$
48,992

 
$
4,229

 
$
—

 
$
—

 
$
53,221

During the six months ended June 30, 2018, Prosper sold $0 of investments which resulted in a realized gain of $0.

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 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 may consist of corporate debt securities, commercial paper, U.S. Treasury securities, Treasury bills, 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

17



assets. Prosper's 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, 2018
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$
—

 
$
—

 
$
277,361

 
$
277,361

Loans Held for Sale
—

 
—

 
116,817

 
116,817

Available for Sale Investments, at Fair Value
—

 
34,841

 
—

 
34,841

Servicing Assets
—

 
—

 
15,644

 
15,644

Total Assets
—

 
34,841

 
409,822

 
444,663

Liabilities:
 

 
 

 
 

 
 

Notes
$
—

 
$
—

 
$
277,425

 
$
277,425

Servicing Liabilities
—

 
—

 
28

 
28

Convertible Preferred Stock Warrant Liability
—

 
—

 
143,676

 
143,676

Loan Trailing Fee Liability
—

 
—

 
3,078

 
3,078

Total Liabilities
$
—

 
$
—

 
$
424,207

 
$
424,207

 
December 31, 2017
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$
—

 
$
—

 
$
293,005

 
$
293,005

Loans Held for Sale
—

 
—

 
49

 
49

Available for Sale Investments, at Fair Value
—

 
53,147

 
—

 
53,147

Servicing Assets
—

 
—

 
14,711

 
14,711

Total Assets
—

 
53,147

 
307,765

 
360,912

Liabilities:
 

 
 

 
 

 
 

Notes
$
—

 
$
—

 
$
293,948

 
$
293,948

Servicing Liabilities
—

 
—

 
59

 
59

Convertible Preferred Stock Warrant Liability
—

 
—

 
116,366

 
116,366

Loan Trailing Fee Liability
—

 
—

 
2,595

 
2,595

Total Liabilities
$
—

 
$
—

 
$
412,968

 
$
412,968

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, 2018 and December 31, 2017:

18



Borrower Loans, Loans Held for Sale and Notes:
 
 
Range
Unobservable Input
 
June 30, 2018
 
December 31, 2017
Discount rate
 
4.4% - 13.9%
 
4.0% - 14.4%
Default rate
 
2.0% - 15.6%
 
2.0% - 15.4%
 
Servicing Rights
 
 
Range
Unobservable Input
 
June 30, 2018
 
December 31, 2017
Discount rate
 
15% - 25%

 
15% - 25%

Default rate
 
1.6% - 16.5%

 
1.5% - 16.1%

Prepayment rate
 
15.2% - 32.9%

 
13.5% - 30.2%

Market servicing rate
 
0.625
%
 
0.625
%
Loan Trailing Fee Liability:
 
 
Range
Unobservable Input
 
June 30, 2018
 
December 31, 2017
Discount rate
 
15% - 25%
 
15% - 25%
Default rate
 
1.6% - 16.5%
 
1.5% - 16.1%
Prepayment rate
 
15.2% - 32.9%
 
13.5% - 30.2%
At June 30, 2018, 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, 2018
$
293,005

 
$
(293,948
)
 
$
49

 
$
(894
)
Purchase of Borrower Loans/Issuance of Notes
91,075

 
(90,693
)
 
1,324,100

 
1,324,482

Principal repayments
(88,947
)
 
91,525

 
(14,265
)
 
(11,687
)
Borrower Loans sold to third parties
(2,016
)
 
—

 
(1,193,651
)
 
(1,195,667
)
Other changes
(338
)
 
633

 
796

 
1,091

Change in fair value
(15,418
)
 
15,058

 
(212
)
 
(572
)
Balance at June 30, 2018
$
277,361

 
$
(277,425
)
 
$
116,817

 
$
116,753


19



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 April 1, 2018
$
285,584

 
$
(285,095
)
 
$
82,803

 
$
83,292

Purchase of Borrower Loans/Issuance of Notes
44,799

 
(44,468
)
 
728,901

 
729,232

Principal repayments
(43,990
)
 
44,423

 
(10,416
)
 
(9,983
)
Borrower Loans sold to third parties
(950
)
 
—

 
(683,547
)
 
(684,497
)
Other changes
(202
)
 
86

 
255

 
139

Change in fair value
(7,880
)
 
7,629

 
(1,179
)
 
(1,430
)
Balance at June 30, 2018
$
277,361

 
$
(277,425
)
 
$
116,817

 
$
116,753

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


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, 2018
14,711

 
59

Additions
7,502

 
—

Less: Changes in fair value
(6,569
)
 
(31
)
Fair Value at June 30, 2018
15,644

 
28

 
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


20



 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at April 1, 2018
14,754

 
41

Additions
4,163

 
—

Less: Changes in fair value
(3,273
)
 
(13
)
Fair Value at June 30, 2018
15,644

 
28

 
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


The following table presents additional information about level 3 Preferred Stock Warrant Liability measured at fair value on a recurring basis (in thousands):
Balance as of January 1, 2018
$
116,366

Add Issuances of Preferred Stock Warrant
35,912

Change in fair value of the preferred stock warrant liability
(8,602
)
Balance at June 30, 2018
$
143,676

Balance as of January 1, 2017
$
—

Add Issuances of Preferred Stock Warrant
47,297

Change in fair value of the preferred stock warrant liability
22,817

Balance at June 30, 2017
$
70,114

Balance as of April 1, 2018
$
127,041

Add Issuances of Preferred Stock Warrant
20,633

Change in fair value of the preferred stock warrant liability
(3,998
)
Balance at June 30, 2018
$
143,676

Balance as of April 1, 2017
$
30,811

Add Issuances of Preferred Stock Warrant
16,887

Change in fair value of the preferred stock warrant liability
22,416

Balance at June 30, 2017
$
70,114


Loan Trailing Fee
The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and defaults rates using a discounted cash flow model.
The following table presents additional information about level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):

21



Balance at January 1, 2018
 
2,595

Issuances
 
1,529

Cash payment of Loan Trailing Fee
 
(1,206
)
Change in fair value
 
160

Balance as of June 30, 2018
 
3,078

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, 2018 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
 
Fair Value as of June 30, 2018
$394,178
 
$277,425
 
Discount rate assumption:
7.52
%
*
7.52
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
390,255

 
$
274,660

 
200 basis point increase
386,431

 
271,964

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
398,202

 
$
280,262

 
200 basis point decrease
402,333

 
283,173

 
Default rate assumption:
13.11
%
*
13.11
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
389,288

 
$
273,967

 
200 basis point increase
384,542

 
270,612

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
399,107

 
$
280,911

 
200 basis point decrease
404,079

 
284,428

 
* 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, 2018 (in thousands, except percentages).
 
Servicing
Assets
 
Servicing
Liabilities
Fair Value as of June 30, 2018
$15,644
 
$28
Market servicing rate assumptions
0.625
%
 
0.625
%
Resulting fair value from:
 

 
 

Market servicing rate increase to 0.65%
$
14,691

 
$
31

Market servicing rate decrease to 0.60%
$
16,634

 
$
25

Weighted average prepayment assumptions
19.98
%
 
19.98
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to prepayment rate
$
15,471

 
$
28

Applying a 0.9 multiplier to prepayment rate
$
15,857

 
$
29

Weighted average default assumptions
12.66
%
 
12.66
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to default rate
$
15,473

 
$
28

Applying a 0.9 multiplier to default rate
$
15,857

 
$
28


22



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.
Financial Instruments, Assets and Liabilities not Recorded at Fair Value
The following tables present the fair value hierarchy for financial instruments, assets, and liabilities not recorded at fair value (in thousands):
June 30, 2018
Carrying Amount
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at Fair Value
Assets:
 
 
 

 
 

 
 

 
 

Cash and Cash Equivalents
$
58,652

 
$
58,652

 
$
—

 
$
—

 
$
58,652

Restricted Cash
134,552

 
—

 
134,552

 
—

 
134,552

Accounts Receivable
3,539

 
—

 
3,539

 
—

 
3,539

Total Assets
196,743

 
58,652

 
138,091

 
—

 
196,743

Liabilities:
 
 
 

 
 

 
 

 
 

Accounts Payable and Accrued Liabilities
$
14,652

 
$
—

 
$
14,652

 
$
—

 
$
14,652

Payable to Investors
112,580

 
—

 
112,580

 
—

 
112,580

Warehouse Line
103,553

 
—

 
103,553

 
—

 
103,553

Total Liabilities
$
230,785

 
$
—

 
$
230,785

 
$
—

 
$
230,785

 

8. Goodwill and Other Intangible Assets
Goodwill 
Prosper’s goodwill balance of $36.4 million at June 30, 2018 did not change during the six months ended June 30, 2018. We did not record any goodwill impairment expense for the six months ended June 30, 2018.
Other Intangible Assets 
The following table presents the detail of other intangible assets for the period presented (dollars in thousands):
 
June 30, 2018
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net
Carrying Value
 
Remaining
Useful Life
(In Years)
Developed technology
$
3,060

 
$
(3,060
)
 
$
—

 
—

User base and customer relationships
5,050

 
(3,873
)
 
$
1,177

 
6.8

Brand name
60

 
(60
)
 
—

 
—

Total intangible assets subject to amortization
$
8,170

 
$
(6,993
)
 
$
1,177

 
 

Prosper’s intangible asset balance was $1.2 million and $1.4 million at June 30, 2018 and December 31, 2017, 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 an impairment loss of $6.3 million, which is recorded in Other Expenses on the Condensed Consolidated Statement of Operations.
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.

23



Amortization expense for the three months ended June 30, 2018 and June 30, 2017 was $0.1 million and $0.2 million, respectively. Amortization expense for the six months ended June 30, 2018 and June 30, 2017 was $0.2 million and $1.0 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):
Year Ending December 31,
 
Remainder of 2018
$
178

2019
279

2020
220

2021
172

2022
136

Thereafter
$
192

Total
$
1,177


9. Other Liabilities
Other Liabilities includes the following:
 
June 30, 2018
 
December 31, 2017
Loan trailing fee
3,078

 
2,595

Deferred revenue
436

 
452

Servicing liabilities
28

 
59

Deferred income tax liability
244

 
225

Deferred rent
3,651

 
3,904

Restructuring liability
3,457

 
3,355

Other
2,824

 
2,079

Total Other Liabilities
$
13,718

 
$
12,669


10. Debt
Warehouse Line
On January 19, 2018, through a wholly-owned subsidiary, Prosper Warehouse I Trust ("PWIT"), Prosper entered into an agreement (the "Warehouse Agreement") for a committed revolving line of credit (the "Warehouse Line"). In connection with the Warehouse Agreement, PWIT entered into a security agreement with a bank as administrative agent and a national banking association as collateral trustee and paying agent. Proceeds under the Warehouse Line may only be used to purchase certain unsecured consumer loans and related rights and documents from the Company and to pay fees and expenses related to the Warehouse Line. Effective June 12, 2018 the Warehouse Agreement was amended. The amendments included increasing the committed line of credit from $100 million to $200 million, extending the term of the Warehouse line (including the final maturity date), amending the monthly unused commitment fee, and reducing the rate at which the Warehouse Line bears interest.
Under the amended agreement, proceeds of loans made under the Warehouse Line may be borrowed, repaid, and reborrowed until the earlier of June 12, 2020 and the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over the 24 month period ending June 12, 2022, excluding the occurrence of any accelerated amortization event or event of default.
Under the amended agreement, the Warehouse Line bears interest at a rate of LIBOR plus 3.00% and has an advance rate of 89%. Additionally, the Warehouse Line bears a monthly unused commitment fee, depending on utilization, of 0.50% or 0.75% per annum on the undrawn portion available under the Warehouse Line.
The Warehouse Agreement contains certain covenants applicable to PWIT, including restrictions on PWIT’s ability to incur indebtedness, pledge assets, merge or consolidate, and enter into certain affiliate transactions. The Warehouse Line also requires Prosper to maintain a minimum tangible net worth of $25 million, minimum net liquidity of $15 million and a maximum leverage ratio of 5:1. Tangible net worth is defined as the sum of (i) (A) convertible preferred stock, (B) total stockholders’ deficit and (C) convertible preferred stock warrant liability, less the sum of (ii) (A) goodwill and (B) intangible assets. Net liquidity is defined as the sum of cash, cash equivalents and available for sale investments. The leverage ratio is defined as the ratio of total consolidated

24



indebtedness other than non-recourse securitization indebtedness, non-recourse or limited recourse warehouse indebtedness, and borrower dependent notes, to tangible net worth. As of June 30, 2018, Prosper was in compliance with the covenants under the Warehouse Agreement.
As of June 30, 2018, Prosper had $103.6 million in debt outstanding and accrued interest under the Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $116.2 million included in "Loans Held for Sale, at Fair Value" on the Condensed Consolidated Balance Sheet. At June 30, 2018 the undrawn portion available under the Warehouse Line was $96.9 million. Prosper incurred $1.6 million of capitalized debt issuance costs, which will be recognized as interest expense through June 12, 2022.
Prosper has also purchased swaptions to limit our exposure to increases in LIBOR. The swaptions are recorded on the Condensed Consolidated Balance Sheet at fair value in Prepaids and Other Assets. Any changes in the fair value are recorded in the Change in Fair Value of Loans, Loans Held for Sale and Notes, Net on the Condensed Consolidated Statement of Operations. The fair value of the swaptions was not material at June 30, 2018.
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.
Basic and diluted net loss per share was calculated as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 

 
 

 
 
 
 
Net loss available to common stockholders for basic
   and diluted EPS
$
(12,599
)
 
$
(41,405
)
 
$
(24,000
)
 
$
(65,426
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares used in computing basic and diluted net loss per share
70,362,716

 
69,691,841

 
70,333,145

 
69,436,365

Basic and diluted net loss per share
$
(0.18
)
 
$
(0.59
)
 
$
(0.34
)
 
$
(0.94
)
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,
 
2018
 
2017
 
2018
 
2017
 
(shares)
 
(shares)
 
(shares)
 
(shares)
Excluded securities:
 

 
 

 
 
 
 
Convertible preferred stock issued and outstanding
214,637,925

 
177,388,428

 
214,637,925

 
177,388,428

Stock options issued and outstanding
75,206,928

 
60,938,265

 
66,403,696

 
53,040,604

Unvested stock options exercised
2,190

 
20,940

 
2,190

 
20,940

Restricted stock units
—

 
—

 
—

 
—

Warrants issued and outstanding
1,080,349

 
1,199,403

 
1,082,917

 
1,199,403

Series E-1 convertible preferred stock warrants
35,544,141

 
35,544,141

 
35,544,141

 
35,544,141

Series F convertible preferred stock warrants
177,720,704

 
177,720,704

 
177,720,704

 
177,720,704

Total common stock equivalents excluded from diluted
   net loss per common share computation
504,192,237

 
452,811,881

 
495,391,573

 
444,914,220



25



12. Convertible Preferred Stock, Warrant Liability and Stockholders’ Deficit
Convertible Preferred Stock and Warrants
Under PMI’s amended and restated certificate of incorporation, preferred stock is issuable in series, and the Board of Directors is authorized to determine the rights, preferences, and terms of each series.
On February 27, 2017, PMI issued to Pinecone Investments LLC a second warrant (the “Second Series E-1 Warrant,” and together with a previously issued First Series E-1 Warrant, the “Series E-1 Warrants”) to purchase 15,277,006 shares of Series E-1 convertible preferred stock 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 Capital Management, L.P. ("Colchis"), as previously described in PMI’s Current Report on Form 8-K as filed with the SEC on December 22, 2016.
In connection with the Consortium Purchase Agreement (as defined in Note 16) entered into with affiliates of the Consortium (as defined in Note 16, such affiliates, "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 an aggregate of 177,720,706 shares of PMI’s Series F convertible 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. 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 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.
On September 20, 2017, Prosper issued and sold 37,249,497 shares of Series G convertible preferred stock in a private placement at a purchase price of $1.34 per share for proceeds of approximately $47.9 million, net of issuance costs. The Series G convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(a)(2) of the Securities Act regarding sales by an issuer not involving a public offering. The purpose of the Series G private placement was to raise funds for general corporate purposes.
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, 2018 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

 
—

Series G
 
0.01

 
37,249,497

 
37,249,497

 
50,000

 
 
 

 
444,760,848

 
214,637,925

 
$
375,952

Dividends
Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G 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, Series F, and Series G convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series

26



E-1, Series E-2, Series F, and Series G 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; (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F, and (v) the shares of Series G Preferred Stock will not be automatically converted unless the holders of at least 60% of the outstanding shares of Series G Preferred Stock approve such conversion. 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, each of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and the Series G 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.
The conversion price of the Series G convertible preferred stock shall be reduced to a number equal to the Series G Preferred Stock original issuance price divided by the quotient obtained by dividing the series G true up amount by the total number of Series G Preferred Stock issued as of the Series G closing date. The Series G true up amount means the aggregate number of shares of Series G Preferred Stock that would have been issued to the purchasers of the Series G Preferred Stock on the Series G closing date, if warrants to purchase shares of Series E-2 Preferred Stock or Series F Preferred Stock that were exercisable or exercised as of the true up time (end of vesting period) were exercisable or exercised as of the Series G Preferred Stock closing date.
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, 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, Series G and Series A-1 convertible 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, Series F, and Series G 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 convertible 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, Series D and Series G 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, and Series G 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.

27



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, Series G, and Series A-1 convertible preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of Series A convertible preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the Series A convertible 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 per share for the Series D convertible preferred stock, $0.84 per share for the Series E-1 convertible preferred stock, $0.84 per share for the Series E-2 convertible preferred stock, $0.84 per share for the Series F convertible preferred stock and $1.34 per share for the Series G 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 was granted on the signing of the Consortium Purchase Agreement (as defined in Note 16) on February 27, 2017. The warrants expire ten years from the date of issuance. For the three months ended June 30, 2018, Prosper recognized $1.1 million of income from the re-measurement of the fair value of the warrants. For the six months ended June 30, 2018, Prosper recognized $2.5 million of income from the re-measurement of the fair value of the warrants. The income is recorded through change in fair value of convertible preferred stock warrants in the condensed consolidated statement of operations.
To determine the fair value of the Series E-1 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, 2018
 
December 31, 2017
Volatility
40%
 
40%
Risk-free interest rate
2.83%
 
2.38%
Remaining contractual term (in years)
8.55
 
9.04
Dividend yield
0%
 
0%
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.

28



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 shares of PMI's Series F convertible preferred stock at $0.01 per share. For the three months ended June 30, 2018, Prosper recognized $2.9 million of income from the re-measurement of the fair value of the warrants. For the six months ended June 30, 2018, Prosper recognized $6.1 million of income from the re-measurement of the fair value of the warrants. The income is recorded through change in fair value of convertible preferred stock warrants 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 the following dates:
 
June 30, 2018
 
December 31, 2017
Volatility
40%
 
40%
Risk-free interest rate
2.83%
 
2.38%
Remaining contractual term (in years)
8.66
 
9.16
Dividend yield
0%
 
0%
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, 2018 is as follows (in thousands):
Balance at January 1, 2018
$
116,366

Warrants Vested
35,912

Change in Fair Value
(8,602
)
Balance as of June 30, 2018
$
143,676


29



Common Stock
PMI, through its Amended and Restated Certificate of Incorporation, 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 September 20, 2017, 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 1,069,760,848, consisting of 625,000,000 shares of common stock, $0.01 par value per share, and 444,760,848 shares of preferred stock, $0.01 par value per share. As of June 30, 2018, 71,317,926 shares of common stock were issued and 70,381,991 shares of common stock were outstanding. As of December 31, 2017, 71,226,934 shares of common stock were issued and 70,290,999 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, 2018, PMI issued 82,792 shares of common stock upon the exercise of vested options for cash proceeds of $18 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 optionholder’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, 2018 and December 31, 2017, there were 2,190 and 11,565 shares, respectively, of restricted stock outstanding that remain unvested and subject to PMI’s right of repurchase.
For the six months ended June 30, 2018, PMI repurchased no shares of restricted stock upon termination of employment of employees.
13. Share Based Incentive Plan and Compensation
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2,which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, 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, 2018, up to 93,468,710 shares of common stock are reserved for issuance under the 2015 Plan, 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 (i) 25% 1 year from the vesting commencement date and 1/48th per month thereafter, (ii) 50% one year from the vesting date and 1/48th per month thereafter, (iii) 50% 2 years from the vesting commencement date and 1/48th per month thereafter, or (iv) 1/36th per month from the vesting commencement date. In no event are options exercisable more than 10 years after the date of grant.
At June 30, 2018, there were 22,824,771 shares available for grant under the 2015 Plan and zero shares available for grant under the 2005 Plan.
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 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 $0.2 million in the three months ended June 30, 2018 and $0.7 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 1.1 years.

30



Early Exercised Stock Options
The balance of stock options that were early exercised under the 2005 Plan as of June 30, 2018 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, 2018 below: 
 
Options
Issued and
Outstanding
 
Weighted-
Average
Exercise
Price
Balance as of January 1, 2018
58,628,039

 
$
0.25

Options issued
18,703,551

 
0.54

Options exercised – vested
(82,792
)
 
0.22

Options forfeited
(3,879,249
)
 
0.37

Balance as of June 30, 2018
73,369,549

 
$
0.32

Options vested and expected to vest as of June 30, 2018
60,048,513

 
0.32

Options vested and exercisable at June 30, 2018
34,914,602

 
0.22

Other Information Regarding Stock Options
Additional information regarding common stock options outstanding as of June 30, 2018 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
 
4,768,290

 
5.55
 
$
0.11

 
4,768,290

 
$
0.11

 
0.21 - 0.50
 
45,281,131

 
8.25
 
0.23

 
28,602,923

 
0.22

 
0.51 - 1.13
 
23,320,128

 
9.60
 
0.54

 
1,543,389

 
0.54

$
0.02 - 1.13
 
73,369,549

 
8.51
 
$
0.32

 
34,914,602

 
$
0.22

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.

31



The fair value of PMI’s stock option awards granted during the three and six months ended June 30, 2018 and June 30, 2017 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,
 
2018
 
2017
 
2018
 
2017
Volatility of common stock
44.43
%
 
N/A
 
44.12
%
 
50.28
%
Risk-free interest rate
2.85
%
 
N/A
 
2.75
%
 
2.12
%
Expected life (in years)
6.0 years

 
N/A
 
6.0 years

 
5.7 years

Dividend yield
0
%
 
N/A
 
0
%
 
0
%
Restricted Stock Unit Activity
During the six months ended June 30, 2018, 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 $1.9 million. The following table summarizes the activities for PMI’s RSUs during the six months ended June 30, 2018:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Unvested - January 1, 2018
1,399,180

 
$
2.16

Granted
3,569,586

 
0.54

Vested
—

 
—

Forfeited
(100,500
)
 
2.17

Unvested - June 30, 2018
4,868,266

 
$
0.96

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 and six months ended June 30, 2018 and June 30, 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Origination and servicing
$
241

 
$
328

 
$
456

 
$
545

Sales and marketing
108

 
141

 
216

 
311

General and administrative
1,904

 
2,843

 
3,912

 
5,956

Total stock based compensation
$
2,253

 
$
3,312

 
$
4,584

 
$
6,812

During the three months ended June 30, 2018 and June 30, 2017, Prosper capitalized $0.1 million and $0.1 million, respectively, of stock-based compensation as internal use software and website development costs. As of June 30, 2018, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to Prosper’s employees’ unvested stock-based awards was approximately $10.4 million, which will be recognized over the remaining weighted-average vesting period of approximately 2 years.
14. Restructuring     
Summary of Restructuring Plan
During 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 and its Tel Aviv, Israel location.
In the six months ended June 30, 2018 Prosper's only restructuring activities related to office space that is no longer needed. Other than accretion and changes in sublease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.

32



The following table summarizes the activities related to Prosper's restructuring plan (in thousands):
 
Facilities Related
 
Total
Balance January 1, 2018
$
3,244

 
$
3,244

Adjustments to expense
591

 
591

Sublease cash receipts
316

 
316

Less: Cash paid
(775
)
 
(775
)
Balance June 30, 2018
$
3,376

 
$
3,376

 
15. Income Taxes
For the three months ended June 30, 2018 and June 30, 2017, Prosper recognized $9 thousand and $97 thousand of income tax expense, respectively. For the six months ended June 30, 2018 and June 30, 2017, Prosper recognized $19 thousand and $262 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, 2018 and June 30, 2017 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 a series of agreements (the "Consortium Purchase Agreement") with a consortium of investors (the "Consortium"), pursuant to which the Consortium has agreed to 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 Purchase 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 Consortium Purchase Agreement, PMI issued to the Consortium, three warrants to purchase up to an 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 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. Pursuant to these cure rights, if the Consortium fails to respond to offers for allocation, purchase or funding, the Consortium can take advantage of a designated period of time to cure such failure. There have been no such failures by the Consortium to date. 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 "Change in Fair Value of Convertible Preferred Stock Warrants" on the Condensed Consolidated Statement of Operations. Additionally, in connection with the execution of the Consortium Purchase Agreement, certain previously issued rebates were settled by an 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 "Change in Fair Value of Convertible Preferred Stock Warrants" on the Condensed Consolidated Statement of Operations.
The following represents the loans purchased and warrants vested under the Consortium Purchase Agreement:

33



 
Loans Acquired (in thousands)
 
Warrants Vested
Total as of December 31, 2017
$
1,826,527

 
75,186,002

Loans Purchased by the Consortium during the six months ended June 30, 2018
831,097

 
36,830,278

Total as of June 30, 2018
$
2,657,624

 
112,016,280

In addition to the $2.7 billion above, warrants vested on signing of the Consortium Purchase Agreement were issued to settle certain rebates on $0.3 billion of whole loan purchases by members of the Consortium prior to the signing of the Consortium Purchase Agreement. This $0.3 billion also reduces the up to $5.0 billion aggregate amount under the Consortium Purchase Agreement.
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.
The table below presents future minimum rental payments, net of minimum sublease rentals of $6.5 million, for the remaining terms of the operating leases (in thousands):
Remainder of 2018
2,939

2019
6,026

2020
6,193

2021
6,170

2022
6,076

Thereafter
8,480

Total
$
35,884

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, 2018.
Rental expense under operating lease arrangements was $1.0 million and $1.2 million for the three months ended June 30, 2018 and June 30, 2017, respectively. Rental expense under operating lease arrangements was $2.1 million and $2.5 million for the six months ended June 30, 2018 and June 30, 2017, 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 six months of 2018 is $0.9 million. The minimum fee is $0.9 million for the year 2019.
Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15.0 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. As of June 30, 2018, Prosper was in compliance with the covenant.
Loan Purchase Commitments
Prosper has entered into an agreement with WebBank to purchase $31.5 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended June 30, 2018 and the first business day of the quarter ending September 30, 2018. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending September 30, 2018.

34



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, 2018 is $3.9 billion. Prosper has accrued $1.3 million and $0.8 million as of June 30, 2018 and December 31, 2017, respectively, in regard to this obligation.
Regulatory Contingencies
Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, we record the amount we consider to be the best estimate within the range of potential losses that are both probable and estimable; however, if we cannot quantify the amount of the estimated loss, then we record the low end of the range of those potential losses.
SEC Inquiry
In April and May of 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to note investors. Although we have since corrected the error, we are currently subject to an investigation by the Securities and Exchange Commission (the “SEC”) as to whether violations of federal securities laws have occurred in connection with this error. We have been fully and voluntarily cooperating with the SEC.
We cannot predict the outcome of the investigation at this time and any potential fines or penalties, if any, that may arise from the investigation. Further, we are unable at this time to estimate a range of outcomes and as a result no accrual has been made.
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 three and six months ended June 30, 2018 and June 30, 2017, as well as the Notes and Borrower Loans outstanding as of June 30, 2018 and December 31, 2017 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
2018
 
2017
 
2018
 
2017
Executive officers and management
$
9

 
$
10

 
$
1

 
$
81

Directors (excluding executive officers and management)
208

 
174

 
22

 
20

Total
$
217

 
$
184

 
$
23

 
$
101


35



 
Aggregate Amount of
Notes and Borrower Loans Purchased
Three Months Ended March 31,
 
Interest Earned on Notes and Borrower Loans
Three Months Ended March 31,
Related Party
2018
 
2017
 
2018
 
2017
Executive officers and management
$
3

 
$
5

 
$
—

 
$
35

Directors (excluding executive officers and management)
107

 
85

 
11

 
10

Total
$
110

 
$
90

 
$
11

 
$
45

 
Notes balance as of
Related Party
June 30, 2018
 
December 31, 2017
Executive officers and management
$
17

 
$
38

Directors (excluding executive officers and management)
560

 
553

 
$
577

 
$
591

19. Significant Concentrations
Prosper is dependent on third party funding sources such as banks, assets managers, 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, 2018, the largest party purchased a total of 52% of those loans. This compares to 52%, 14% and 8% for the three largest parties for the six months ended June 30, 2017. The party purchasing 14% for the six
months ended June 30, 2017 is a member of the Consortium and purchased these loans prior to the closing of the Consortium Agreement on February 27, 2017. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which 93% and 92% of Borrower Loans were originated through the Whole Loan Channel in the six months ended June 30, 2018 and June 30, 2017, 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.

36




Prosper Funding LLC
Condensed Consolidated Balance Sheets (Unaudited)
(amounts in thousands)
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Cash and Cash Equivalents
$
10,892

 
$
8,223

Restricted Cash
120,152

 
140,092

Loans Held for Sale at Fair Value
31

 
49

Borrower Loans Receivable at Fair Value
277,361

 
293,005

Property and Equipment, Net
6,972

 
7,953

Servicing Assets
16,162

 
14,598

Other Assets
274

 
125

Total Assets
$
431,844

 
$
464,045

Liabilities and Member’s Equity
 
 
 
Accounts Payable and Accrued Liabilities
$
1,453

 
$
745

Payable to Related Party
5,121

 
2,889

Payable to Investors
112,444

 
132,112

Notes at Fair Value
277,425

 
293,948

Other Liabilities
4,926

 
3,985

Total Liabilities
401,369

 
433,679

Member's Equity
 
 
 
Member's Equity
24,904

 
24,904

Retained Earnings
5,571

 
5,462

Total Member's Equity
$
30,475

 
$
30,366

Total Liabilities and Member's Equity
$
431,844

 
$
464,045

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

37



Prosper Funding LLC
Condensed Consolidated Statements of Operations (Unaudited)
(amounts in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 

 
 

 
 
 
 
Operating Revenues
 

 
 

 
 
 
 
Administration Fee Revenue - Related Party
$
30,836

 
$
27,309

 
$
54,620

 
$
42,463

Servicing Fees, Net
7,209

 
6,520

 
14,022

 
12,401

Gain (Loss) on Sale of Borrower Loans
(16,181
)
 
(13,084
)
 
(27,754
)
 
(16,709
)
Other Revenues
73

 
34

 
136

 
64

Total Operating Revenues
21,937

 
20,779

 
41,024

 
38,219

Interest Income on Borrower Loans
10,907

 
12,007

 
21,859

 
23,507

Interest Expense on Notes
(10,177
)
 
(11,177
)
 
(20,388
)
 
(21,855
)
Net Interest Income
730

 
830

 
1,471

 
1,652

Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net
(255
)
 
70

 
(364
)
 
(24
)
Total Net Revenues
22,412

 
21,679

 
42,131

 
39,847

Expenses
 

 
 

 
 
 
 
Administration Fee - Related Party
20,285

 
18,466

 
38,175

 
34,282

Servicing
1,663

 
1,524

 
3,478

 
3,255

General and Administrative
182

 
145

 
365

 
318

Total Expenses
22,130

 
20,135

 
42,018

 
37,855

Total Net Income (Loss)
$
282

 
$
1,544

 
$
113

 
$
1,992

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

38



Prosper Funding LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Cash Flows from Operating Activities:
 

 
 

Net Income (Loss)
$
113

 
$
1,992

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
364

 
24

Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes
(295
)
 
(272
)
Gain on Sale of Borrower Loans
(8,147
)
 
(6,532
)
Change in Fair Value of Servicing Rights
6,552

 
5,609

Depreciation and Amortization
2,991

 
2,637

Changes in Operating Assets and Liabilities:
 

 
 

Purchase of Loans Held for Sale at Fair Value
(1,324,100
)
 
(1,245,826
)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value
1,324,114

 
1,246,358

Other Assets
(153
)
 
(71
)
Accounts Payable and Accrued Liabilities
708

 
(1,592
)
Payable to Investors
(19,668
)
 
18,374

Net Related Party Receivable/Payable
2,116

 
3,807

Other Liabilities
972

 
1,398

Net Cash (Used in) Provided by Operating Activities
(14,433
)
 
25,906

Cash Flows from Investing Activities:
 

 
 

Purchase of Borrower Loans Held at Fair Value
(91,075
)
 
(106,940
)
Principal Payment of Borrower Loans Held at Fair Value
90,963

 
99,482

Maturities of Short Term Investments
—

 
1,280

Purchases of Short Term Investments
—

 
(1
)
Purchases of Property and Equipment
(1,894
)
 
(2,859
)
Net Cash Used in Investing Activities
(2,006
)
 
(9,038
)
Cash Flows from Financing Activities:
 

 
 

Proceeds from Issuance of Notes Held at Fair Value
90,693

 
106,506

Payments of Notes Held at Fair Value
(91,525
)
 
(100,274
)
Net Cash (Used in) Provided by Financing Activities
(832
)
 
6,232

Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
(17,271
)
 
23,100

Cash, Cash Equivalents and Restricted Cash at Beginning of the Period
148,315

 
154,912

Cash, Cash Equivalents and Restricted Cash at End of the Period
$
131,044

 
$
178,012

Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Paid for Interest
$
22,252

 
$
22,121

Non-Cash Investing Activity - Accrual for Property and Equipment, Net
$
(116
)
 
601

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

39



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”). 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, 2017. The balance sheet at December 31, 2017 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, 2018 and June 30, 2017.
The preparation of Prosper Funding's condensed consolidated financial statements and related disclosures in conformity with US 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, 2017. There have been no changes to these accounting policies during the first six months of 2018.
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.
Restricted Cash
Restricted cash consists primarily of cash deposits and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors or Prosper has on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown in the consolidated statements of cash flows:



40



 
June 30,
2018
 
December 31,
2017
 
June 30,
2017
 
December 31,
2016
Cash and Cash Equivalents
$
10,892

 
8,223

 
$
12,384

 
$
6,929

Restricted Cash
120,152

 
140,092

 
165,628

 
147,983

Total Cash, Cash Equivalents and Restricted Cash show in the consolidated statements of cash flows
$
131,044

 
$
148,315

 
$
178,012

 
$
154,912

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. 
Recent Accounting Pronouncements
Accounting Standards Adopted In The Current Period
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 US 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. Prosper Funding adopted the requirements of the ASU as of January 1, 2018, utilizing the modified retrospective approach. 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. The impact of adopting the ASU is not significant to the Consolidated Financial Statements in the current period.
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. Prosper Funding adopted standard effective January 1, 2018. The adoption of this standard did not have a material impact on Prosper Funding’s consolidated financial statements. 
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. Prosper Funding adopted standard effective January 1, 2018. Prosper Funding has $120.2 million and $165.6 million of restricted cash on its consolidated balance sheet as of June 30, 2018 and 2017, respectively, whose cash flow statement classification changed to align with the new guidance.
In January 2016, the FASB issued ASU 2016-01, "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. Prosper Funding adopted standard effective January 1, 2018. The adoption of this standard did not have a material impact on Prosper Funding’s consolidated financial statements.
3. Property and Equipment
Property and equipment consist of the following (in thousands):

41



 
June 30,
2018
 
December 31,
2017
Property and equipment:
 

 
 

Internal-use software and web site development costs
$
21,372

 
$
19,911

Less accumulated depreciation and amortization
(14,400
)
 
(11,958
)
Total property and equipment, net
$
6,972

 
$
7,953

Depreciation expense for the three months ended June 30, 2018 and June 30, 2017 was $1.4 million and $1.4 million, respectively. Depreciation expense for the six months ended June 30, 2018 and June 30, 2017 was $3.0 million and $2.6 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, 2018 and December 31, 2017, are presented in the following table (in thousands):
 
Borrower Loans
 
Notes
 
Loans Held for Sale
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Aggregate principal balance outstanding
$
280,852

 
$
296,668

 
$
(284,011
)
 
$
(300,922
)
 
$
44

 
$
59

Fair value adjustments
(3,491
)
 
(3,663
)
 
6,586

 
6,974

 
(13
)
 
(10
)
Fair value
$
277,361

 
$
293,005

 
$
(277,425
)
 
$
(293,948
)
 
$
31

 
$
49

 
At June 30, 2018, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.31% to 32.32% and had various maturity dates through June 2023. At December 31, 2017, outstanding Borrower Loans had original maturities of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 32.32%, and had various maturity dates through December 2022.
Approximately $0.6 million represents the loss that is attributable to changes in the instrument specific credit risks related to Borrower Loans that was recorded in the change in fair value during the six months ended June 30, 2018.
As of June 30, 2018, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.6 million and a fair value of $1.1 million. As of December 31, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.5 million and a fair value of $1.3 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of June 30, 2018 and December 31, 2017, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0.3 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 a loss of $16.2 million and $13.1 million for the three months ended June 30, 2018 and June 30, 2017, respectively. The total gains and losses recognized on the sale of such Borrower Loans were a loss of $27.8 million and $16.7 million for the six months ended June 30, 2018 and June 30, 2017, respectively.
As of June 30, 2018, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.9 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through June 2023. At December 31, 2017, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through December 2022.
$11.2 million and $9.2 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, 2018 and June 30, 2017, respectively. $21.8 million and $17.9 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, 2018 and June 30, 2017, respectively.

42



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.
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, 2018 and June 30, 2017. 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.

43



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 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.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands): 
June 30, 2018
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$
—

 
$
—

 
$
277,361

 
$
277,361

Servicing Assets
—

 
—

 
16,162

 
16,162

Loans Held for Sale
—

 
—

 
31

 
31

Total Assets
—

 
—

 
293,554

 
293,554

Liabilities:
 

 
 

 
 

 
 

Notes
$
—

 
$
—

 
$
277,425

 
$
277,425

Servicing Liabilities
—

 
—

 
28

 
28

Loan Trailing Fee Liability
—

 
—

 
3,078

 
3,078

Total Liabilities
$
—

 
$
—

 
$
280,531

 
$
280,531

December 31, 2017
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$
—

 
$
—

 
$
293,005

 
$
293,005

Servicing Assets
—

 
—

 
14,598

 
14,598

Loans Held for Sale
—

 
—

 
49

 
49

Total Assets
—

 
—

 
307,652

 
307,652

Liabilities:
 

 
 

 
 

 
 

Notes
$
—

 
$
—

 
$
293,948

 
$
293,948

Servicing Liabilities
—

 
—

 
59

 
59

Loan Trailing Fee Liability
—

 
—

 
2,595

 
2,595

Total Liabilities
$
—

 
$
—

 
$
296,602

 
$
296,602

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, 2018 and December 31, 2017: 

44



Borrower Loans, Loans Held for Sale and Notes: 
 
 
Range
Unobservable Input
 
June 30, 2018
 
December 31, 2017
Discount rate
 
4.4% - 13.9%
 
4.0% - 14.4%
Default rate
 
2.0% - 15.6%
 
2.0% - 15.4%
Servicing Assets and Liabilities:
 
 
Range
Unobservable Input
 
June 30, 2018
 
December 31, 2017
Discount rate
 
15% - 25%

 
15% - 25%

Default rate
 
1.6% - 16.5%

 
1.5% - 16.1%

Prepayment rate
 
15.2% - 32.9%

 
13.5% - 30.2%

Market servicing rate
 
0.625
%
 
0.625
%
Loan Trailing Fee Liability:
 
 
Range
Unobservable Input
 
June 30, 2018
 
December 31, 2017
Discount rate
 
15% - 25%
 
15% - 25%
Default rate
 
1.6% - 16.5%
 
1.5% - 16.1%
Prepayment rate
 
15.2% - 32.9%
 
13.5% - 30.2%
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, 2018
$
293,005

 
$
(293,948
)
 
$
49

 
$
(894
)
Originations
91,075

 
(90,693
)
 
1,324,100

 
1,324,482

Principal repayments
(88,947
)
 
91,525

 
(14
)
 
2,564

Borrower Loans sold to third parties
(2,016
)
 
—

 
(1,324,100
)
 
(1,326,116
)
Other changes
(338
)
 
633

 
—

 
295

Change in fair value
(15,418
)
 
15,058

 
(4
)
 
(364
)
Balance at June 30, 2018
$
277,361

 
$
(277,425
)
 
$
31

 
$
(33
)
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


45



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower 
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at April 1, 2018
$
285,584

 
$
(285,095
)
 
$
41

 
$
530

Originations
44,799

 
(44,468
)
 
728,901

 
729,232

Principal repayments
(43,990
)
 
44,423

 
(6
)
 
427

Borrower Loans sold to third parties
(950
)
 
—

 
(728,901
)
 
(729,851
)
Other changes
(202
)
 
86

 
—

 
(116
)
Change in fair value
(7,880
)
 
7,629

 
(4
)
 
(255
)
Balance at June 30, 2018
$
277,361

 
$
(277,425
)
 
$
31

 
$
(33
)
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


The following table presents additional information about level 3 servicing assets and liabilities recorded at fair value (in thousands):
 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at January 1, 2018
14,598

 
59

Additions
8,147

 
—

Less: Changes in fair value
(6,583
)
 
(31
)
Fair Value at June 30, 2018
16,162

 
28

 
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 April 1, 2018
15,023

 
41

Additions
4,452

 
—

Less: Changes in fair value
(3,313
)
 
(13
)
Fair Value at June 30, 2018
16,162

 
28


46



 
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



Loan Trailing Fee
The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and defaults rates using a discounted cash flow model.
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, 2018
 
2,595

Issuances
 
1,529

Cash payment of Loan Trailing Fee
 
(1,206
)
Change in fair value
 
160

Balance as of June 30, 2018
 
3,078

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, 2018 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
 
Fair Value as of June 30, 2018
$
277,392

 
$
277,425

 
Discount rate assumption:
7.52
%
*
7.52
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
274,662

 
$
274,660

 
200 basis point increase
271,970

 
271,964

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
280,255

 
$
280,262

 
200 basis point decrease
283,162

 
283,173

 
Default rate assumption:
13.11
%
*
13.11
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
273,981

 
$
273,967

 
200 basis point increase
270,641

 
270,612

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
280,892

 
$
280,911

 
200 basis point decrease
284,391

 
284,428

 
 * Represents weighted average assumptions considering all credit grades.

47



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, 2018 (in thousands, except percentages).
 
Servicing
Assets
 
Servicing
Liabilities
Fair Value as of June 30, 2018
$
16,162

 
$
28

Market servicing rate assumptions
0.625
%
 
0.625
%
Resulting fair value from:
 

 
 

Market servicing rate increase to 0.65%
15,160

 
31

Market servicing rate decrease to 0.60%
17,165

 
25

Weighted average prepayment assumptions
19.98
%
 
19.98
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to prepayment rate
15,964

 
28

Applying a 0.9 multiplier to prepayment rate
16,363

 
29

Weighted average default assumptions
12.66
%
 
12.66
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to default rate
15,967

 
28

Applying a 0.9 multiplier to default rate
16,362

 
28

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 six months of 2018 is $0.9 million. The minimum fee is $0.9 million for the year 2019.
Loan Purchase Commitments
Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase $31.5 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended June 30, 2018 and first business day of the quarter ending September 30, 2018. Prosper Funding will purchase these Borrower Loans within the first three business days of the quarter ending September 30, 2018.
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

48



outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at June 30, 2018 is $3.9 billion. Prosper Funding had accrued $1.3 million and $0.8 million as of June 30, 2018 and December 31, 2017, respectively, in regard to this obligation.
Regulatory Contingencies
Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, we record the amount we consider to be the best estimate within the range of potential losses that are both probable and estimable; however, if we cannot quantify the amount of the estimated loss, then we record the low end of the range of those potential losses.
SEC Inquiry
In April and May of 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to note investors. Although we have since corrected the error, we are currently subject to an investigation by the Securities and Exchange Commission (the “SEC”) as to whether violations of federal securities laws have occurred in connection with this error. We have been fully and voluntarily cooperating with the SEC.
We cannot predict the outcome of the investigation at this time and any potential fines or penalties, if any, that may arise from the investigation. Further, we are unable at this time to estimate a range of outcomes and as a result no accrual has been made.
9. Related Parties
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, 2018 and December 31, 2017 are summarized below (in thousands):
 
Aggregate Amount of
Notes and Borrower Loans Purchased
 
Interest Earned on Notes and Borrower Loans
 
Six Months Ended June 30,
 
Six Months Ended June 30,
Related Party
2018
 
2017
 
2018
 
2017
Executive officers and management
$
9

 
$
10

 
$
1

 
$
81

Directors (excluding executive officers and management)
—

 
—

 
—

 
—

Total
$
9

 
$
10

 
$
1

 
$
81

 
Aggregate Amount of
Notes and Borrower Loans Purchased
 
Interest Earned on Notes and Borrower Loans
 
Three Months Ended March 31,
 
Three Months Ended March 31,
Related Party
2018
 
2017
 
2018
 
2017
Executive officers and management
$
3

 
$
5

 
$
—

 
$
35

Directors (excluding executive officers and management)
—

 
—

 
—

 
—

Total
$
3

 
$
5

 
$
—

 
$
35

 
Note and Borrower Loan
Balance as of
Related Party
June 30, 2018
 
December 31, 2017
Executive officers and management
$
17

 
$
38

Directors  (excluding executive officers and management)
—

 
—

 
$
17

 
$
38


49



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, 2017.
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 portions of the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.
During the year ended December 31, 2017, our marketplace facilitated $2.9 billion in Borrower Loan originations, of which $2.7 billion were funded through our Whole Loan Channel, representing 93% of the total Borrower Loans originated through our marketplace during this period. From inception through June 30, 2018, our marketplace facilitated $12.8 billion in Borrower Loan originations, of which $11.3 billion were funded through our Whole Loan Channel, representing 88% of the total Borrower Loans originated through our marketplace during this period. In the three months ended June 30, 2018, our marketplace facilitated $866.9 million in Borrower Loan originations up 12% from the same period in 2017. In the three months ended June 30, 2018, $822.4 million of the borrower loan originations originated through our marketplace were funded through our Whole Loan Channel, representing 95% of the total Borrower Loans originated through our marketplace during this period.
As a credit marketplace, we believe our customers are 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.
   

50



Results of Operations
Key Operating and Financial Metrics (in thousands)

 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Loan Originations
$
866,894

 
$
774,700

 
$
1,611,021

 
$
1,360,315

Transaction Fees, Net
37,988

 
35,423

 
69,343

 
62,291

Whole Loans Outstanding (1)
3,902,142

 
3,557,914

 
3,902,142

 
3,557,914

Servicing Fees, Net
7,487

 
6,793

 
14,671

 
12,947

Total Net Revenues
31,675

 
31,447

 
62,125

 
62,292

Core Revenue (2)
52,308

 
48,334

 
98,037

 
82,486

Net Loss
(12,599
)
 
(41,405
)
 
(24,000
)
 
(65,426
)
Adjusted EBITDA (2)
8,807

 
6,716

 
13,327

 
(2,336
)
(1) Balance as of June 30.
(2) Core Revenue and Adjusted EBITDA are non-GAAP Financial measures. For more information regarding these measures and a reconciliation of these measures 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, 2018 and 2017 (in thousands, except percentages):
 
Three Months Ended
June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Total Net Revenue
$
31,675

 
$
31,447

 
228

 
1
 %
Total Expenses
44,265

 
72,755

 
(28,490
)
 
(39
)%
Net Loss Before Taxes
(12,590
)
 
(41,308
)
 
28,718

 
(70
)%
Income Tax Expense
9

 
97

 
(88
)
 
(91
)%
Net Loss
$
(12,599
)
 
$
(41,405
)
 
28,806

 
(70
)%
 
 
Six Months Ended June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Total Net Revenue
$
62,125

 
$
62,292

 
(167
)
 
—
 %
Total Expenses
86,106

 
127,456

 
(41,350
)
 
(32
)%
Net Loss Before Taxes
(23,981
)
 
(65,164
)
 
41,183

 
(63
)%
Income Tax Expense
19

 
262

 
(243
)
 
(93
)%
Net Loss
$
(24,000
)
 
$
(65,426
)
 
41,426

 
(63
)%

Total net revenue for the three months ended June 30, 2018 was relatively flat when compared to the three months ended June 30, 2017, primarily due to increased Borrower Loan originations, which increased 12% on a dollar basis, but was offset by an increase of $3.7 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, 2018. See below for an explanation of the increase in origination volume.  Total expenses for the three months ended June 30, 2018 decreased $28.5 million, a 39% decrease from the three months ended June 30, 2017, primarily due to a decrease in the fair value of the preferred stock warrant liability of $4.0 million in the three months ended June 30, 2018 compared to a $22.4 million increase in the three months ended June 30, 2017. Net loss for the three months ended June 30, 2018 decreased $28.8 million, primarily due to the decrease in expenses explained above.

51



Total net revenue for the six months ended June 30, 2018 was relatively flat when compared to the six months ended June 30, 2017, primarily due to increased Borrower Loan originations, which increased 18% on a dollar basis, but was offset by an increase of $15.7 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, 2018. See below for an explanation of the increase in origination volume. Total expenses for the six months ended June 30, 2018 decreased $41.4 million, a 32% decrease from the six months ended June 30, 2017, primarily due to a decrease in the fair value of the preferred stock warrant liability of $8.6 million in the six months ended June 30, 2018 compared to a $22.8 million increase in the six months ended June 30, 2017 and a $8.1 million decrease in other expenses for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. The $8.1 million decrease is partially driven by impairment charges, which we incurred in the six months ended June 30, 2017 (see below for further details). Net loss for the six months ended June 30, 2018 decreased $41.4 million, primarily due to the decrease in expenses explained above.
Origination Volume
From inception through June 30, 2018, a total of 1,003,231 Borrower Loans totaling $12.8 billion were originated through Prosper’s marketplace.
During the second quarter ended June 30, 2018, 65,442 Borrower Loans totaling $866.9 million were originated through Prosper’s marketplace, compared to 61,346 Borrower Loans totaling $774.6 million during the second quarter ended June 30, 2017. This represented an increase of 7% in terms of the number of loans and a 12% increase in the dollar amount of loans. The origination increase experienced during the quarter ended June 30, 2018 versus the quarter ended June 30, 2017 was due to higher borrower demand and stable funding sources.
Loan origination volume by Prosper Rating was as follows (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
AA
$
100.7

 
12
%
 
$
40.9

 
5
%
 
$
197.1

 
12
%
 
$
73.2

 
5
%
A
166.8

 
19
%
 
81.4

 
11
%
 
297.6

 
18
%
 
154.8

 
11
%
B
216.1

 
25
%
 
162.0

 
21
%
 
394.6

 
24
%
 
289.8

 
21
%
C
227.3

 
26
%
 
243.8

 
31
%
 
431.4

 
27
%
 
423.6

 
31
%
D
102.1

 
12
%
 
153.7

 
20
%
 
191.4

 
12
%
 
261.0

 
19
%
E
43.6

 
5
%
 
75.9

 
10
%
 
80.3

 
5
%
 
125.8

 
9
%
HR
10.3

 
1
%
 
16.9

 
2
%
 
18.6

 
1
%
 
32.0

 
2
%
Total
$
866.9

 
 
 
$
774.6

 
 
 
$
1,611.0

 
 
 
$
1,360.2

 
 

During the three and six months ended June 30, 2018, the mix of originations on the Prosper platform was relatively lower risk when compared to the three and six months ended June 30, 2017 as Prosper tightened its credit underwriting to reduce borrower defaults in higher risk tiers.


52



Revenue
The following tables summarize Prosper’s revenue for the three and six months ended June 30, 2018 and 2017 (in thousands, except percentages):
 
Three Months Ended June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Operating Revenues
 

 
 

 
 

 
 

Transaction Fees, Net
$
37,988

 
$
35,423

 
2,565

 
7
 %
Servicing Fees, Net
7,487

 
6,793

 
694

 
10
 %
Gain (Loss) on Sale of Borrower Loans
4,163

 
3,803

 
360

 
9
 %
Fair Value of Warrants Vested on the Sale of Borrower Loans
(20,633
)
 
(16,887
)
 
(3,746
)
 
22
 %
Other Revenues
1,015

 
1,415

 
(400
)
 
(28
)%
Total Operating Revenues
30,020

 
30,547

 
(527
)
 
(2
)%
Interest Income
 

 
 

 
 

 
 

Interest Income on Borrower Loans
14,556

 
12,007

 
2,549

 
21
 %
Interest Expense on Notes and Warehouse Line
(11,471
)
 
(11,177
)
 
(294
)
 
3
 %
Net Interest Income
3,085

 
830

 
2,255

 
272
 %
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
(1,430
)
 
70

 
(1,500
)
 
(2,143
)%
Total Revenues
31,675

 
31,447

 
228

 
1
 %
 
Six Months Ended June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Operating Revenues
 

 
 

 
 

 
 

Transaction Fees, Net
$
69,343

 
$
62,291

 
7,052

 
11
 %
Servicing Fees, Net
14,671

 
12,947

 
1,724

 
13
 %
Gain (Loss) on Sale of Borrower Loans
7,512

 
3,485

 
4,027

 
116
 %
Fair Value of Warrants Vested on the Sale of Borrower Loans
(35,912
)
 
(20,194
)
 
(15,718
)
 
78
 %
Other Revenues
2,367

 
2,135

 
232

 
11
 %
Total Operating Revenues
57,981

 
60,664

 
(2,683
)
 
(4
)%
Interest Income
 

 
 

 
 

 
 

Interest Income on Borrower Loans
26,916

 
23,507

 
3,409

 
15
 %
Interest Expense on Notes and Warehouse Line
(22,200
)
 
(21,855
)
 
(345
)
 
2
 %
Net Interest Income
4,716

 
1,652

 
3,064

 
185
 %
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
(572
)
 
(24
)
 
(548
)
 
2,283
 %
Total Revenues
62,125

 
62,292

 
(167
)
 
—
 %
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, 2018. This was partially offset by a lower average transaction fee which was 4.38% and 4.57% of the principal amount of originated loans facilitated through Prosper’s marketplace for the three months ended June 30, 2018 and 2017,

53



respectively. The decrease in the average transaction fee was due to the higher proportion of loans with a Prosper rating of AA being originated on the platform during the current quarter. These loans have a lower transaction fee rate.
Transaction fees increased primarily due to higher originations during the six months ended June 30, 2018. This was partially offset by a lower average transaction fee, which was 4.30% and 4.58% of the principal amount of originated loans facilitated through Prosper’s marketplace for the six months ended June 30, 2018 and June 30, 2017, respectively. The decrease in the average transaction fee was due to the higher proportion of loans with a Prosper rating of AA being originated on the platform during the current quarter. These loans have a lower transaction fee rate.
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 increase in servicing fees during the three months ended June 30, 2018 was due to an increase in the net collection fees collected and higher overall whole loan balance as compared to the three months ended June 30, 2017. The increase in servicing fees during the six months ended June 30, 2018 was due to the increase in collection fees and higher overall whole loan balance as compared to the six months ended June 30, 2017.
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 during the three months ended June 30, 2018 was due to an increase in volume of such sales during the three months ending June 30, 2018 due to an increase in loans being originated through the platform as described above. The increase during the six months ended June 30, 2018 was due to an increase in volume of such sales during the six months ended June 30, 2018 and $3.2 million less of rebates that were issued in the six months ended June 30, 2018 when compared to the six months ended June 30, 2017. The amount of rebates decreased in the six months ended June 30, 2018 as Prosper had sufficient demand for the loans being sold on the Platform, in part due to the consortium agreement signed in February 2017.
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 increases of $3.7 million and $15.7 million recognized primarily related to an increase in the number of warrants that vested during the three and six months ended June 30, 2018, respectively.
Other Revenues
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 decrease in Other Revenues for the three months ended June 30, 2018 was primarily the result of a decrease in securitization fees as Prosper facilitated no securitizations during the three months ended June 30, 2018 compared to one securitization during the three months ended June 30, 2017. The change for the six months ended June 30, 2018 is not significant.
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. The increase during the three and six months ended June 30, 2018 was due to the net interest earned on the borrower loans purchased by Prosper with funding from the Warehouse Line. The Warehouse Line has a lower interest rate than the related 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

54



Notes include default rates derived from historical performance, and discount rates. Loans held for sale 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, 2018 and 2017, respectively (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Borrower Loans
$
(7,880
)
 
$
(6,617
)
 
$
(15,418
)
 
$
(10,822
)
Loans held for sale
(1,179
)
 
—

 
(212
)
 
6

Notes
7,629

 
6,687

 
15,058

 
10,792

Total
$
(1,430
)
 
$
70

 
$
(572
)
 
$
(24
)
Expenses
The following tables summarize Prosper’s expenses for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended
June 30,
 
 

 
 

 
2018
 
2017
 
$ Change
 
% Change
Expenses
 
 
 

 
 

 
 

Origination and Servicing
$
9,192

 
$
8,873

 
319

 
4
 %
Sales and Marketing
20,907

 
20,131

 
776

 
4
 %
General and Administrative -Research and Development
4,153

 
3,909

 
244

 
6
 %
General and Administrative - Other
13,998

 
14,849

 
(851
)
 
(6
)%
Change in Fair Value of Convertible Preferred Stock Warrants
(3,998
)
 
22,416

 
(26,414
)
 
(118
)%
Restructuring Charges
271

 
647

 
(376
)
 
(58
)%
Other Expenses
$
(258
)
 
1,930

 
(2,188
)
 
(113
)%
Total Expenses
$
44,265

 
$
72,755

 
$
(28,490
)
 
(39
)%
 
Six Months Ended June 30,
 
 

 
 

 
2018
 
2017
 
$ Change
 
% Change
Expenses
 
 
 

 
 

 
 

Origination and Servicing
$
18,013

 
$
17,278

 
735

 
4
 %
Sales and Marketing
39,735

 
39,687

 
48

 
—
 %
General and Administrative -Research and Development
8,421

 
8,083

 
338

 
4
 %
General and Administrative - Other
28,444

 
31,390

 
(2,946
)
 
(9
)%
Change in Fair Value of Convertible Preferred Stock Warrants
$
(8,602
)
 
22,817

 
(31,419
)
 
(138
)%
Restructuring Charges
595

 
572

 
23

 
4
 %
Other Expenses
$
(500
)
 
7,629

 
(8,129
)
 
(107
)%
Total Expenses
$
86,106

 
$
127,456

 
$
(41,350
)
 
(32
)%

55



As of June 30, 2018, Prosper had 396 full-time employees compared to 363 full-time employees as of June 30, 2017. The following table reflects full-time employees as of June 30, 2018 and 2017 by department:
 
June 30, 2018
 
June 30, 2017
Origination and Servicing
172

 
162

Sales and Marketing
10

 
24

General and Administrative - Research and Development
86

 
74

General and Administrative - Other
128

 
103

Total Headcount
396

 
363

 
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, 2018 was not significant.
The increase in the six months ended June 30, 2018 was primarily the result of increased amortization costs for internal use software of $0.4 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 stock based compensation for the employees who support these activities. For the three months ended June 30, 2018, the increase was largely due to increased variable costs as Prosper increased its marketing efforts. The increase was driven by a $3.5 million or 93% increase in partnership costs as Prosper significantly increased partnership activities and a $0.6 million or 27% increase in online marketing costs as Prosper increased its online marketing activities. The increase in these costs was partially offset by a $3.6 million or 27% decrease in direct mailing costs as Prosper decreased the volume of its direct mail campaigns.
For the six months ended June 30, 2018, marketing costs were relatively flat largely due to more efficient marketing spending as Prosper was able to save on direct mail costs while increasing partnership and digital marketing spend. Direct mail costs decreased $7.7 million or 27% as Prosper decreased the volume of its direct mail campaigns. The decrease in direct mailing costs was offset by a $6.0 million or 98% increase in partnership costs and a $1.6 million or 45% increase in online marketing costs.
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 increase during the three months ended June 30, 2018 was due to a $0.2 million increase in compensation as Prosper increased its headcount in this area. The total expenses incurred for the three months ended June 30, 2018 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 $1.4 million and $1.0 million for the three months ended June 30, 2018 and 2017, respectively.
The increase during the six months ended June 30, 2018 was due to a $0.3 million increase in compensation as Prosper increased its headcount in this area. The total expenses incurred for the six months ended June 30, 2018 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 $2.5 million and $2.1 million for the six months ended June 30, 2018 and June 30, 2017, 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, 2018 was primarily the result of a decrease in compensation expense of $1.0 million, a decrease in professional services of $0.4 million and a decrease in amortization of property and equipment of $0.3 million.

56



The decrease for the six months ended June 30, 2018 was primarily the result of a decrease in compensation expense of $1.5 million, a decrease in professional services of $0.9 million, a decrease in amortization of property and equipment of $0.5 million and a decrease in amortization of intangibles of $0.8 million.
Changes in the Fair Value of Convertible Preferred Stock Warrants
Changes in the Fair Value of Convertible Preferred Stock warrants moved to a gain in the three and six months ended June 30, 2018 due to a decrease in the fair value of the underlying convertible preferred stock.
Restructuring Charges
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 six months ended June 30, 2018 and 2017, the expenses relate to adjustments to fair value of the existing liabilities and accretion expense on the remaining liability.
Other Expenses (Income)
Other Expenses (Income) includes interest income, impairment charges on assets held for sale, and fair value changes on Convertible Preferred Stock Warrants. During the three and six months ended June 30, 2017, Prosper management actively marketed 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 impairment charges of $2.0 million and $6.3 million, respectively. 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

Core Revenue
Core Revenue is a non-GAAP financial measure that we define as our Total Net Revenue adjusted to exclude the Fair Value of Warrants Vested on Sale of Borrower Loans. We believe it is useful to exclude the Fair Value of Warrants Vested on Sale of Borrower Loans from Total Net Revenue to derive a better measurement of our business performance. We believe that this adjustment also affords greater comparability to other marketplace lenders.
The Fair Value of Warrants Vested on the Sale of Borrower Loans relates to the Consortium Agreement. This agreement is set to expire in 2019 and Prosper currently does not expect to sign a similar agreement to replace it. As a result we believe that providing the Core Revenue metric that excludes the impact of our Fair Value of Warrants Vested on Sale of Borrower Loans is useful to investors.    
Core Revenue has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for Total Net Revenue which has been prepared in accordance with GAAP. These limitations include the following:
•
Core Revenue is net of Fair Value of Warrants Vested on Sale of Borrower Loans, which is our largest contra revenue item; and
•
other companies, including companies in our industry, may calculate Core Revenue differently or not at all, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Core Revenue alongside other financial performance measures, including Total Net Revenue and our financial results presented in accordance with GAAP. The following table presents a reconciliation of Total Net Revenue to Core Revenue for each of the periods indicated (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Total Net Revenue
$
31,675

 
$
31,447

 
$
62,125

 
$
62,292

Less: Fair Value of Warrants Vested on Sale of Borrower Loans
(20,633
)
 
(16,887
)
 
(35,912
)
 
(20,194
)
Core Revenue
$
52,308

 
$
48,334

 
$
98,037

 
$
82,486


Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as Net Loss adjusted for interest income on available for sale securities and cash and cash equivalents, income tax expense, depreciation and amortization, impairment of intangible

57



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 preferred 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 excluded these expenses because they are non-cash.
•
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):

58



 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net Loss
$
(12,599
)
 
$
(41,405
)
 
$
(24,000
)
 
$
(65,426
)
Fair Value of Warrants Vested on Sale of Borrower Loans
20,633

 
16,887

 
35,912

 
20,194

Depreciation expense:
 
 
 
 
 
 
 
    Servicing and Origination
1,413

 
1,357

 
2,991

 
2,637

    General & Administration - Other
1,007

 
1,293

 
2,142

 
2,603

Amortization of Intangibles
89

 
177

 
201

 
1,030

Impairment of Intangibles
—

 
1,999

 
—

 
6,320

Stock-based Compensation
2,253

 
3,312

 
4,584

 
6,812

Restructuring Charges
271

 
647

 
595

 
572

Change in the Fair Value of Warrants
(3,998
)
 
22,416

 
(8,602
)
 
22,817

Interest Income on Available for Sale Securities, Cash and Cash Equivalents
(271
)
 
(64
)
 
(515
)
 
(157
)
Income Tax Expense
9

 
97

 
19

 
262

Adjusted EBITDA
$
8,807

 
$
6,716

 
$
13,327

 
$
(2,336
)

Expenses on the Condensed Consolidated Statement of Operations include the following amount of stock based compensation for the periods presented (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Origination and servicing
241

 
328

 
456

 
545

Sales and marketing
108

 
141

 
216

 
311

General and administrative
1,904

 
2,843

 
3,912

 
5,956

Total stock based compensation
$
2,253

 
$
3,312

 
$
4,584

 
$
6,812


Liquidity and Capital Resources
We currently anticipate that our available funds, warehouse line, and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future.
The following table summarizes Prosper’s cash flow activities for the six months ended June 30, 2018 and 2017 (in thousands):
 
Six Months Ended
June 30,
 
2018
 
2017
Net Loss
$
(24,000
)
 
$
(65,426
)
Net cash (used in) provided by operating activities
(121,839
)
 
6,731

Net cash provided by investing activities
15,725

 
14,837

Net cash provided by financing activities
100,855

 
6,186

Net increase (decrease) in cash, cash equivalents and restricted cash
(5,259
)
 
27,754

Cash, cash equivalents and restricted cash at the beginning of the period
198,463

 
186,244

Cash, cash equivalents and restricted cash at the end of the period
$
193,204

 
$
213,998

Cash, cash equivalents and restricted cash ("net cash") decreased for the six months ended June 30, 2018 primarily due to the net $19.9 million less cash held on the platform by investors that is classified as restricted cash, $116.2 million of net purchases of borrower loans by Prosper, and $2.7 million in purchases of property and equipment, which was partially offset by $103.1 million provided by the Warehouse Line, $13.1 million of net income, net of non-cash items and net maturity of $18.6 million in available for sale securities. 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 net $18.6 million of available for sale securities that have been converted into cash. Net cash provided by financing activities primarily represents proceeds from the warehouse line and 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, 2018 and June 30, 2017 (in thousands):

59



 
Three Months Ended June 30,
 
2018
 
2017
Net Loss
$
(12,599
)
 
$
(41,405
)
Net cash (used in) provided by operating activities
(61,006
)
 
53,348

Net cash provided by (used in) investing activities
11,840

 
(2,217
)
Net cash provided by financing activities
30,996

 
1,011

Net increase (decrease) in cash and cash equivalents
(18,170
)
 
52,142

Cash and cash equivalents at the beginning of the period
211,374

 
161,856

Cash and cash equivalents at the end of the period
$
193,204

 
$
213,998

Net cash decreased for the three months ended June 30, 2018 primarily due to the net $38.5 million less cash held on the platform by investors that is classified as restricted cash, $34.9 million of net purchases of borrower loans by Prosper, and $1.4 million in purchases of property and equipment, which was partially offset by $31.5 million provided by the Warehouse Line, $9.8 million of net income, net of non-cash items and net maturity of $13.1 million in available for sale securities. 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.  
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.
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 for the year ended December 31, 2017. There have been no significant changes to these critical accounting estimates during the first six months of 2018.

60



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, 2017.
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 would 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 and six months ended June 30, 2018 and 2017 (in thousands, except percentages):
 
Three Months Ended
June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Total Net Revenue
$
22,412

 
$
21,679

 
$
733

 
3
 %
Total Expenses
22,130

 
20,135

 
1,995

 
10
 %
Net Income (Loss)
$
282

 
$
1,544

 
$
(1,262
)
 
(82
)%
 
Six Months Ended June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Total Net Revenue
$
42,131

 
$
39,847

 
$
2,284

 
6
 %
Total Expenses
42,018

 
37,855

 
4,163

 
11
 %
Net Income (Loss)
$
113

 
$
1,992

 
$
(1,879
)
 
(94
)%


61



Total net revenue for the three months ended June 30, 2018 increased $0.7 million, a 3% increase from the three months ended June 30, 2017, primarily due to the increased number of loan listings on the marketplace during the quarter, which resulted in increased administration fee revenue for the listing driven portion of the administration fee. Total expenses for the three months ended June 30, 2018 increased $2.0 million, a 10% increase from the three months ended June 30, 2017, 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, 2018 increased $2.3 million, a 6% increase from the six months ended June 30, 2017, primarily due to the increased number of loan listings on the marketplace during the quarter, which resulted in increased administration fee revenue for the listing driven portion of the administration fee. Total expenses for the six months ended June 30, 2018 increased $4.2 million, an 11% increase from the six months ended June 30, 2017, primarily due to higher corporate administration fees related to the listing driven portion during the current quarter.
Revenue
The following tables summarize Prosper Funding’s revenue for the three and six months ended June 30, 2018 and 2017 (in thousands, except percentages):
 
Three Months Ended
June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Revenues
 

 
 

 
 

 
 

Operating Revenues
 

 
 

 
 

 
 

Administration Fee Revenue - Related Party
$
30,836

 
$
27,309

 
3,527

 
13
 %
Servicing Fees, Net
7,209

 
6,520

 
689

 
11
 %
Gain (Loss) on Sale of Borrower Loans
(16,181
)
 
(13,084
)
 
(3,097
)
 
24
 %
Other Revenues
73

 
34

 
39

 
115
 %
Total Operating Revenues
21,937

 
20,779

 
1,158

 
6
 %
Interest Income on Borrower Loans
10,907

 
12,007

 
(1,100
)
 
(9
)%
Interest Expense on Notes
(10,177
)
 
(11,177
)
 
1,000

 
(9
)%
Net Interest Income
730

 
830

 
(100
)
 
(12
)%
Change in Fair Value on Borrower Loans, Loans Held for
   Sale and Notes, net
(255
)
 
70

 
(325
)
 
(464
)%
Total Revenue
$
22,412

 
$
21,679

 
733

 
3
 %
 
Six Months Ended June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Revenues
 

 
 
 
 

 
 

Operating Revenues
 

 
 

 
 

 
 

Administration Fee Revenue - Related Party
$
54,620

 
$
42,463

 
12,157

 
29
 %
Servicing Fees, Net
14,022

 
12,401

 
1,621

 
13
 %
Gain (Loss) on Sale of Borrower Loans
(27,754
)
 
(16,709
)
 
(11,045
)
 
66
 %
Other Revenues
136

 
64

 
72

 
113
 %
Total Operating Revenues
41,024

 
38,219

 
2,805

 
7
 %
Interest Income on Borrower Loans
21,859

 
23,507

 
(1,648
)
 
(7
)%
Interest Expense on Notes
(20,388
)
 
(21,855
)
 
1,467

 
(7
)%
Net Interest Income
1,471

 
1,652

 
(181
)
 
(11
)%
Change in Fair Value on Borrower Loans, Loans Held for
   Sale and Notes, net
(364
)
 
(24
)
 
(340
)
 
1,417
 %
Total Revenue
$
42,131

 
$
39,847

 
2,284

 
6
 %

62



Administration Fee Revenue - Related Party
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, 2018 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, 2018 and an increase in the rebate fee due to an increase in the rebates given related to the Consortium Purchase Agreement. The increase for the six months ended June 30, 2018 was the result of an increase in the listing driven portion of administration fees as a result of higher listings in the six months ended June 30, 2018 and an increase in the rebate fee due to an increase in the rebates given related to the Consortium Purchase Agreement.
Servicing Fees, 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 increases in servicing fees were due to an increase in collection fees during the period and an higher outstanding Borrower Loan balance.
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, 2018 was due to the increase in rebates of $3.6 million primarily due to warrants issued by PMI in relation to the agreements with the Consortium that were reached in 2017 that result 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, 2018 was due to the increase in rebates of $12.5 million primarily due to warrants issued by PMI in relation to the agreements with the Consortium that were reached in 2017 that result in warrants for convertible preferred stock vesting as loans are purchased by the Consortium.
Other Revenues
Other Revenues consist 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 collectible. 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 decrease in net interest income for the periods above was primarily driven by the decrease 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 that 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 month periods ended June 30, 2018 and 2017, respectively (in thousands):

63



 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Borrower Loans
$
(7,880
)
 
$
(6,617
)
 
$
(15,418
)
 
$
(10,822
)
Loans held for sale
(4
)
 
—

 
(4
)
 
6

Notes
7,629

 
6,687

 
15,058

 
10,792

Total
$
(255
)
 
$
70

 
$
(364
)
 
$
(24
)
Expenses
The following tables summarize Prosper Funding’s expenses for the three and six month periods ended June 30, 2018 and 2017 (in thousands, except percentages):
 
Three Months Ended
June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Expenses
 

 
 

 
 

 
 

Administration Fee Expense – Related Party
$
20,285

 
$
18,466

 
1,819

 
10
%
Servicing
1,663

 
1,524

 
139

 
9
%
General and Administrative
182

 
145

 
37

 
26
%
Total Expenses
$
22,130

 
$
20,135

 
1,995

 
10
%
 
Six Months Ended June 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Expenses
 

 
 

 
 

 
 

Administration Fee Expense – Related Party
$
38,175

 
$
34,282

 
3,893

 
11
%
Servicing
3,478

 
3,255

 
223

 
7
%
General and Administrative
365

 
318

 
47

 
15
%
Total Expenses
$
42,018

 
$
37,855

 
4,163

 
11
%
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 fees collected by or on behalf of Prosper Funding. The increase in fees for the three months ended June 30, 2018 was due to higher fees paid on the origination of borrower loans due to the increase in origination volume. The increase in fees for the six months ended June 30, 2018 was due to higher fees paid on the origination of borrower loans due to the increase 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 three and six months ended June 30, 2018 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 decrease for the three months and six months ended June 30, 2018 was primarily due to an increase in outsourced costs.


64



Liquidity and Capital Resources
We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future.
The following table summarizes Prosper Funding’s cash flow activities for the six months ended June 30, 2018 and 2017 (in thousands):
 
Six Months Ended
June 30,
 
2018
 
2017
Net Income
$
113

 
$
1,992

Net cash provided by (used in) operating activities
(14,433
)
 
$
25,906

Net cash used in investing activities
(2,006
)
 
(9,038
)
Net cash (used in) provided by financing activities
(832
)
 
6,232

Net increase (decrease) in cash, cash equivalents and restricted cash
(17,271
)
 
23,100

Cash, cash equivalents and restricted cash at the beginning of the period
148,315

 
154,912

Cash, cash equivalents and restricted cash at the end of the period
$
131,044

 
$
178,012

 
The net decrease in Cash for the six months ended June 30, 2018, is primarily due to the net $19.7 million less cash held on the platform by investors that is classified as restricted cash. 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, 2018 and 2017. 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, 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, 2018, Prosper Funding has not engaged in any off-balance sheet financing activities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk and Interest Rate Risk
Prosper Marketplace, Inc.
Market Rate Sensitivity
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.
Through the Warehouse Line we invest in Borrower Loans classified as held for sale. Investments in interest-earning instruments carry a degree of interest rate risk. Changes in U.S. interest rates affect the market value of these Borrower Loans held on our balance sheet. The Company’s future investment income may fall short of expectations, or the Company may suffer a loss in principal if the Company is forced to sell Borrower Loans, which have declined in market value due to changes in interest rates as stated above. Changes in the market value of Borrower Loans classified as held for sale are recorded through the Statement of Operations. The fair value of Borrower Loans which are held on our balance sheet as held for sale is $116.8 million as of June 30, 2018.
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. For Borrower Loans and Notes presented on our Balance Sheet on behalf of our fractional loan pool investors, 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.

65



The Company is also exposed to variable interest rate risk under the debt from the Warehouse Line, which had an outstanding balance of $103.6 million as of June 30, 2018. To reduce the impact of large fluctuations in interest rates, we hedged a portion of our interest rate risk by entering into a derivative agreement with a financial institution, which is currently out of the money. The derivative agreement that we use to manage the risk associated with fluctuations in interest rates may not be able to eliminate the exposure to these changes. Interest rates are sensitive to numerous factors outside of our control, such as government and central bank monetary policy in the United States. Depending on the size of the exposures and the relative movements of interest rates, if we choose not to hedge or fail to effectively hedge our exposure, we could experience a material adverse effect on our results of operations and financial condition.
Prosper had cash and cash equivalents of $58.7 million as of June 30, 2018, and $45.8 million as of December 31, 2017. These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities which may include money market funds, 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 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 $34.8 million and $53.1 million as of June 30, 2018 and December 31, 2017, respectively. These investments consisted of U.S. Treasury bills, 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 $0.1 million in the fair value of Prosper’s available for sale investments as of June 30, 2018, and of approximately $0.3 million in the fair value of Prosper’s available for sale investments as of December 31, 2017. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $0.1 million in the fair value of Prosper’s available for sale investments as of June 30, 2018, and of approximately $0.3 million in the fair value of Prosper’s available for sale investments as of December 31, 2017. 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’s investment in Borrower Loans held for sale was $116.8 million as of June 30, 2018. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $1.2 million in the fair value of Prosper’s investment in Borrower Loans held for sale as of June 30, 2018. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $1.2 million in the fair value of Prosper’s investment in Borrower Loans held for sale as of June 30, 2018. Any realized gains or losses resulting from such interest rate change would be recorded in our Statement of Operations so long as we hold these Borrower Loans on our balance sheet.
Prosper Funding LLC 
Market Rate Sensitivity
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 of 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 $10.9 million as of June 30, 2018, and $8.2 million as of December 31, 2017. These amounts were held in various unrestricted deposits with highly rated financial institutions. 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

66



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 Registrant’s Principal Executive Officer (PEO) and 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, 2018. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of June 30, 2018.
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 Exchange Act) during the three months ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.

67



PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Prosper's disclosure under this Item is incorporated by reference to the matters referenced in "Note 17 – Commitments and Contingencies – SEC Inquiry" of PMI’s Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Prosper Funding's disclosure under this Item is incorporated by reference to the matters referenced in "Note 8 – Commitments and Contingencies – SEC Inquiry" of Prosper Funding's Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
This Item should be read in conjunction with the disclosures contained in Part I, Item 3, "Legal Proceedings" of our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 1A. Risk Factors 
You should carefully consider 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, 2017.

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

EXHIBIT INDEX

68



Exhibit
Number
 
Exhibit Description
 
 
 
 
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)
 
 
 
 
Amended and Restated Certificate of Incorporation of PMI (incorporated by reference to Exhibit 3.2 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on November 13, 2017)
 
 
 
 
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)
 
 
 
 
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)
 
 
 
 
Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5)
 
 
 
 
Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4)
 
 
 
 
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)
 
 
 
 
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)
 
 
 
 
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)
 
 
 
 
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, 2018 (1)
 
 
 
 
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, 2018 (1)
 
 
 
 
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, 2018 (1)
 
 
 
 
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, 2018 (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, 2018 (1)
 
 
 
 
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, 2018 (1)
 
 
 
 
XBRL Instance Documents
 
 
 
 
XBRL  Taxonomy Extension Schema Document
 
 
 
 
Taxonomy Extension Calculation Linkbase Document
 
 
 
 
Taxonomy Extension Label Linkbase Document
 
 
 
 
Taxonomy Extension Presentation Linkbase Document
 
 
 
 
Taxonomy Extension Definition Linkbase Document

69



(1)
 
Filed herewith.
 
 
 




70



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 10, 2018
/s/ David Kimball
 
David Kimball
 
Chief Executive Officer of Prosper Marketplace, Inc.
 
Chief Executive Officer of Prosper Funding LLC
 
(Principal Executive Officer)
 
 
Date: August 10, 2018
/s/ Usama Ashraf
 
Usama Ashraf
 
Chief Financial Officer of Prosper Marketplace, Inc.
 
Chief Financial Officer of Prosper Funding LLC
 
(Principal Financial and Accounting Officer)
 
 


71

PROSPER MARKETPLACE, INC Reports