10-Q 1 prosper-93016x10q.htm SEPT 30 2016 10-Q Document


 
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 September 30, 2016
Commission
File Number
 
Exact Name of Registrant as Specified in its Charter
 
I.R.S. Employer
Identification Number
333-147019
333-179941-01
333-204880
 
PROSPER MARKETPLACE, INC.
a Delaware corporation
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5400
 
73-1733867
 
 
 
 
 
333-179941
333-204880-01
 
PROSPER FUNDING LLC
a Delaware limited liability company
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5479
 
45-4526070
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Prosper Marketplace, Inc.
Yes x No ¨
Prosper Funding LLC
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Prosper Marketplace, Inc.
Yes x No ¨
Prosper Funding LLC
Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large
Accelerated
Filer
 
Accelerated
Filer
 
Non-
Accelerated
Filer
 
Smaller
Reporting
Company
Prosper Marketplace, Inc.
o
 
o
 
x
 
o
Prosper Funding LLC
o
 
o
 
o
 
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Prosper Marketplace, Inc.
Yes¨ No x
Prosper Funding LLC
Yes¨ No x
Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
As of November 7, 2016, there were 69,783,206 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.
THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PROSPER MARKETPLACE, INC. AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.
 

1



TABLE OF CONTENTS
 
 
 
 
 
Page No.
 
 
 
PART I.
 
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
PART II.
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
Except as the context requires otherwise, as used herein, “Registrants” refers to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “we,” “us,” “our,” “Prosper,” and the “Company” refer to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. (“BillGuard”), a Delaware corporation, Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, and Prosper Capital Management LLC, a Delaware limited liability company, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis. In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” Further, investors currently invest in Borrower Loans through two channels: (i) the “Note Channel”, which allows investors to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel”, which allows accredited and institutional investors to purchase Borrower Loans in their entirety directly from PFL. Finally, although historically we have referred to investors as “lender members,” we call them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace. All share and per share numbers presented in this Form 10-Q have been adjusted to reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.


2



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;
our limited operational history and lack of significant historical performance data about borrower performance;
potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;
our compliance with applicable local, state and federal law, including the Securities Act, Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace;
the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
the lack of a public trading market for the Notes and the lack of any trading platform on which investors can resell the Notes;
the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our marketplace or adversely impact our ability to service Borrower Loans.
There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of our Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

3



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

4



Item 1. Condensed Consolidated Financial Statements
Prosper Marketplace, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except for share and per share amounts)
 
September 30, 2016
 
December 31, 2015
Assets
 

 
 

Cash and Cash Equivalents
$
31,853

 
$
66,295

Restricted Cash
120,648

 
151,223

Available for Sale Investments, at Fair Value
42,783

 
73,187

Accounts Receivable
918

 
2,434

Loans Held for Sale, at Fair Value
136

 
32

Borrower Loans, at Fair Value
314,671

 
297,273

Property and Equipment, Net
26,678

 
24,965

Prepaid and Other Assets
7,420

 
6,433

Servicing Assets
12,664

 
14,363

Goodwill
36,368

 
36,368

Intangibles Assets, Net
10,069

 
13,051

Total Assets
$
604,208

 
$
685,624

Liabilities, Convertible Preferred Stock and Stockholders' Deficit
 

 
 

Accounts Payable and Accrued Liabilities
$
11,639

 
$
22,409

Payable to Investors
101,162

 
136,507

Notes at Fair Value
313,920

 
297,405

Other Liabilities
20,954

 
20,735

Total Liabilities
447,675

 
477,056

Commitments and Contingencies (see Note 16)


 


Convertible Preferred Stock – $0.01 par value; 177,388,425 shares authorized, issued and outstanding as of September 30, 2016 and December 31, 2015. Aggregate liquidation preference of $325,952 as of September 30, 2016 and December 31, 2015.
275,938

 
275,938

Stockholders' Deficit
 

 
 

Common Stock ($0.01 par value; 298,222,103 shares authorized, 70,708,055 issued and 69,772,120 outstanding as of September 30, 2016; and 270,326,075 shares authorized, 70,367,425 shares issued and 69,431,490 outstanding as of December 31, 2015)
194

 
127

Additional Paid-In Capital
121,206

 
102,971

Less: Treasury Stock (5,177,235 common shares at cost, September 30, 2016 and December 31, 2015)
(23,417
)
 
(23,417
)
Accumulated Deficit
(217,413
)
 
(146,907
)
Accumulated Other Comprehensive Income/(Loss)
25

 
(144
)
Total Stockholders' Deficit
(119,405
)
 
(67,370
)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit
$
604,208

 
$
685,624

All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016. 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5




Prosper Marketplace, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except for share and per share amounts) 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 

 
 

Operating Revenues
 

 
 

 
 

 
 

Transaction Fees, Net
$
14,086

 
$
46,842

 
$
75,186

 
$
111,984

Servicing Fees, Net
7,079

 
4,652

 
21,898

 
10,796

Gain on Sale of Borrower Loans
761

 
4,263

 
3,865

 
9,881

Other Revenue
973

 
2,229

 
4,562

 
4,935

Total Operating Revenues
22,899

 
57,986

 
105,511

 
137,596

Interest Income
 
 
 
 
 
 
 
Interest Income on Borrower Loans
11,735

 
10,280

 
33,710

 
30,892

Interest Expense on Notes
(10,636
)
 
(9,550
)
 
(30,456
)
 
(28,561
)
Net Interest Income
1,099

 
730

 
3,254

 
2,331

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
(47
)
 
(87
)
 
(126
)
 
(66
)
Total Net Revenue
23,951

 
58,629

 
108,639

 
139,861

Expenses
 
 
 
 
 
 
 
Origination and Servicing
7,633

 
8,357

 
26,850

 
22,335

Sales and Marketing
9,391

 
31,844

 
54,303

 
76,996

General and Administrative
24,740

 
22,236

 
83,498

 
57,570

Restructuring Charges, Net
(470
)
 

 
14,153

 

Total Expenses
41,294

 
62,437

 
178,804

 
156,901

Net Loss Before Taxes
(17,343
)
 
(3,808
)
 
(70,165
)
 
(17,040
)
Income Tax Expense
74

 
35

 
344

 
284

Net Loss Applicable to Common Stockholders
$
(17,417
)
 
$
(3,843
)
 
$
(70,509
)
 
$
(17,324
)
Net Loss Per Share – Basic and Diluted
$
(0.27
)
 
$
(0.07
)
 
$
(1.12
)
 
$
(0.32
)
Weighted-Average Shares - Basic and Diluted
65,393,175

 
55,907,765

 
63,015,616

 
54,746,980

All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016. 
The accompanying notes are an integral part of these condensed consolidated financial statements.

6




Prosper Marketplace, Inc.
Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)
(in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net Loss
$
(17,417
)
 
$
(3,843
)
 
$
(70,509
)
 
$
(17,324
)
Other Comprehensive Income (Loss), Before Tax
 

 
 

 
 

 
 

Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value
(54
)
 
4

 
161

 
4

Realized Gain (Loss) on Sale of Available for Sale Investments, at Fair Value
1

 

 
7

 

Other Comprehensive Income (Loss), Before Tax
(53
)
 
4

 
168

 
4

Income tax effect

 

 

 

Other Comprehensive Income (Loss), Net of Tax
(53
)
 
4

 
168

 
4

Comprehensive Income (Loss)
(17,470
)
 
(3,839
)
 
(70,341
)
 
(17,320
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

7




Prosper Marketplace, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from Operating Activities:
 

 
 

Net Loss
$
(70,509
)
 
$
(17,324
)
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities:
 
 
 
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes
126

 
66

Depreciation and Amortization
9,892

 
4,967

Gain on Sales of Borrower Loans
(7,030
)
 
(9,958
)
Change in Fair Value of Servicing Rights
8,550

 
3,322

Stock-Based Compensation Expense
17,181

 
7,439

Restructuring Liability
5,107

 

Other, Net
968

 
94

Changes in Operating Assets and Liabilities:
 
 
 
Purchase of Loans Held for Sale at Fair Value
(1,619,866
)
 
(2,426,963
)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value
1,619,757

 
2,435,253

Restricted Cash Except for those Related to Investing Activities
37,044

 
(69,651
)
Accounts Receivable
1,516

 
1,800

Prepaid and Other Assets
(989
)
 
(4,168
)
Accounts Payable and Accrued Liabilities
(6,677
)
 
7,483

Payable to Investors
(35,345
)
 
72,263

Other Liabilities
(7,247
)
 
(2,000
)
Net Cash (Used in) Provided by Operating Activities
(47,522
)
 
2,623

Cash Flows from Investing Activities:
 
 
 
Purchase of Borrower Loans Held at Fair Value
(164,436
)
 
(142,103
)
Principal Payments of Borrower Loans Held at Fair Value
127,308

 
111,864

Purchases of Property and Equipment
(10,049
)
 
(9,518
)
Maturities of Short Term Investments
1,279

 
1,274

Purchases of Short Term Investments
(1,277
)
 
(1,275
)
Purchases of Available for Sale Investments, at Fair Value
(11,725
)
 
(47,100
)
Proceeds from Sale of Available for Sale Investments
10,444

 

Maturities of Available for Sale Investments
31,645

 

Acquisition of Businesses, Net of Cash Acquired

 
(19,000
)
Changes in Restricted Cash Related to Investing Activities
(6,469
)
 
(1,446
)
Net Cash Used in Investing Activities
(23,280
)
 
(107,304
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from Issuance of Notes Held at Fair Value
165,727

 
142,246

Payments of Notes Held at Fair Value
(129,603
)
 
(111,711
)
Proceeds from Issuance of Convertible Preferred Stock, Net

 
164,793

Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock
526

 
4,950

Repurchase of Common Stock and Restricted Stock
(71
)
 
(23,245
)
Taxes Paid for Awards Vested Under Equity Incentive Plans
(219
)
 
(2,387
)
Net Cash Provided by Financing Activities
36,360

 
174,646

Net (Decrease) Increase in Cash and Cash Equivalents
(34,442
)
 
69,965

Cash and Cash Equivalents at Beginning of the Period
66,295

 
50,557

Cash and Cash Equivalents at End of the Period
$
31,853

 
$
120,522

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Paid for Interest
$
30,228

 
$
28,698

Non-Cash Investing Activity- Accrual for Property and Equipment, Net
$
241

 
$
5

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

 
$
840

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

8




Prosper Marketplace, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation
Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005.  Except as the context requires otherwise, as used in these notes to the condensed consolidated financial statements of Prosper Marketplace, Inc., “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015. The balance sheet at December 31, 2015 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The preparation of Prosper’s condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in Prosper’s financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions.
The accompanying interim condensed consolidated financial statements include the accounts of PMI and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.
On January 23, 2015, PMI acquired all of the outstanding limited liability company units of American HealthCare Lending, LLC (“American HealthCare Lending”), a company that operated a patient financing platform, and merged American HealthCare Lending with and into Prosper Healthcare Lending LLC (“PHL”), a newly established entity surviving the merger. Prosper’s condensed consolidated financial statements include PHL’s results of operations and financial position from the date of acquisition forward.
On October 9, 2015, PMI acquired all of the outstanding stock of BillGuard, Inc. (“BillGuard”), a company incorporated in Delaware in 2010 that developed applications that help consumers manage their identity, finances and credit. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. Prosper’s condensed consolidated financial statements include BillGuard’s results of operations and financial position from the date of acquisition forward.
Reclassifications 
Due to the early adoption of ASU 2016-09 on January 1, 2016, reclassifications were made to the financing section of the condensed consolidated statements of cash flows to reflect taxes paid for awards vested under equity incentive plans.  Prior period amounts have been reclassified to conform to the current presentation.   
2. Summary of Significant Accounting Policies
Prosper’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes to these accounting policies during the first nine months of 2016.
Fair Value Measurements
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments at Fair Value, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.

9




Restructuring Charges
Restructuring charges consist of severance and contract termination related costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. 
Borrower Loans, Loans Held for Sale and Notes
Through the Note Channel, Prosper purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s condensed consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.
Loan Trailing Fee
On July 1, 2016, Prosper signed a series of agreements with WebBank to include an additional program fee (Loan Trailing Fee). These agreements are effective August 1, 2016. The Loan Trailing Fee is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans, irrespective of whether the loans are sold by Prosper, and gives the issuing bank an ongoing financial interest in the performance of the loans it originates. This fee is paid by Prosper to the issuing bank partner over the term of the respective loans and is a function of the principal and interest payments. In the event that principal and interest payments are not made, Prosper is not required to make this Loan Trailing Fee payment. The obligation to pay the Loan Trailing Fee is recorded at fair value at the time of the origination of the loan with Other Liabilities and recorded as a reduction of Transaction Fees, net. Any changes in the fair value of this liability are recorded in changes in fair value of Borrower Loans, Loans Held for Sale and Notes, Net on the statements of operations. The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which considers assumptions of expected prepayment rates and defaults rates.

Recent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper may adopt the standard in either Prosper’s fiscal year ending December 31, 2017 or 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In March 2016, April 2016 and May 2016, the FASB further amended the guidance to clarify the implementation on principal versus agent considerations, the identification of performance obligation and the licensing implementation guidance, and to provide narrow-scope improvements and practical expedients.  Prosper has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.  
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity to eliminate the use of different methods in practice and thereby reduce existing diversity in the accounting for hybrid financial instruments issued in

10




the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument. The existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which became effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The new guidance simplifies the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.  
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures.  This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper will be required to recognize and measure leases at the beginning off the earliest period presented using a modified retrospective approach.  Prosper anticipates that this standard will have a material impact on our consolidated financial statements.  While Prosper is continuing to assess all potential impacts of the standard, Prosper currently believes the most significant impact relates to our accounting for office operating leases.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718).  This guidance makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This guidance will be effective for us in the first quarter of our fiscal year 2017, and early adoption is permitted. Prosper has decided to early adopt this guidance effective January 1, 2016, the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements. 
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper is currently evaluating the impacts the adoption of this accounting standard will have on Prosper's cash flows.

3. Property and Equipment, Net
Property and equipment consist of the following (in thousands):

11




 
September 30,
2016
 
December 31,
2015
Property and equipment:
 

 
 

Computer equipment
$
14,241

 
$
10,522

Internal-use software and website development costs
15,144

 
10,990

Office equipment and furniture
3,064

 
2,442

Leasehold improvements
7,071

 
5,719

Assets not yet placed in service
2,121

 
3,242

Property and equipment
41,641

 
32,915

Less accumulated depreciation and amortization
(14,963
)
 
(7,950
)
Total property and equipment, net
$
26,678

 
$
24,965

Depreciation and amortization expense for property and equipment for the three months ended September 30, 2016 and 2015 was $2.5 million and $1.3 million, respectively.  Depreciation and amortization expense for property and equipment for the nine months ended September 30, 2016 and 2015 was $6.9 million and $4.4 million, respectively. Prosper capitalized internal-use software and website development costs in the amount of $1.3 million and $2.0 million for the three months ended September 30, 2016 and 2015, respectively.  Prosper capitalized internal-use software and website development costs in the amount of $5.2 million and $5.9 million for the nine months ended September 30, 2016 and 2015, respectively. Prosper recorded internal-use software and website development impairment charges of $672 thousand and $0 for the nine months ended September 30, 2016 and 2015, respectively, as a result of its decision to discontinue several software and website development projects. These charges are included in general and administration expenses on the condensed consolidated statements of operations.
4. Borrower Loans, Loans Held for Sale, and Notes Held at Fair Value
The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale and Notes as of September 30, 2016 and December 31, 2015, are presented in the following table (in thousands):
 
Borrower Loans
 
Notes
 
Loans Held for Sale
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
Aggregate principal balance outstanding
$
319,210

 
$
296,945

 
$
(322,003
)
 
$
(294,331
)
 
$
148

 
$
42

Fair value adjustments
(4,539
)
 
328

 
8,083

 
(3,074
)
 
(12
)
 
(10
)
Fair value
$
314,671

 
$
297,273

 
$
(313,920
)
 
$
(297,405
)
 
$
136

 
$
32

At September 30, 2016, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through September 2021. At December 31, 2015, outstanding Borrower Loans had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2020. 
Approximately $0.4 million and $2.4 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 three and nine months ending September 30, 2016.
As of September 30, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.7 million and a fair value of $0.8 million. As of December 31, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.3 million and a fair value of $0.9 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of September 30, 2016 and December 31, 2015, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.1 million, respectively.
5. Loan Servicing Assets and Liabilities
Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees.  The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains recognized on the sale of such Borrower Loans were $0.8 million and $4.3 million

12




for the three months ended September 30, 2016 and 2015, respectively. The total gains recognized on the sale of such Borrower Loans were $3.9 million and $9.9 million for the nine months ended September 30, 2016 and 2015, respectively.
As of September 30, 2016, 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 and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through September 2021. At December 31, 2015, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.8 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and various maturity dates through December 2020.
$9.7 million and $6.3 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended September 30, 2016 and 2015 respectively. $29.8 million and $14.1 million of contractually specified servicing fees and ancillary fees are included on our condensed statements of operations in Servicing Fees, Net for the nine months ended September 30, 2016 and 2015 respectively.
Fair value
Valuation method – Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.
Market servicing rate – Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider.
Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets.
Default Rate – The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans.  Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6. Available for Sale Investments, at Fair Value 
Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired (OTTI). 
The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of September 30, 2016 and December 31, 2015, are as follows (in thousands): 

13




September 30, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed maturity securities:
 

 
 

 
 

 
 

Corporate debt securities
$
29,733

 
$
16

 
$
(8
)
 
$
29,741

US Treasury securities
10,525

 
14

 
(2
)
 
10,537

Agency bonds
2,499

 
6

 

 
2,505

Total Available for Sale Investments
$
42,757

 
$
36

 
$
(10
)
 
$
42,783

December 31, 2015
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed maturity securities:
 

 
 

 
 

 
 

Corporate debt securities
$
50,327

 
$
1

 
$
(94
)
 
$
50,234

Commercial paper
9,493

 

 

 
9,493

US Treasury securities
8,512

 

 
(41
)
 
8,471

Agency bonds
2,499

 

 
(8
)
 
2,491

Total fixed maturity securities
70,831

 
1

 
(143
)
 
70,689

Short term bond funds
2,500

 

 
(2
)
 
2,498

Total Available for Sale Investments
$
73,331

 
$
1

 
$
(145
)
 
$
73,187

A summary of available for sale investments with unrealized losses as of September 30, 2016, and December 31, 2015, aggregated by category and period of continuous unrealized loss, is as follows (in thousands):
 
Less than 12 months
 
12 months or longer
 
Total
September 30, 2016
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

Corporate debt securities
$
12,075

 
$
(8
)
 
$

 
$

 
$
12,075

 
$
(8
)
U.S. treasury securities
4,503

 
(2
)
 

 

 
4,503

 
(2
)
Total Investments with Unrealized Losses
$
16,578

 
$
(10
)
 
$

 
$

 
$
16,578

 
$
(10
)
 
 
Less than 12 months
 
12 months or longer
 
Total
December 31, 2015
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

Corporate debt securities
$
45,375

 
$
(94
)
 
$

 
$

 
$
45,375

 
$
(94
)
U.S. treasury securities
8,471

 
(41
)
 

 

 
8,471

 
(41
)
Agency bonds
2,491

 
(8
)
 

 

 
2,491

 
(8
)
Total fixed maturity securities
56,337

 
(143
)
 

 

 
56,337

 
(143
)
Short term bond funds
2,498

 
(2
)
 

 

 
2,498

 
(2
)
Total Investments with Unrealized Losses
$
58,835

 
$
(145
)
 
$

 
$

 
$
58,835

 
$
(145
)
 
There were no impairment charges recognized during the nine months ended September 30, 2016
The maturities of available for sale investments at September 30, 2016, and December 31, 2015, are as follows (in thousands):

14




September 30, 2016
Within 1 year
 
After 1 year through 5 years
 
After 5 years to 10 years
 
After 10 years
 
Total
Corporate debt securities
$
25,235

 
$
4,506

 
$

 
$

 
$
29,741

US Treasury securities
6,532

 
4,005

 

 

 
10,537

Agency bonds

 
2,505

 

 

 
2,505

Total Fair Value
$
31,767

 
$
11,016

 
$

 
$

 
$
42,783

Total Amortized Cost
$
31,763

 
$
10,994

 
$

 
$

 
$
42,757

December 31, 2015
Within 1 year
 
After 1 year through 5 years
 
After 5 years to 10 years
 
After 10 years
 
Total
Corporate debt securities
$
26,289

 
$
23,945

 
$

 
$

 
$
50,234

Commercial paper
9,493

 

 

 

 
9,493

US Treasury securities

 
8,471

 

 

 
8,471

Agency bonds

 
2,491

 

 

 
2,491

Total Fair Value
$
35,782

 
$
34,907

 
$

 
$

 
$
70,689

Total Amortized Cost
$
35,831

 
$
35,000

 
$

 
$

 
$
70,831

During the nine months ended September 30, 2016, Prosper sold $10.4 million of investments which resulted in a realized gain of $7 thousand.
7.  Fair Value of Assets and Liabilities 
Prosper measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. Servicing Assets and Liabilities are also subject to fair value measurement within the financial statements of Prosper. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature. 
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower

15




Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
Investments held at fair value consist of available for sale investments.  The available for sale investments consist of corporate debt securities, commercial paper, U.S. treasury securities, agency bonds and short term bond funds.  When available, Prosper uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper's 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 following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
September 30, 2016
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$

 
$

 
$
314,671

 
$
314,671

Loans Held for Sale

 

 
136

 
136

Available for Sale Investments, at Fair Value

 
42,783

 

 
42,783

Servicing Assets

 

 
12,664

 
12,664

Total Assets

 
42,783

 
327,471

 
370,254

Liabilities:
 

 
 

 
 

 
 

Notes
$

 
$

 
$
313,920

 
$
313,920

Servicing Liabilities

 

 
254

 
254

Contingent Consideration

 

 
4,994

 
4,994

Total Liabilities
$

 
$

 
$
319,168

 
$
319,168

 
December 31, 2015
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$

 
$

 
$
297,273

 
$
297,273

Loans Held for Sale

 

 
32

 
32

Available for Sale Investments, at Fair Value

 
73,187

 

 
73,187

Servicing Assets

 

 
14,363

 
14,363

Total Assets

 
73,187

 
311,668

 
384,855

Liabilities:
 

 
 

 
 

 
 

Notes
$

 
$

 
$
297,405

 
$
297,405

Servicing Liabilities

 

 
484

 
484

Contingent Consideration

 

 
4,801

 
4,801

Total Liabilities
$

 
$

 
$
302,690

 
$
302,690

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

16




The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at September 30, 2016 and December 31, 2015:
Borrower Loans, Loans Held for Sale and Notes: 
 
 
Range
Unobservable Input
 
September 30, 2016
 
December 31, 2015
Discount rate
 
4.4% - 15.2%
 
4.3% - 14.5%
Default rate
 
1.6% - 14.8%
 
1.4% - 14.4%
 
Servicing Rights
 
 
Range
Unobservable Input
 
September 30, 2016
 
December 31, 2015
Discount rate
 
15% - 25%

 
15% - 25%

Default rate
 
1.4% - 15.0%

 
1.2% - 14.7%

Prepayment rate
 
14.9% - 27.7%

 
14.3% - 25.6%

Market servicing rate
 
0.625
%
 
0.625
%
At September 30, 2016, 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, 2016
$
297,273

 
$
(297,405
)
 
$
32

 
$
(100
)
Purchase of Borrower Loans/Issuance of Notes
164,436

 
(165,727
)
 
1,619,866

 
1,618,575

Principal repayments
(125,419
)
 
129,603

 
(269
)
 
3,915

Borrower Loans sold to third parties
(1,889
)
 

 
(1,619,488
)
 
(1,621,377
)
Other changes
232

 
(229
)
 
(3
)
 

Change in fair value
(19,962
)
 
19,838

 
(2
)
 
(126
)
Balance at September 30, 2016
$
314,671

 
$
(313,920
)
 
$
136

 
$
887

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at January 1, 2015
$
273,243

 
$
(273,783
)
 
$
8,463

 
$
7,923

Purchase of Borrower Loans/Issuance of Notes
142,103

 
(142,246
)
 
2,426,963

 
2,426,820

Principal repayments
(111,864
)
 
111,711

 
(546
)
 
(699
)
Borrower Loans sold to third parties
(447
)
 
425

 
(2,434,707
)
 
(2,434,729
)
Other changes
(108
)
 
119

 
(18
)
 
(7
)
Change in fair value
(16,465
)
 
16,520

 
(121
)
 
(66
)
Balance at September 30, 2015
$
286,462

 
$
(287,254
)
 
$
34

 
$
(758
)


17




Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at July 1, 2016
$
310,034

 
$
(309,530
)
 
$
4,706

 
$
5,210

Purchase of Borrower Loans/Issuance of Notes
55,221

 
(56,580
)
 
261,855

 
260,496

Principal repayments
(43,043
)
 
45,403

 
(133
)
 
2,227

Borrower Loans sold to third parties
(751
)
 

 
(266,286
)
 
(267,037
)
Other changes
238

 
(196
)
 
(4
)
 
38

Change in fair value
(7,028
)
 
6,983

 
(2
)
 
(47
)
Balance at September 30, 2016
$
314,671

 
$
(313,920
)
 
$
136

 
$
887

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at July 1, 2015
$
284,200

 
$
(284,627
)
 
$
1,431

 
$
1,004

Purchase of Borrower Loans/Issuance of Notes
47,591

 
(47,670
)
 
1,024,464

 
1,024,385

Principal repayments
(38,407
)
 
38,202

 
(4
)
 
(209
)
Borrower Loans sold to third parties
(447
)
 
425

 
(1,025,824
)
 
(1,025,846
)
Other changes
21

 
(18
)
 
(8
)
 
(5
)
Change in fair value
(6,496
)
 
6,434

 
(25
)
 
(87
)
Balance at September 30, 2015
$
286,462

 
$
(287,254
)
 
$
34

 
$
(758
)
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, 2016
14,363

 
484

Additions
7,092

 
9

Less: Changes in fair value
(8,791
)
 
(239
)
Fair Value at September 30, 2016
12,664

 
254

 
Servicing
Assets
 
Servicing
Liabilities
Amortized Cost at January 1, 2015
4,163

 
624

Adjustment to Adopt Fair Value Measurement
546

 
(29
)
Fair Value at January 1, 2015
4,709

 
595

Additions
10,204

 
246

Less: Changes in fair value
(3,613
)
 
(291
)
Fair Value at September 30, 2015
11,300

 
550

 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at July 1, 2016
14,297

 
324

Additions
1,342

 

Less: Changes in fair value
(2,975
)
 
(70
)
Fair Value at September 30, 2016
12,664

 
254


18




 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at July 1, 2015
8,682

 
606

Additions
4,370

 
53

Less: Changes in fair value
(1,752
)
 
(109
)
Fair Value at September 30, 2015
11,300

 
550

Contingent Consideration:
On October 9, 2015, PMI, purchased 100% of the outstanding shares of BillGuard. The contingent consideration was primarily performance-based and will be determined over a one-year period from the date of purchase. Total contingent consideration due in October 2016 is based on revenues generated and other criteria.  We measured the fair value of the contingent consideration using a probability-weighted discounted cash flow approach. Some of the significant inputs used for the valuation are not observable in the market and are thus Level 3 inputs. Contingent consideration is recorded in the condensed consolidated balance sheets under "Other Liabilities." Significant increases or decreases in certain underlying assumptions used to value the contingent consideration could significantly increase or decrease the fair value estimates recorded in the condensed consolidated balance sheets. During the three and nine month periods ended September 30, 2016, there were fair value changes of $65 thousand and $192 thousand, respectively, resulting in a fair value of $5.0 million at September 30, 2016 from the opening fair value at January 1, 2016 of $4.8 million
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 September 30, 2016 for Borrower Loans, Loans Held for Sale and Notes funded through the Note Channel are presented in the following table (in thousands, except percentages):
 
Borrower Loans and
Loans Held for Sale
 
Notes
 
Discount rate assumption:
7.59
%
*
7.59
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
311,509

 
$
310,760

 
200 basis point increase
308,426

 
307,680

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
317,914

 
$
317,161

 
200 basis point decrease
321,244

 
320,488

 
Default rate assumption:
11.50
%
*
11.50
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
311,358

 
$
310,601

 
200 basis point increase
308,142

 
307,380

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
318,009

 
$
317,264

 
200 basis point decrease
321,389

 
320,651

 
* 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 September 30, 2016 (in thousands, except percentages).

19




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

 
 

Market servicing rate increase to 0.65%
$
11,744

 
$
279

Market servicing rate decrease to 0.60%
$
13,583

 
$
228

Weighted average prepayment assumptions
21.06
%
 
21.06
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to prepayment rate
$
12,426

 
$
249

Applying a 0.9 multiplier to prepayment rate
$
12,904

 
$
258

Weighted average default assumptions
11.64
%
 
11.64
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to default rate
$
12,451

 
$
253

Applying a 0.9 multiplier to default rate
$
12,880

 
$
254

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
8. Acquisitions 
On January 23, 2015, PMI acquired all of the outstanding limited liability company interests of American HealthCare Lending, and merged American HealthCare Lending with and into PHL, with PHL surviving the merger. In January 2015, PMI completed the allocation of the purchase price of the acquisition of American HealthCare Lending to acquired assets and liabilities.   
On October 9, 2015, PMI acquired all of the outstanding shares of BillGuard, Inc. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. The allocation of the purchase price is preliminary and subject to further adjustment as information relative to closing date balances and related tax balances are finalized.  
9. Goodwill and Other Intangible Assets
Goodwill 
Prosper’s goodwill balance of $36.4 million at September 30, 2016 did not change during the nine months ended September 30, 2016. We did not record any goodwill impairment expense for the nine months ended September 30, 2016.
Other Intangible Assets 
The following table presents the detail of other intangible assets for the period presented (dollars in thousands):
 
September 30, 2016
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net
Carrying Value
 
Remaining
Useful Life
(In Years)
User base and customer relationships
$
6,250

 
$
(2,541
)
 
$
3,709

 
8.4

Developed technology
8,310

 
(1,950
)
 
$
6,360

 
4.0

Brand name
60

 
(60
)
 

 

Total intangible assets subject to amortization
$
14,620

 
$
(4,551
)
 
$
10,069

 
 

Prosper’s intangible asset balance was $10.1 million and $13.1 million at September 30, 2016 and December 31, 2015, respectively.

20




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.
Amortization expense for the three months ended September 30, 2016 and 2015 was $1.0 million and $0.2 million, respectively. Amortization expense for the nine months ended September 30, 2016 and 2015 was $3.0 million and $0.5 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):
Year Ending December 31,
 
2016
$
855

2017
3,260

2018
2,329

2019
1,779

2020
1,344

Thereafter
502

Total
$
10,069

10. Other Liabilities
Other Liabilities includes the following:
 
September 30, 2016
 
December 31, 2015
Class action settlement liability
$
2,984

 
$
5,949

Repurchase liability for unvested restricted stock awards
180

 
473

Contingent consideration
4,994

 
4,801

Deferred revenue
285

 
1,591

Servicing liabilities
254

 
484

Deferred rent
4,563

 
5,240

Restructuring liability
5,107

 

Other
2,587

 
2,197

Total Other Liabilities
$
20,954

 
$
20,735

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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 

 
 

 
 

 
 

Net loss available to common stockholders for basic
   and diluted EPS
$
(17,417
)
 
$
(3,843
)
 
$
(70,509
)
 
$
(17,324
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares used in computing basic and diluted net loss per share
65,393,175

 
55,907,765

 
63,015,616

 
54,746,980

Basic and diluted net loss per share
$
(0.27
)
 
$
(0.07
)
 
$
(1.12
)
 
$
(0.32
)
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:  

21




 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(shares)
 
(shares)
 
(shares)
 
(shares)
Excluded securities:
 

 
 

 
 

 
 

Convertible preferred stock issued and outstanding
177,388,425

 
177,388,425

 
177,388,425

 
177,388,425

Stock options issued and outstanding
50,387,360

 
35,063,150

 
44,617,487

 
32,592,610

Unvested stock options exercised
3,209,345

 
11,906,925

 
3,209,345

 
11,906,925

Warrants issued and outstanding
1,203,344

 
602,355

 
910,945

 
602,355

Total common stock equivalents excluded from diluted
   net loss per common share computation
232,188,474

 
224,960,855

 
226,126,202

 
222,490,315

The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
12. Convertible Preferred Stock and Stockholders’ Deficit
Convertible Preferred Stock
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of September 30, 2016 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
New 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

New Series B
 
0.01

 
35,775,880

 
35,775,880

 
21,581

New Series C
 
0.01

 
24,404,770

 
24,404,770

 
70,075

New Series D
 
0.01

 
23,888,640

 
23,888,640

 
165,000

 
 
 

 
177,388,425

 
177,388,425

 
$
325,952

The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Common Stock
PMI, through its amended and restated certificate of incorporation, as amended, is the sole issuer of common stock and related options, RSUs and warrants. On February 16, 2016, PMI amended and restated its certificate of incorporation to, among other things, effect a 5-for-1 forward stock split. On May 31, 2016, PMI further amended its amended and restated certificate of incorporation to increase the number of shares of common stock authorized for issuance.  The total number of shares of stock which PMI has the authority to issue is 475,610,528, consisting of 298,222,103 shares of common stock, $0.01 par value per share, and 177,388,425 shares of preferred stock, $0.01 par value per share. As of September 30, 2016, 70,708,055 shares of common stock were issued and 69,772,120 shares of common stock were outstanding. As of December 31, 2015, 70,367,425 shares of common stock were issued and 69,431,490 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 nine months ended September 30, 2016, PMI issued 386,720 shares of common stock upon the exercise of vested options for cash proceeds of $0.3 million. Certain options are eligible for exercise prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the same vesting schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the holder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At September 30, 2016 and December 31, 2015, there were 3,209,345 and 9,806,170 shares, respectively, of restricted stock outstanding that remain unvested and subject to Prosper’s right of repurchase.

22




For the nine months ended September 30, 2016, PMI repurchased 288,520 shares of restricted stock for $70 thousand upon termination of employment of various employees.
Common Stock Issued upon Exercise of Warrants
For the nine months ended September 30, 2016, PMI issued 51,915 shares of common stock upon the exercise of warrants for aggregate proceeds of $11 thousand.
13. Share Based Incentive Plan and Compensation
In 2005, PMI’s stockholders approved the adoption of the 2005 Stock Plan. On December 1, 2010, PMI’s stockholders approved the adoption of the Amended and Restated 2005 Stock Plan (the “2005 Plan”). The 2005 Plan expired during the year ending December 31, 2015 and PMI’s stockholders approved the adoption of the 2015 Equity Incentive Plan. On February 15, 2016, PMI’s stockholders approved the adoption of an Amendment No. 1 to the 2015 Equity Incentive Plan, and on May 31, 2016, PMI’s stockholders approved the adoption of an Amendment No. 2 to the 2015 Equity Incentive Plan (as amended to date, the “2015 Plan”). As of September 30, 2016 under the 2005 Plan, up to 56,902,925 shares of common stock are reserved and may be issued to employees, directors, and consultants by PMI’s board of directors and stockholders to promote the success of Prosper’s business. As of September 30, 2016 under the 2015 Plan, up to 54,336,473 shares of common stock are reserved and may be granted to employees, directors, and consultants by PMI’s board of directors and stockholders to promote the success of Prosper’s business. Options generally vest 25% one year from the vesting commencement date and 1/48th per month thereafter or vest 50% two years from the vesting commencement date and 1/48th per month thereafter or vest 1/36th per month from the vesting commencement date.  In no event are options exercisable more than ten years after the date of grant.
At September 30, 2016, there were 20,684,495 shares available for grant under the 2015 Plan and zero shares available for grant under the 2005 Plan.
The number of options, restricted stock units and amounts per share reflects a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Stock Option Reprice
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “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. Prosper believes the repricing of such stock options will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of this repricing. The financial statement impact of this repricing is $0.8 million in the three months ended September 30, 2016, $2.0 million in the nine months ended September 30, 2016 and $2.9 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 2.5 years.
Early Exercised Stock Options
The activity of options that were early exercised under the 2005 Plan for the nine months ended September 30, 2016 is below:
 
Early exercised
options, unvested
 
Weighted average
exercise price
Balance as of January 1, 2016
9,806,170

 
$
0.05

Repurchase of restricted stock
(288,520
)
 
0.24

Restricted stock vested
(6,308,305
)
 
0.04

Balance as of September 30, 2016
3,209,345

 
$
0.06

Additional information regarding the unvested early exercised stock options outstanding as of September 30, 2016 is as follows:

23




 
 
Options Outstanding
Range of
Exercise Prices
 
Number
Outstanding
 
Weighted –Avg.
 Remaining Life
 
Weighted –Avg.
 Exercise Price
0.02

 
2,910,435

 
0.4
 
$
0.02

0.11

 
212,710

 
1.3
 
0.11

1.13

 
86,200

 
1.9
 
1.13

$0.02 - $1.13

 
3,209,345

 
0.5
 
$
0.06

Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized for the nine months ended September 30, 2016 below: 
 
Options
Issued and
Outstanding
 
Weighted-
Average
Exercise
Price
Balance as of January 1, 2016
40,425,605

 
$
2.64

Options issued
19,655,338

 
2.14

Options exercised – vested
(386,720
)
 
0.75

Options forfeited
(12,886,025
)
 
1.60

Balance as of September 30, 2016
46,808,198

 
$
1.55

 
 
 
 
Options vested and/or exercisable at September 30, 2016
26,701,173

 
1.13

Due to the timing of the Reprice, the ending weighted average exercise price shown above reflects repriced options while the opening weighted average exercise price does not.
Other Information Regarding Stock Options
Additional information regarding common stock options outstanding as of September 30, 2016 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 - 0.99
 
12,919,025

 
7.15
 
$
0.12

 
12,919,025

 
$
0.12

 
1.00 - 2.99
 
33,208,863

 
9.09
 
2.04

 
13,101,838

 
1.97

 
3.00 - 4.99
 
463,490

 
8.38
 
3.62

 
463,490

 
3.62

 
5.00 - 5.52
 
216,820

 
8.67
 
5.46

 
216,820

 
5.46

$
0.02 - 5.52
 
46,808,198

 
8.54
 
$
1.55

 
26,701,173

 
$
1.13

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 publically 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.  

24




Prosper also estimates forfeitures of unvested stock options. Expected forfeitures are based on Prosper’s historical experience.  To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for options that do not vest.
The fair value of PMI’s stock option awards granted during the three months ended September 30, 2016 and 2015 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Volatility of common stock
n/a
 
50.71
%
 
50.88
%
 
56.14
%
Risk-free interest rate
n/a
 
1.70
%
 
1.29
%
 
1.71
%
Expected life
n/a
 
6.0 years

 
5.8 years

 
6.0 years

Dividend yield
n/a
 
0
%
 
0
%
 
0
%
Restricted Stock Unit Activity
During the nine months ended September 30, 2016, 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 $10.7 million. The following table summarizes the activities for PMI’s RSUs during the nine months ending September 30, 2016:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Unvested - December 31, 2015
1,835,510

 
$
5.52

Granted