10-Q 1 prosper-63017x10q.htm 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 June 30, 2017
Commission
File Number
 
Exact Name of Registrant as Specified in its Charter
 
I.R.S. Employer
Identification Number
333-147019
333-179941-01
333-204880
 
PROSPER MARKETPLACE, INC.
a Delaware corporation
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5400
 
73-1733867
 
 
 
 
 
333-179941
333-204880-01
 
PROSPER FUNDING LLC
a Delaware limited liability company
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5479
 
45-4526070
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Prosper Marketplace, Inc.
Yes x No ¨
Prosper Funding LLC
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Prosper Marketplace, Inc.
Yes x No ¨
Prosper Funding LLC
Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large
Accelerated
Filer
 
Accelerated
Filer
 
Non-
Accelerated
Filer
 
Smaller
Reporting
Company
 
Emerging Growth Company
Prosper Marketplace, Inc.
o
 
o
 
x
 
o
 
o
Prosper Funding LLC
o
 
o
 
x
 
o
 
o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Prosper Marketplace, Inc.
Yes¨ No x
Prosper Funding LLC
Yes¨ No x
Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
As of August 4, 2017, there were 69,744,201 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.

1



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

2



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


3



Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
PFL’s ability to make payments on the Notes;
our ability to attract potential borrowers and investors to our marketplace;
the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;
our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
credit risks posed by the credit worthiness of borrowers, including the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes, and the effectiveness of our credit rating systems;
the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;
our compliance with applicable regulations and regulatory developments or court decisions affecting our business;
potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;
our compliance with applicable local, state and federal law, including the Securities Act, Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace;
the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
the lack of a public trading market for the Notes and the lack of any trading platform on which investors can resell the Notes;
the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our marketplace or adversely impact our ability to service Borrower Loans.
There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” sections of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016 for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

4



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

5



Item 1. Condensed Consolidated Financial Statements
Prosper Marketplace, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except for share and per share amounts)
 
June 30, 2017
 
December 31, 2016
Assets
 

 
 

Cash and Cash Equivalents
$
34,667

 
$
22,337

Restricted Cash
179,331

 
163,907

Available for Sale Investments, at Fair Value
7,997

 
32,769

Accounts Receivable
732

 
757

Loans Held for Sale, at Fair Value
95

 
624

Borrower Loans, at Fair Value
312,272

 
315,627

Property and Equipment, Net
22,068

 
24,853

Prepaid and Other Assets
9,227

 
4,606

Servicing Assets
13,489

 
12,786

Goodwill
36,368

 
36,368

Intangible Assets, Net
1,862

 
9,212

Total Assets
$
618,108

 
$
623,846

Liabilities, Convertible Preferred Stock and Stockholders' Deficit
 

 
 

Accounts Payable and Accrued Liabilities
$
10,508

 
$
15,017

Payable to Investors
160,611

 
142,644

Notes at Fair Value
311,410

 
316,236

Other Liabilities
12,775

 
17,173

Convertible Preferred Stock Warrant Liability
70,114

 
21,711

Total Liabilities
565,418

 
512,781

Commitments and Contingencies (see Note 17)


 


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

 
275,938

Stockholders' Deficit
 

 
 

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

 
212

Additional Paid-In Capital
131,021

 
123,988

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

 
$
623,846

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

6




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

 
 

 
 
 
 
Operating Revenues
 

 
 

 
 
 
 
Transaction Fees, Net
$
35,423

 
$
19,276

 
$
62,291

 
$
61,100

Servicing Fees, Net
6,793

 
7,676

 
12,947

 
14,819

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

 
(687
)
 
3,485

 
3,104

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

 
(20,194
)
 

Other Revenue
1,415

 
816

 
2,135

 
3,589

Total Operating Revenues
30,547

 
27,081

 
60,664

 
82,612

Interest Income
 
 
 
 
 
 
 
Interest Income on Borrower Loans
12,007

 
11,192

 
23,507

 
21,975

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

 
1,094

 
1,652

 
2,156

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

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

 
28,173

 
62,292

 
84,689

Expenses
 
 
 
 
 
 
 
Origination and Servicing
8,873

 
8,833

 
17,278

 
19,282

Sales and Marketing
20,131

 
12,303

 
39,687

 
45,023

General and Administrative
18,758

 
28,499

 
39,473

 
59,145

Restructuring Charges, Net
647

 
14,061

 
572

 
14,061

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

 

 
22,817

 

Other Expenses, Net
1,930

 

 
7,629

 

Total Expenses
72,755

 
63,696

 
127,456

 
137,511

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

 
105

 
262

 
270

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

 
63,270,058

 
69,436,365

 
61,813,773

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

7




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

 
 

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

16

 
215

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

 
6

(12
)
 
6

Other Comprehensive Income, Before Tax
(1
)
 
31

4

 
221

Income tax effect

 


 

Other Comprehensive Income, Net of Tax
(1
)
 
31

4

 
221

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

8




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

 
 

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

 
79

Depreciation and Amortization
6,270

 
6,430

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

 
5,647

Stock-Based Compensation Expense
6,812

 
11,510

Restructuring Liability
412

 
8,492

Fair Value of Warrants Vested
21,677

 

Change in Fair Value of Warrants
22,817

 

Impairment Losses on Assets Held for Sale
6,319

 

Other, Net
199

 
227

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

 
1,353,338

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

Accounts Receivable
25

 
1,564

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

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

 
83,514

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

 
1,278

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

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

 
9,193

Maturities of Available for Sale Investments
8,600

 
20,064

Changes in Restricted Cash Related to Investing Activities
2,905

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

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

 
109,147

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

 
464

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

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

 
25,196

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

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

 
66,295

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

 
$
28,824

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

 
$
19,787

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

 
$
346

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

9




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

1. Basis of Presentation
Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005.  Except as the context requires otherwise, as used in these notes to the condensed consolidated financial statements of Prosper Marketplace, Inc., “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016. The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The preparation of Prosper’s condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in Prosper’s financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions.
The accompanying interim condensed consolidated financial statements include the accounts of PMI and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Prosper’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no changes to these accounting policies during the first six months of 2017.
Fair Value Measurements
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments at Fair Value, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors, Convertible Preferred Stock Warrant Liability and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
Borrower Loans, Loans Held for Sale and Notes
Through the Note Channel, Prosper purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s condensed consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.

10




Assets Held for Sale:
Prosper classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year. The net assets held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.
Recent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Prosper intends to adopt the guidance for Prosper's fiscal year ending December 31, 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Prosper expects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018. Our preliminary results indicate that transaction fees are included in the scope of the new guidance, while servicing fees and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing. While we anticipate some changes to revenue recognition for certain customer contracts, Prosper does not currently believe that this ASU will have a material effect on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures.  This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements, however we do expect that this guidance will have a material impact on Prosper's consolidated financial statements. As of June 30, 2017 Prosper has a total of $41.4 million in non-cancelable operating lease commitments.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper is currently evaluating the impacts the adoption of this accounting standard will have on Prosper's consolidated financial statements.

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

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

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

11




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

 
 

Computer equipment
$
14,370

 
$
14,107

Internal-use software and website development costs
18,603

 
16,750

Office equipment and furniture
3,010

 
3,010

Leasehold improvements
7,038

 
7,038

Assets not yet placed in service
1,453

 
1,222

Property and equipment
44,474

 
42,127

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

 
$
24,853

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

 
$
319,143

 
$
(319,072
)
 
$
(323,358
)
 
$
106

 
$
641

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

 
7,122

 
(11
)
 
(17
)
Fair value
$
312,272

 
$
315,627

 
$
(311,410
)
 
$
(316,236
)
 
$
95

 
$
624

At June 30, 2017, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through June 2022. At December 31, 2016, outstanding Borrower Loans had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2021. 
Approximately $1.2 million and $2.0 million represents the loss that is attributable to changes in the instrument specific credit risks related to Borrower Loans that were recorded in the change in fair value during the six months ending June 30, 2017 and June 30, 2016, respectively.
As of June 30, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.6 million and a fair value of $0.9 million. As of December 31, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.2 million and a fair value of $1.0 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of June 30, 2017 and December 31, 2016, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.5 million, respectively.
5. Loan Servicing Assets and Liabilities

12




Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees.  The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains losses recognized on the sale of such Borrower Loans for the three months ended June 30, 2017were a gain of $3.8 million and a loss of $16.9 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium after the closing of the Consortium transaction. The total gains and losses recognized on the sale of such Borrower Loans for the six months ended June 30, 2017 were a gain of $3.5 million and a loss of $20.2 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium after the closing of the Consortium transaction. Total losses recognized on the sale of such Borrower Loans were $0.7 million during the three months ended June 30, 2016. Total gains recognized on the sale of such Borrower Loans were $3.1 million during the six months ended June 30, 2016.
As of June 30, 2017, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.6 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through June 2022. At December 31, 2016, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.5 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through December 2021.
$9.4 million and $10.4 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended June 30, 2017 and 2016, respectively. $18.2 million and $20.0 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the six months ended June 30, 2017 and 2016, respectively.
Fair value
Valuation method – Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.
Market servicing rate – Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider.
Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets.
Default Rate – The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans.  Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6. Available for Sale Investments, at Fair Value 
Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired (OTTI). 

13




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

 
 

 
 

 
 

US Treasury securities
5,501

 

 
(3
)
 
5,498

Agency bonds
2,500

 

 
(1
)
 
2,499

Total Available for Sale Investments
$
8,001

 
$

 
$
(4
)
 
$
7,997

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

 
 

 
 

 
 

Corporate debt securities
$
21,762

 
$
1

 
$
(10
)
 
$
21,753

US Treasury securities
8,516

 
3

 
(3
)
 
8,516

Agency bonds
2,499

 
1

 

 
2,500

Total Available for Sale Investments
$
32,777

 
$
5

 
$
(13
)
 
$
32,769

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

 
 

 
 

 
 

 
 

 
 

U.S. treasury securities
$
5,498

 
$
(3
)
 


 


 
$
5,498

 
$
(3
)
Agency bonds

 

 
2,499

 
(1
)
 
2,499

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

 
$
(3
)
 
$
2,499

 
$
(1
)
 
$
7,997

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

 
 

 
 

 
 

 
 

 
 

Corporate debt securities
$

 
$

 
$
14,651

 
$
(10
)
 
$
14,651

 
$
(10
)
U.S. treasury securities
$

 
$

 
$
4,499

 
$
(3
)
 
$
4,499

 
$
(3
)
Total Investments with Unrealized Losses
$

 
$

 
$
19,150

 
$
(13
)
 
$
19,150

 
$
(13
)

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

 


 


 


 
5,498

Agency bonds
2,499

 


 


 


 
2,499

Total Fair Value
$
7,997

 
$

 
$

 
$

 
$
7,997

Total Amortized Cost
$
8,001

 
$

 
$

 
$

 
$
8,001


14




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

 

 

 

 
21,753

US Treasury securities
8,516

 

 

 

 
8,516

Agency bonds
2,500

 

 

 

 
2,500

Total Fair Value
$
32,769

 
$

 
$

 
$

 
$
32,769

Total Amortized Cost
$
32,777

 
$

 
$

 
$

 
$
32,777


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

15




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

 
 

 
 

 
 

Borrower Loans
$

 
$

 
$
312,272

 
$
312,272

Loans Held for Sale

 

 
95

 
95

Available for Sale Investments, at Fair Value

 
7,997

 

 
7,997

Servicing Assets

 

 
13,489

 
13,489

Total Assets

 
7,997

 
325,856

 
333,853

Liabilities:
 

 
 

 
 

 
 

Notes
$

 
$

 
$
311,410

 
$
311,410

Servicing Liabilities

 

 
111

 
111

Convertible Preferred Stock Warrant Liability

 

 
70,114

 
70,114

Loan Trailing Fee Liability

 

 
1,655

 
1,655

Total Liabilities
$

 
$

 
$
383,290

 
$
383,290

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

 
 

 
 

 
 

Borrower Loans
$

 
$

 
$
315,627

 
$
315,627

Loans Held for Sale

 

 
624

 
624

Available for Sale Investments, at Fair Value

 
32,769

 

 
32,769

Servicing Assets

 

 
12,786

 
12,786

Total Assets

 
32,769

 
329,037

 
361,806

Liabilities:
 

 
 

 
 

 
 

Notes
$

 
$

 
$
316,236

 
$
316,236

Servicing Liabilities

 

 
198

 
198

Convertible Preferred Stock Warrant Liability

 

 
21,711

 
21,711

Loan Trailing Fee Liability

 

 
665

 
665

Total Liabilities
$

 
$

 
$
338,810

 
$
338,810

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

16




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

 
15% - 25%

Default rate
 
1.6% - 15.7%

 
1.5% - 15.2%

Prepayment rate
 
14.4% - 26.7%

 
13.6% - 26.6%

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

 
$
(316,236
)
 
$
624

 
$
15

Purchase of Borrower Loans/Issuance of Notes
106,940

 
(106,506
)
 
1,245,826

 
1,246,260

Principal repayments
(97,492
)
 
100,274

 
(42
)
 
2,740

Borrower Loans sold to third parties
(1,990
)
 

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

 
266

 
(3
)
 
272

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

 
6

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

 
$
(311,410
)
 
$
95

 
$
957

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

 
$
(297,405
)
 
$
32

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

 
(109,147
)
 
1,358,011

 
1,358,079

Principal repayments
(82,376
)
 
83,119

 
(136
)
 
607

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

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

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

 

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

 
$
(309,530
)
 
$
4,705

 
$
5,209


17




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

 
$
(316,944
)
 
$
109

 
$
701

Purchase of Borrower Loans/Issuance of Notes
50,260

 
(49,692
)
 
721,829

 
722,397

Principal repayments
(48,048
)
 
48,695

 
(14
)
 
633

Borrower Loans sold to third parties
(869
)
 

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

 
(156
)
 

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

 

 
70

Balance at June 30, 2017
$
312,272

 
$
(311,410
)
 
$
95

 
$
957

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

 
$
(302,357
)
 
$
30

 
$
916

Purchase of Borrower Loans/Issuance of Notes
54,044

 
(53,873
)
 
426,591

 
426,762

Principal repayments
(41,390
)
 
41,057

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

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

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

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

 
$
(309,530
)
 
$
4,705

 
$
5,209


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

 
198

Additions
6,532

 

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

 
111

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

 
484

Additions
5,750

 
9

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

 
324

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

 
147

Additions
3,768

 

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

 
111


18




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

 
398

Additions
1,729

 

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

 
324


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

Issuances
 
1,216

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

Balance at June 30, 2017
 
1,655


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

 
 

 
100 basis point increase
$
309,203

 
$
308,250

 
200 basis point increase
306,119

 
305,170

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
315,614

 
$
314,653

 
200 basis point decrease
318,948

 
317,984

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

 
 

 
100 basis point increase
$
308,608

 
$
307,645

 
200 basis point increase
304,984

 
304,015

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
316,150

 
$
315,200

 
200 basis point decrease
319,980

 
319,038

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

19




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

 
 

Market servicing rate increase to 0.65%
$
12,613

 
$
122

Market servicing rate decrease to 0.60%
$
14,365

 
$
100

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

 
 

Applying a 1.1 multiplier to prepayment rate
$
13,301

 
$
109

Applying a 0.9 multiplier to prepayment rate
$
13,678

 
$
113

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

 
 

Applying a 1.1 multiplier to default rate
$
13,301

 
$
111

Applying a 0.9 multiplier to default rate
$
13,680

 
$
111

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

 
$
(3,775
)
 
$
347

 
7.8

Developed technology
4,793

 
(3,278
)
 
$
1,515

 
0.8

Brand name
60

 
(60
)
 

 

Total intangible assets subject to amortization
$
8,975

 
$
(7,113
)
 
$
1,862

 
 

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

20




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

2018
379

2019
279

2020
219

2021
500

Total
$
1,732

9. Assets Held for Sale

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

Goodwill
 
12

Total Assets Held for Sale
 
$
142

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

 
$
2,996

Repurchase liability for unvested restricted stock awards
24

 
118

Loan trailing fee
1,655

 
665

Servicing liabilities
111

 
198

Deferred rent
4,133

 
4,469

Restructuring liability
3,414

 
6,052

Other
3,438

 
2,675

Total Other Liabilities
$
12,775

 
$
17,173

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

21




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

 
 

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

 
63,270,058

69,436,365

 
61,813,773

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

 
 

 
 
 
Convertible preferred stock issued and outstanding
177,388,428

 
177,388,425

177,388,428

 
177,388,425

Stock options issued and outstanding
60,938,265

 
43,719,604

53,040,604

 
41,694,271

Unvested stock options exercised
20,940

 
5,345,950

20,940

 
5,345,950

Restricted stock units

 


 

Warrants issued and outstanding
1,199,403

 
962,113

1,199,403

 
792,449

Series E convertible preferred stock warrants
35,544,141

 

35,544,141

 

Series F convertible preferred stock warrants
177,720,704

 

177,720,704

 

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

 
227,416,092

444,914,220

 
225,221,095

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

22




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

 
68,558,220

 
68,558,220

 
$
19,774

Series A-1
 
0.01

 
24,760,915

 
24,760,915

 
49,522

Series B
 
0.01

 
35,775,880

 
35,775,880

 
21,581

Series C
 
0.01

 
24,404,770

 
24,404,770

 
70,075

Series D
 
0.01

 
23,888,640

 
23,888,640

 
165,000

Series E-1
 
0.01

 
35,544,141

 

 

Series E-2
 
0.01

 
16,858,078

 

 

Series F
 
0.01

 
177,720,707

 
3

 

 
 
 

 
407,511,351

 
177,388,428

 
$
325,952

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

23




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

24




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

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

Dividend yield
%

25




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

Warrants Vested
25,586

Change in Fair Value
22,817

Balance at June 30, 2017
$
70,114

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

26




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

 
$
1.48

Options issued
30,388,611

 
0.22

Options exercised – vested
(134,633
)
 
0.11

Options forfeited
(12,089,870
)
 
1.17

Options expired
(2,500
)
 
0.22

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

 
$
0.21

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

 
0.21

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

 
0.18

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

27




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

 
6.56
 
$
0.11

 
8,275,145

 
$
0.11

 
0.20 - 0.50
 
51,260,062

 
9.09
 
0.22

 
12,822,171

 
0.22

 
0.50 - 1.13
 
22,120

 
7.35
 
1.13

 
22,120

 
1.13

$
0.02 - 1.13
 
59,557,327

 
8.74
 
$
0.20

 
21,119,436

 
$
0.18

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

5.7 years

 
5.8 years

Dividend yield
N/A
 
0
%
0
%
 
0
%
Restricted Stock Unit Activity
During the six months ended June 30, 2017, PMI granted restricted stock units (“RSUs”) to certain employees that are subject to three