10-Q 1 prosper-33118x10q.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 March 31, 2018
Commission
File Number
 
Exact Name of Registrant as Specified in its Charter
 
I.R.S. Employer
Identification Number
333-147019
333-179941-01
333-204880
 
PROSPER MARKETPLACE, INC.
a Delaware corporation
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5400
 
73-1733867
 
 
 
 
 
333-179941
333-204880-01
 
PROSPER FUNDING LLC
a Delaware limited liability company
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5479
 
45-4526070
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months 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 May 4, 2018, there were 70,358,241 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.

1



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

2



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


3



Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
PFL’s ability to make payments on the Notes;
our ability to attract potential borrowers and investors to our marketplace;
the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;
our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
credit risks posed by the credit worthiness of borrowers, including the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes, and the effectiveness of our credit rating systems;
the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;
our compliance with applicable regulations and regulatory developments or court decisions affecting our business;
potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;
our compliance with applicable local, state and federal law, including the Securities Act, Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace;
the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
the lack of a public trading market for the Notes and the lack of any trading platform on which investors can resell the Notes;
the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our marketplace or adversely impact our ability to service Borrower Loans.
There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does occur, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” sections of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2017 for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

4



WHERE YOU CAN FIND MORE INFORMATION
The following filings are available for download free of charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public at the SEC’s 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)
 
March 31, 2018
 
December 31, 2017
Assets
 

 
 

Cash and Cash Equivalents
$
39,309

 
$
45,795

Restricted Cash
172,065

 
152,668

Available for Sale Investments, at Fair Value
47,740

 
53,147

Accounts Receivable
3,839

 
683

Loans Held for Sale, at Fair Value
82,803

 
49

Borrower Loans, at Fair Value
285,584

 
293,005

Property and Equipment, Net
16,851

 
18,136

Prepaid and Other Assets
6,129

 
7,796

Servicing Assets
14,754

 
14,711

Goodwill
36,368

 
36,368

Intangible Assets, Net
1,266

 
1,377

Total Assets
$
706,708

 
$
623,735

Liabilities, Convertible Preferred Stock and Stockholders' Deficit
 

 
 

Accounts Payable and Accrued Liabilities
$
11,143

 
$
11,942

Payable to Investors
151,064

 
132,432

Notes at Fair Value
285,095

 
293,948

Warehouse Line
71,883

 

Other Liabilities
13,081

 
12,669

Convertible Preferred Stock Warrant Liability
127,041

 
116,366

Total Liabilities
659,307

 
567,357

Commitments and Contingencies (see Note 17)


 


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

 
323,793

Stockholders' Deficit
 

 
 

Common Stock – $0.01 par value; 625,000,000 shares authorized; 71,278,880 shares issued, and 70,342,945 shares outstanding, as of March 31, 2018; 625,000,000 shares authorized; 71,226,934 shares issued, and 70,290,999 shares outstanding, as of December 31, 2017.
228

 
228

Additional Paid-In Capital
139,092

 
136,653

Less: Treasury Stock
(23,417
)
 
(23,417
)
Accumulated Deficit
(392,206
)
 
(380,806
)
Accumulated Other Comprehensive Loss
(89
)
 
(73
)
Total Stockholders' Deficit
(276,392
)
 
(267,415
)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit
$
706,708

 
$
623,735

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

6




Prosper Marketplace, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except for share and per share amounts) 
 
Three Months Ended
March 31,
 
2018
 
2017
Revenues
 

 
 

Operating Revenues
 

 
 

Transaction Fees, Net
$
31,354

 
$
26,869

Servicing Fees, Net
7,184

 
6,154

Gain (Loss) on Sale of Borrower Loans
3,350

 
(318
)
Fair Value of Warrants Vested on Sale of Borrower Loans
(15,279
)
 
(3,307
)
Other Revenue
1,352

 
720

Total Operating Revenues
27,961

 
30,118

Interest Income
 
 
 
Interest Income on Borrower Loans
12,360

 
11,499

Interest Expense on Notes and Warehouse Line
(10,729
)
 
(10,678
)
Net Interest Income
1,631

 
821

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
858

 
(94
)
Total Net Revenue
30,450

 
30,845

Expenses
 
 
 
Origination and Servicing
8,821

 
8,404

Sales and Marketing
18,828

 
19,555

General and Administrative
18,715

 
20,717

Restructuring Charges, Net
323

 
(75
)
Change in Fair Value of Convertible Preferred Stock Warrants
(4,604
)
 
401

Other Expenses (Income), Net
(242
)
 
5,700

Total Expenses
41,841

 
54,702

Net Loss Before Taxes
(11,391
)
 
(23,857
)
Income Tax Expense
10

 
164

Net Loss Applicable to Common Stockholders
$
(11,401
)
 
$
(24,021
)
Net Loss Per Share – Basic and Diluted
$
(0.16
)
 
$
(0.35
)
Weighted-Average Shares - Basic and Diluted
70,302,910

 
69,178,049

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
March 31,
 
2018
 
2017
Net Loss
$
(11,401
)
 
$
(24,021
)
Other Comprehensive Income (Loss), Before Tax
 

 
 

Change in Net Unrealized Gain on Available for Sale Investments, at Fair Value
(15
)
 
17

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

 
(12
)
Other Comprehensive Income, Before Tax
(15
)
 
5

Income tax effect

 

Other Comprehensive Income, Net of Tax
(15
)
 
5

Comprehensive Loss
(11,416
)
 
(24,016
)
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)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from Operating Activities:
 

 
 

Net Loss
$
(11,401
)
 
$
(24,021
)
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
(858
)
 
94

Depreciation and Amortization
2,825

 
3,443

Gain on Sales of Borrower Loans
(3,339
)
 
(2,764
)
Change in Fair Value of Servicing Rights
3,278

 
3,063

Stock-Based Compensation Expense
2,331

 
3,500

Restructuring Liability
323

 
(73
)
Fair Value of Warrants Vested
15,279

 
4,790

Change in Fair Value of Warrants
(4,604
)
 
401

Impairment Losses on Assets Held for Sale

 
4,321

Other, Net
(532
)
 
15

Changes in Operating Assets and Liabilities:
 
 
 
Purchase of Loans Held for Sale at Fair Value
(595,199
)
 
(523,997
)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value
513,953

 
524,515

Restricted Cash Except for those Related to Investing Activities

 

Accounts Receivable
(3,156
)
 
(125
)
Prepaid and Other Assets
2,540

 
(4,270
)
Accounts Payable and Accrued Liabilities
(183
)
 
(5,670
)
Payable to Investors
18,632

 
(27,593
)
Other Liabilities
(722
)
 
(2,246
)
Net Cash Used in Operating Activities
(60,833
)
 
(46,617
)
Cash Flows from Investing Activities:
 
 
 
Purchase of Borrower Loans Held at Fair Value
(46,276
)
 
(56,680
)
Principal Payments of Borrower Loans Held at Fair Value
46,023

 
50,565

Purchases of Property and Equipment
(1,358
)
 
(1,596
)
Maturities of Short Term Investments

 
1,282

Purchases of Short Term Investments

 
(1,280
)
Purchases of Available for Sale Investments, at Fair Value
(1,504
)
 

Proceeds from Sale of Available for Sale Investments

 
16,163

Maturities of Available for Sale Investments
7,000

 
8,600

Net Cash Provided by Investing Activities
3,885

 
17,054

Cash Flows from Financing Activities:
 
 
 
Proceeds from Issuance of Notes Held at Fair Value
46,225

 
56,814

Payments of Notes Held at Fair Value
(47,102
)
 
(51,579
)
Proceeds from revolving debt facilities
71,600

 

Payment for debt issuance costs
(873
)
 

Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock
9

 
4


9




Repurchase of Common Stock and Restricted Stock

 
(64
)
Net Cash Provided by Financing Activities
69,859

 
5,175

Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
12,911

 
(24,388
)
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period
198,463

 
186,244

Cash, Cash Equivalents and Restricted Cash at End of the Period
$
211,374

 
$
161,856

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Paid for Interest
$
10,941

 
$
11,100

Non-Cash Investing Activity- Accrual for Property and Equipment, Net
$
153

 
$
88

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

10




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

1. Basis of Presentation
Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005.  Except as the context requires otherwise, as used in these notes to the condensed consolidated financial statements of 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, 2017. The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The preparation of Prosper’s condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in Prosper’s financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions.
The accompanying interim condensed consolidated financial statements include the accounts of PMI and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Prosper’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2017. There have been no changes to these accounting policies during the first three months of 2018 other than the changes noted below.
Fair Value Measurements
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments at Fair Value, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors, Convertible Preferred Stock Warrant Liability and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
Restricted Cash
Restricted cash consists primarily of cash deposits and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors or Prosper has on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown in the condensed consolidated statements of cash flows:


11




 
March 31,
2018
 
December 31,
2017
 
March 31,
2017
 
December 31,
2016
Cash and Cash Equivalents
$
39,309

 
45,795

 
$
28,535

 
$
22,337

Restricted Cash
172,065

 
152,668

 
133,321

 
163,907

Total Cash, Cash Equivalents and Restricted Cash show in the consolidated statements of cash flows
$
211,374

 
$
198,463

 
$
161,856

 
$
186,244

Borrower Loans, Loans Held for Sale and Notes
Through the Note Channel, Prosper purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s condensed consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.
Debt
For debt instruments carried at amortized cost, the Company defers specific incremental costs directly related to issuing debt or entering into revolving debt arrangements. Debt issuance costs associated with revolving debt arrangements are presented as an asset and subsequently amortized over the term of the revolving debt arrangement.
Revenues
Revenue primarily results from fees and net interest income earned. Fees include transaction fees for our services performed on behalf of WebBank to originate a loan. We also have other smaller sources of revenue reported as other revenue, this includes referral fees and securitization fees. For more information about Prosper's revenues, see Note 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 Financial Statements in the 2017 10-K.
Transaction Fees
Prosper has a customer contract with WebBank to facilitate the origination of all Borrower Loans through Prosper’s marketplace. In exchange for these services, Prosper earns a transaction fee from WebBank that is recognized when performance is complete, which is upon the successful origination of a Borrower Loan and which is similar to the recognition prior to the adoption of ASC 606. The transaction fee Prosper earns is determined by the term and credit grade of the Borrower Loan that is facilitated on Prosper’s marketplace, and ranges from 1.00% to 5.00% of the original principal amount of such Borrower Loan that WebBank originates.  Prosper records the transaction fee net of any fees paid to WebBank because Prosper does not receive an identifiable benefit from WebBank other than the Borrower Loan that has been recognized at fair value.
Other Revenues
Other revenues consist primarily of securitization fees and credit referral fees. Credit referral fees are where partner companies pay us an agreed upon amount for successful referrals of customers from our marketplace. The transaction price is a fixed amount per a referral and is recognized by the Company upon a successful referral which is similar to the recognition prior to the adoption of ASC 606. Securitization fees represent fees Prosper earns to facilitate securitizations for purchaser’ of Borrower Loans and is recognized as other revenue when the securitization is completed which is similar to the recognition prior to the adoption of ASC 606. In some instances Prosper may also provide a guarantee, which requires us to first fair value the guarantee and allocate the remaining transaction price to the securitization performance obligation.
As of March 31, 2018 Prosper had no material contract assets, contract liabilities or deferred contract costs. As of March 31, 2018, Prosper had no unsatisfied performance obligations related to transaction fee or other revenues.
Recent Accounting Pronouncements
Accounting Standards Adopted In The Current Period

12




In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. Prosper adopted the requirements of the ASU as of January 1, 2018, utilizing the modified retrospective approach. Transaction fees, securitization fees and credit referral fees are included in the scope of the new guidance, while servicing fees, net interest income and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing or ASC topic 310. The impact of adopting the ASU did not result in a material cumulative effect adjustment upon the date of adoption. Additionally, the impact of adoption on the Consolidated Financial Statements for the current period is insignificant.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. Prosper adopted the standard effective January 1, 2018,  the adoption of this standard did not have a material impact on Prosper’s consolidated financial statements. 
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16)", which requires companies to recognize the income-tax consequences of an intra-entity transfer
of an asset other than inventory. Prosper adopted the standard effective January 1, 2018,  the adoption of this standard did not have a material impact on Prosper’s consolidated financial statements. 

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18)", which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Prosper adopted the standard effective January 1, 2018. Prosper has $172.1 million and $133.3 million of restricted cash on its consolidated balance sheet as of March 31, 2018 and 2017, respectively, whose cash flow statement classification changed to align with the new guidance.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Prosper adopted standard effective January 1, 2018,  the adoption of this standard did not have a material impact on Prosper’s consolidated financial statements. 
Accounting Standards Issued, To Be Adopted By The Company In Future Periods
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. 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. We do expect that this guidance will have a material impact on Prosper's consolidated financial statements. As of March 31, 2018 Prosper has a total of $30.5 million in non-cancelable operating lease commitments.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The standard eliminates Step 2 from the goodwill impairment test, which requires a hypothetical purchase price allocation. Prosper will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The standard should be applied on a prospective basis. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
3. Property and Equipment, Net

13




Property and equipment consist of the following (in thousands):
 
March 31,
2018
 
December 31,
2017
Property and equipment:
 

 
 

Computer equipment
$
14,530

 
$
14,499

Internal-use software and website development costs
20,222

 
19,910

Office equipment and furniture
3,010

 
3,010

Leasehold improvements
7,078

 
7,078

Assets not yet placed in service
1,952

 
1,216

Property and equipment
46,792

 
45,713

Less accumulated depreciation and amortization
(29,941
)
 
(27,577
)
Total property and equipment, net
$
16,851

 
$
18,136

Depreciation and amortization expense for property and equipment for the three months ended March 31, 2018 and March 31, 2017 was $2.7 million and $2.6 million, respectively. Prosper capitalized internal-use software and website development costs in the amount of $1.1 million and $1.1 million for the three months ended March 31, 2018 and March 31, 2017, respectively. 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 March 31, 2018 and December 31, 2017, are presented in the following table (in thousands):
 
Borrower Loans
 
Notes
 
Loans Held for Sale
 
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
Aggregate principal balance outstanding
$
288,725

 
$
296,668

 
$
(291,470
)
 
$
(300,922
)
 
$
81,845

 
$
59

Fair value adjustments
(3,141
)
 
(3,663
)
 
6,375

 
6,974

 
958

 
(10
)
Fair value
$
285,584

 
$
293,005

 
$
(285,095
)
 
$
(293,948
)
 
$
82,803

 
$
49

At March 31, 2018, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.31% to 32.32% and had various maturity dates through March 2023. At December 31, 2017, outstanding Borrower Loans had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.31% to 32.32% and had various maturity dates through December 2022
Approximately $0.4 million and $1.8 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 months ending March 31, 2018 and March 31, 2017, respectively.
As of March 31, 2018, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.0 million and a fair value of $1.2 million. As of December 31, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.5 million and a fair value of $1.3 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of March 31, 2018 and December 31, 2017, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0.3 million, respectively.
5. Loan Servicing Assets and Liabilities
Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees.  The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains and losses recognized on the sale of such Borrower Loans for the three months ended March 31, 2018 was a gain of $3.4 million and a loss of $15.3 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium. The total losses recognized on the sale of such Borrower Loans were $3.6 million during the three months ended March 31, 2017, which included rebates provided to members of the Consortium prior to the closing of

14




the Consortium transaction and a loss of $3.3 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium after the closing of the Consortium transaction..
As of March 31, 2018, 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 5.31% to 35.52% and various maturity dates through March 2023. At December 31, 2017, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.31% to 35.52% and various maturity dates through December 2022.
$10.6 million and $9.7 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended March 31, 2018 and March 31, 2017, respectively.
Fair value
Valuation method – Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.
Market servicing rate – Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider.
Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets.
Default Rate – The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans.  Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.
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). 

15




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

 
 

 
 

 
 

Treasury Bills
28,610

 

 
(39
)
 
28,571

US Treasury securities
19,220

 

 
(51
)
 
19,169

Total Available for Sale Investments
$
47,830

 
$

 
$
(90
)
 
$
47,740

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

 
 

 
 

 
 

Treasury Bills
$
34,014

 
$

 
$
(36
)
 
$
33,978

US Treasury securities
19,207

 

 
(38
)
 
19,169

Total Available for Sale Investments
$
53,221

 
$

 
$
(74
)
 
$
53,147

A summary of available for sale investments with unrealized losses as of March 31, 2018, and December 31, 2017, aggregated by category and period of continuous unrealized loss, is as follows (in thousands):
 
Less than 12 months
 
12 months or longer
 
Total
March 31, 2018
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

Treasury Bills
$
28,571

 
$
(39
)
 
$

 
$

 
$
28,571

 
$
(39
)
US Treasury securities
$
19,169

 
$
(51
)
 
$

 
$

 
$
19,169

 
$
(51
)
Total Investments with Unrealized Losses
$
47,740

 
$
(90
)
 
$

 
$

 
$
47,740

 
$
(90
)
 
 
Less than 12 months
 
12 months or longer
 
Total
December 31, 2017
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

Treasury Bills
$
33,978

 
$
(36
)
 
$

 
$

 
$
33,978

 
$
(36
)
US Treasury securities
$
19,169

 
$
(38
)
 
$

 
$

 
$
19,169

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

 
$
(74
)
 
$

 
$

 
$
53,147

 
$
(74
)

There were no impairment charges recognized during the three months ended March 31, 2018
The maturities of available for sale investments at March 31, 2018 and December 31, 2017 are as follows (in thousands):
March 31, 2018
Within 1 year
 
After 1 year through 5 years
 
After 5 years to 10 years
 
After 10 years
 
Total
Treasury Bills
28,571

 

 

 

 
28,571

US Treasury securities
16,447

 
2,722

 

 

 
19,169

Total Fair Value
$
45,018

 
$
2,722

 
$

 
$

 
$
47,740

Total Amortized Cost
$
45,096

 
$
2,734

 
$

 
$

 
$
47,830


16




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

 

 

 

 
33,978

US Treasury securities
14,947

 
4,222

 

 

 
19,169

Total Fair Value
$
48,925

 
$
4,222

 
$

 
$

 
$
53,147

Total Amortized Cost
$
48,992

 
$
4,229

 
$

 
$

 
$
53,221


During the three months ended March 31, 2018, Prosper sold $0 of investments which resulted in a realized gain of $0.
7.  Fair Value of Assets and Liabilities 
Prosper measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
Investments held at fair value consist of available for sale investments.  The available for sale investments may consist of corporate debt securities, commercial paper, U.S. treasury securities, Treasury bills, agency bonds and short term bond funds.  When available, Prosper uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts. 
The Convertible Preferred Stock Warrant Liability is valued using a Black Scholes-Option pricing model. Refer to Note 12 for further details.

17




The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
March 31, 2018
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$

 
$

 
$
285,584

 
$
285,584

Loans Held for Sale

 

 
82,803

 
82,803

Available for Sale Investments, at Fair Value

 
47,740

 

 
47,740

Servicing Assets

 

 
14,754

 
14,754

Total Assets

 
47,740

 
383,141

 
430,881

Liabilities:
 

 
 

 
 

 
 

Notes
$

 
$

 
$
285,095

 
$
285,095

Servicing Liabilities

 

 
41

 
41

Convertible Preferred Stock Warrant Liability

 

 
127,041

 
127,041

Loan Trailing Fee Liability

 

 
2,663

 
2,663

Total Liabilities
$

 
$

 
$
414,840

 
$
414,840

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

 
 

 
 

 
 

Borrower Loans
$

 
$

 
$
293,005

 
$
293,005

Loans Held for Sale

 

 
49

 
49

Available for Sale Investments, at Fair Value

 
53,147

 

 
53,147

Servicing Assets

 

 
14,711

 
14,711

Total Assets

 
53,147

 
307,765

 
360,912

Liabilities:
 

 
 

 
 

 
 

Notes
$

 
$

 
$
293,948

 
$
293,948

Servicing Liabilities

 

 
59

 
59

Convertible Preferred Stock Warrant Liability

 

 
116,366

 
116,366

Loan Trailing Fee Liability

 

 
2,595

 
2,595

Total Liabilities
$

 
$

 
$
412,968

 
$
412,968

As Prosper’s Borrower Loans, Loans Held for Sale, Notes and loan servicing rights do not trade in an active market with readily observable prices, Prosper uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at March 31, 2018 and December 31, 2017:
Borrower Loans, Loans Held for Sale and Notes:
 
 
Range
Unobservable Input
 
March 31, 2018
 
December 31, 2017
Discount rate
 
3.9% - 14.1%
 
4.0% - 14.4%
Default rate
 
2.0% - 15.4%
 
2.0% - 15.4%
 

18




Servicing Rights
 
 
Range
Unobservable Input
 
March 31, 2018
 
December 31, 2017
Discount rate
 
15% - 25%

 
15% - 25%

Default rate
 
1.5% - 16.3%

 
1.5% - 16.1%

Prepayment rate
 
10.7% - 31.4%

 
13.5% - 30.2%

Market servicing rate
 
0.625
%
 
0.625
%
Loan Trailing Fee Liability:
 
 
Range
Unobservable Input
 
March 31, 2018
 
December 31, 2017
Discount rate
 
15% - 25%
 
15% - 25%
Default rate
 
1.5% - 16.3%
 
1.5% - 16.1%
Prepayment rate
 
10.7% - 31.4%
 
13.5% - 30.2%
At March 31, 2018, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
The following tables present additional information about level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at January 1, 2018
$
293,005

 
$
(293,948
)
 
$
49

 
$
(894
)
Purchase of Borrower Loans/Issuance of Notes
46,276

 
(46,225
)
 
595,199

 
595,250

Principal repayments
(44,957
)
 
47,102

 
(3,849
)
 
(1,704
)
Borrower Loans sold to third parties
(1,066
)
 

 
(510,104
)
 
(511,170
)
Other changes
(136
)
 
547

 
541

 
952

Change in fair value
(7,538
)
 
7,429

 
967

 
858

Balance at March 31, 2018
$
285,584

 
$
(285,095
)
 
$
82,803

 
$
83,292

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
56,680

 
(56,814
)
 
523,997

 
523,863

Principal repayments
(49,444
)
 
51,579

 
(28
)
 
2,107

Borrower Loans sold to third parties
(1,121
)
 

 
(524,487
)
 
(525,608
)
Other changes
(1
)
 
422

 
(3
)
 
418

Change in fair value
(4,205
)
 
4,105

 
6

 
(94
)
Balance at March 31, 2017
$
317,536

 
$
(316,944
)
 
$
109

 
$
701



19




The following tables present additional information about level 3 servicing assets and liabilities measured at fair value on a recurring basis (in thousands):
 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at January 1, 2018
14,711

 
59

Additions
3,339

 

Less: Changes in fair value
(3,296
)
 
(18
)
Fair Value at March 31, 2018
14,754

 
41

 
Servicing
Assets
 
Servicing
Liabilities
Fair Value at January 1, 2017
12,786

 
198

Additions
2,764

 

Less: Changes in fair value
(3,114
)
 
(51
)
Fair Value at March 31, 2017
12,436

 
147


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

Add Issuances of Preferred Stock Warrant
15,279

Change in fair value of the preferred stock warrant liability
(4,604
)
Balance at March 31, 2018
$
127,041


Balance as of January 1, 2017
$

Add Issuances of Preferred Stock Warrant
30,410

Change in fair value of the preferred stock warrant liability
401

Balance at March 31, 2017
$
30,811


Loan Trailing Fee
The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and defaults rates using a discounted cash flow model.
The following table presents additional information about level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
Balance at January 1, 2018
 
2,595

Issuances
 
625

Cash payment of Loan Trailing Fee
 
(651
)
Change in fair value
 
94

Balance at March 31, 2018
 
2,663

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 March 31, 2018 for Borrower Loans, Loans Held for Sale and Notes funded through the Note Channel are presented in the following table (in thousands, except percentages):

20




 
Borrower Loans and
Loans Held for Sale
 
Notes
 
Fair value at March 31, 2018
$368,387
 
$285,095
 
Discount rate assumption:
7.00
%
*
7.00
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
364,642

 
$
282,191

 
200 basis point increase
360,991

 
279,362

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
372,233

 
$
288,075

 
200 basis point decrease
376,181

 
291,135

 
Default rate assumption:
13.44
%
*
13.44
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
363,713

 
$
281,460

 
200 basis point increase
359,176

 
277,933

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
373,114

 
$
288,771

 
200 basis point decrease
377,894

 
292,488

 
* 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 March 31, 2018 (in thousands, except percentages).
 
Servicing
Assets
 
Servicing
Liabilities
Fair value at March 31, 2018
$14,754
 
$41
Market servicing rate assumptions
0.625
%
 
0.625
%
Resulting fair value from:
 

 
 

Market servicing rate increase to 0.65%
$
13,834

 
$
46

Market servicing rate decrease to 0.60%
$
15,689

 
$
37

Weighted average prepayment assumptions
19.88
%
 
19.88
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to prepayment rate
$
14,579

 
$
41

Applying a 0.9 multiplier to prepayment rate
$
14,947

 
$
42

Weighted average default assumptions
12.91
%
 
12.91
%
Resulting fair value from:
 

 
 

Applying a 1.1 multiplier to default rate
$
14,573

 
$
41

Applying a 0.9 multiplier to default rate
$
14,955

 
$
41

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Financial Instruments, Assets and Liabilities not Recorded at Fair Value
The following tables present the fair value hierarchy for financial instruments, assets, and liabilities not recorded at fair value (in thousands):

21




March 31, 2018
Carrying Amount
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at Fair Value
Assets:
 
 
 

 
 

 
 

 
 

Cash and Cash Equivalents
$
39,309

 
$

 
$
39,309

 
$

 
$
39,309

Restricted Cash
172,065

 

 
172,065

 

 
172,065

Accounts Receivable
3,839

 

 
3,839

 

 
3,839

Total Assets
215,213

 

 
215,213

 

 
215,213

Liabilities:
 
 
 

 
 

 
 

 
 

Accounts Payable and Accrued Liabilities
$
11,143

 
$

 
$
11,143

 
$

 
$
11,143

Payable to Investors
151,064

 

 
151,064

 

 
151,064

Warehouse Line
71,883

 

 
71,883

 

 
71,883

Total Liabilities
$
234,090

 
$

 
$
234,090

 
$

 
$
234,090

 

8. Goodwill and Other Intangible Assets
Goodwill 
Prosper’s goodwill balance of $36.4 million at March 31, 2018 did not change during the three months ended March 31, 2018. We did not record any goodwill impairment expense for the three months ended March 31, 2018.
Other Intangible Assets 
The following table presents the detail of other intangible assets for the period presented (dollars in thousands):
 
March 31, 2018
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net
Carrying Value
 
Remaining
Useful Life
(In Years)
Developed technology
$
3,060

 
$
(3,060
)
 
$

 

User base and customer relationships
5,050

 
(3,784
)
 
$
1,266

 
7.1

Brand name
60

 
(60
)
 

 

Total intangible assets subject to amortization
$
8,170

 
$
(6,904
)
 
$
1,266

 
 

Prosper’s intangible asset balance was $1.3 million and $1.4 million at March 31, 2018 and December 31, 2017, respectively. During the three months March 31, 2017, certain intangible assets were made available for sale and as a result they were written down to fair value. This resulted in an impairment loss of $4.3 million in the three months ended March 31, 2017, which is recorded in Other Expenses on the Condensed Consolidated Statement of Operations.
The user base and customer relationship intangible assets are being amortized on an accelerated basis over a three to ten year period. The technology and brand name intangible assets are being amortized on a straight line basis over three to five years and one year, respectively.

22




Amortization expense for the three months ended March 31, 2018 and March 31, 2017 was $0.1 million and $0.9 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):
Year Ending December 31,
 
Remainder of 2018
$
267

2019
279

2020
220

2021
172

2022
136

Thereafter
$
192

Total
$
1,266

9. Other Liabilities
Other Liabilities includes the following:
 
March 31, 2018
 
December 31, 2017
Loan trailing fee
2,663

 
2,595

Deferred revenue
493

 
452

Servicing liabilities
41

 
59

Deferred income tax liability
235

 
225

Deferred rent
3,782

 
3,904

Restructuring liability
3,429

 
3,355

Other
2,438

 
2,079

Total Other Liabilities
$
13,081

 
$
12,669


10. Debt
Warehouse Line
On January 19, 2018, through a wholly-owned subsidiary, Prosper Warehouse I Trust ("PWIT"), Prosper entered into a $100 million committed revolving line of credit agreement ( the "Warehouse Agreement"). In connection with the Warehouse Agreement, PWIT entered into a security agreement with a bank as administrative agent and a national banking association as collateral trustee and paying agent. Proceeds under the Warehouse Line may only be used to purchase certain unsecured consumer loans and related rights and documents from the Company and to pay fees and expenses related to the Warehouse Line.
Proceeds of loans made under the Warehouse Line may be borrowed, repaid and reborrowed until the earliest of January 19, 2020 and the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over the 24 month period ending January 19, 2022, excluding the occurrence of any accelerated amortization event or event of default.
The Warehouse Line bears interest at a rate of LIBOR plus 3.25% and has an advance rate of 89%. Additionally, the Warehouse Line bears a monthly unused commitment fee of 0.75% per annum on the undrawn portion available under the Warehouse Line. For purposes of this calculation, the maximum amount of the undrawn portion is $50 million.
The Warehouse Agreement contains certain covenants applicable to PWIT, including restrictions on PWIT’s ability to incur indebtedness, pledge assets, merge or consolidate, and enter into certain affiliate transactions. The Warehouse Line also requires Prosper to maintain a minimum tangible net worth of $25 million, minimum net liquidity of $15 million and a maximum leverage ratio of 5:1. Tangible net worth is defined as the sum of (i) (A) convertible preferred stock, (B) total stockholders’ deficit and (C) convertible preferred stock warrant liability less (ii) the sum of (A) goodwill and (B) intangible assets. Net liquidity is defined as the sum of cash, cash equivalents and available for sale investments. The leverage ratio is defined as the ratio of total consolidated indebtedness other than non-recourse securitization indebtedness, non-recourse or limited recourse warehouse indebtedness, and borrower dependent notes, to tangible net worth. As of March 31, 2018, Prosper was in compliance with the covenants under the Warehouse Agreement.

23




As of March 31, 2018, Prosper had $71.9 million in debt outstanding under the Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $81.3 million included in "Loans Held for Sale, at Fair Value" on the Condensed Consolidated Balance Sheet. At March 31, 2018 the undrawn portion available under the Warehouse Line was $28.4 million. Prosper incurred $1.0 million of capitalized debt issuance costs, which will be recognized as interest expense through January 19, 2022.
Prosper has also purchased a swaption to limit our exposure to increases in LIBOR. The swaption is recorded on the Condensed Consolidated Balance Sheet at fair value in Prepaids and Other Assets. Any changes in the fair value will be recorded in the Change in Fair Value of Loans, Loans Held for Sale and Notes, Net on the Condensed Consolidated Statement of Operations. The fair value of the swaption was not material at March 31, 2018.
11. Net Loss Per Share
The weighted average shares used in calculating basic and diluted net loss per share excludes certain shares that are disclosed as outstanding shares in the condensed consolidated balance sheets because such shares are restricted as they were associated with options that were early exercised and continue to remain unvested.
Basic and diluted net loss per share was calculated as follows:
 
Three Months Ended March 31,
 
2018
 
2017
Numerator:
 

 
 

Net loss available to common stockholders for basic
   and diluted EPS
$
(11,401
)
 
$
(24,021
)
Denominator:
 
 
 
Weighted average shares used in computing basic and diluted net loss per share
70,302,910

 
69,178,049

Basic and diluted net loss per share
$
(0.16
)
 
$
(0.35
)
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 March 31,
 
2018
 
2017
 
(shares)
 
(shares)
Excluded securities:
 

 
 

Convertible preferred stock issued and outstanding
214,637,925

 
177,388,428

Stock options issued and outstanding
60,695,848

 
41,234,189

Unvested stock options exercised
6,875

 
30,835

Restricted stock units
2,371

 
351,721

Warrants issued and outstanding
1,081,630

 
988,513

Series E-1 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
489,689,494

 
433,258,531

12. Convertible Preferred Stock, Warrant Liability and Stockholders’ Deficit
Convertible Preferred Stock and Warrants
Under PMI’s amended and restated certificate of incorporation, preferred stock is issuable in series, and the Board of Directors is authorized to determine the rights, preferences, and terms of each series.
On February 27, 2017, PMI issued to Pinecone 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.

24




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. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI, insolvency of PMI or PFL certain breaches of contract by PMI or PFL that are not cured within a defined cure period and upon the occurrence of certain events set forth in the Warrant Agreement.
The Series F Warrant will be exercisable with respect to vested Warrant Shares, in whole or in part, at any time prior to the tenth anniversary of its date of issuance. The number of shares underlying the Series F Warrant may be adjusted following certain events such as stock splits, dividends, reclassifications, and certain other issuances by PMI.
On September 20, 2017, Prosper issued and sold 37,249,497 shares of Series G convertible preferred stock ("Series G") in a private placement at a purchase price of $1.34 per share for proceeds of approximately $47.9 million, net of issuance costs. The Series G convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(a)(2) of the Securities Act regarding sales by an issuer not involving a public offering. The purpose of the new Series G private placement was to raise funds for general corporate purposes.
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of March 31, 2018 are disclosed in the table below (amounts in thousands except share and per share amounts): 
Convertible Preferred Stock
 
Par Value
 
Authorized
shares
 
Outstanding
and Issued
shares
 
Liquidation
Preference (outstanding shares)
Series A
 
$
0.01

 
68,558,220

 
68,558,220

 
$
19,774

Series A-1
 
0.01

 
24,760,915

 
24,760,915

 
49,522

Series B
 
0.01

 
35,775,880

 
35,775,880

 
21,581

Series C
 
0.01

 
24,404,770

 
24,404,770

 
70,075

Series D
 
0.01

 
23,888,640

 
23,888,640

 
165,000

Series E-1
 
0.01

 
35,544,141

 

 

Series E-2
 
0.01

 
16,858,078

 

 

Series F
 
0.01

 
177,720,707

 
3

 

Series G
 
0.01

 
37,249,497

 
37,249,497

 
50,000

 
 
 

 
444,760,848

 
214,637,925

 
$
375,952

Dividends
Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the Series A, Series B, Series C, Series D, Series E-1, Series E-2 Series F and Series G convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights.  To date, no dividends have been declared on any of the PMI’s preferred stock or common stock.
Conversion
Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an Initial Public Offering (“IPO”) that values Prosper at least at $2 billion and that results in aggregate proceeds to Prosper of at least $100 million or (ii) upon a written request from the holders of at least 60% of the voting power of the outstanding preferred stock (on an as-converted basis), provided that (i) the Series A-1 convertible preferred

25




stock shall not be converted without at least 14% of the voting power of the outstanding Series A-1 convertible preferred stock; (ii) the Series D shall not be converted without at least 60% of the voting power of the outstanding Series D; (iii) the Series E-1 and Series E-2 shall not be converted without at least 60% of the voting power of the outstanding Series E-1 and Series E-2, voting together as a single class; (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F, and (v) the shares of Series G Preferred Stock will not be automatically converted unless the holders of at least 60% of the outstanding shares of Series G Preferred Stock approve such conversion. In addition, if a holder of the Series A convertible preferred stock has converted any of the Series A convertible preferred stock, then all of such holder’s shares of Series A-1 convertible preferred stock also will be converted upon a liquidation event. In lieu of any fractional shares of common stock to which a holder would otherwise be entitled, PMI shall pay such holder cash in an amount equal to the fair market value of such fractional shares, as determined by its Board of Directors. At present, 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.
The conversion price of the Series G convertible preferred stock shall be reduced to a number equal to the Series G Preferred Stock original issuance price divided by the quotient obtained by dividing the series G true up amount by the total number of Series G Preferred Stock issued as of the series G closing date. The Series G true up amount means the aggregate number of shares of Series G Preferred Stock that would have been issued to the purchasers of the Series G Preferred Stock on the Series G closing date, if warrants to purchase shares of Series E-2 Preferred Stock or Series F Preferred Stock that were exercisable or exercised as of the true up time (end of vesting period) were exercisable or exercised as of the Series G Preferred Stock closing date.
Liquidation Rights
PMI’s convertible preferred stock has been classified as temporary equity on the Consolidated Balance Sheets. The preferred stock is not redeemable; however, in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of Series E-1, Series E-2 and Series F convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A, Series B, Series C, Series D, Series G and Series A-1 preferred stock or common stock, an amount per share for (i) each share of Series E-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, (ii) each share of Series E-2 convertible preferred stock equal to the sum of two-thirds the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (iii) each share of Series F convertible preferred stock equal to the sum of two-thirds of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series E-1, Series E-2, and Series F convertible preferred stock, each holder of Series A, Series B, Series C and Series D, Series E-2, Series F and Series G convertible preferred stock is entitled to receive, on a pari passu basis, prior to and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 preferred stock or common stock, (i) an amount per share for each share of Series E-2 and Series F convertible preferred stock equal to the sum of one-third of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (ii) an amount per share for each share of Series A, Series B, Series C, Series D and Series G convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, Series G and Series A-1 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

26




for the Series C convertible preferred stock, $6.91 per share for the Series D convertible preferred stock, $0.84 per share for the Series E-1 convertible preferred stock, $0.84 per share for the Series E-2 convertible preferred stock, $0.84 per share for the Series F convertible preferred stock and $1.34 per share for the Series G convertible preferred stock.
Voting
Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the Bylaws of PMI. 
Convertible Preferred Stock Warrant Liability
Series E-1 Warrants
In connection with the Settlement and Release Agreement dated November 17, 2016 among PMI, PFL and Colchis, on December 16, 2016, PMI issued the First Series E-1 Warrant. The Second Series E-1 Warrant for an additional 15,277,006 shares of Series E-1 convertible preferred stock was granted on the signing of the Condensed Consortium Purchase Agreement on February 27, 2017. The warrants expire ten years from the date of issuance. For the three months ended March 31, 2018, Prosper recognized $1.4 million of income from the re-measurement of the fair value of the warrants. The income is recorded through change in fair value of convertible preferred stock warrants in the condensed consolidated statement of operations.
To determine the fair value of the Series E-1 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:
 
March 31, 2018
 
December 31, 2017
Volatility
40%
 
40%
Risk-free interest rate
2.72%
 
2.38%
Remaining contractual term (in years)
8.80
 
9.04
Dividend yield
0%
 
0%
The above assumptions were determined as follows:
Volatility: The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield in effect as of the period end date and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant.
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
Series F Warrants
In connection with the Consortium Purchase Agreement (as described in Note 16), PMI issued warrants to purchase up to 177,720,706 shares of PMI's Series F convertible preferred stock at $0.01 per share. For the three months ended March 31, 2018,

27




Prosper recognized $3.2 million of income from the re-measurement of the fair value of the warrants. The income is recorded through change in fair value of convertible preferred stock warrants in the condensed consolidated statement of operations.
To determine the fair value of the Series F Convertible Preferred Stock Warrants, the Company first determined the value of a share of a Series F convertible preferred stock. To determine the fair value of the convertible preferred stock, the Company first derived the BEV of the Company using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the OPM was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The concluded per share value for the Series F convertible preferred stock warrants utilized the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding convertible Series F preferred stock warrants utilizing the following assumptions as of the following dates:
 
March 31, 2018
 
December 31, 2017
Volatility
40%
 
40%
Risk-free interest rate
2.72%
 
2.38%
Remaining contractual term (in years)
8.91
 
9.16
Dividend yield
0%
 
0%
The above assumptions were determined as follows:
Volatility: The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield in effect as of the period end date and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant.
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
The combined activity of the Convertible Preferred Stock Warrant Liability for the three months ended March 31, 2018 is as follows (in thousands):
Balance at January 1, 2018
$
116,366

Warrants Vested
15,279

Change in Fair Value
(4,604
)
Balance at March 31, 2018
$
127,041

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 September 20, 2017, PMI further amended its Amended and Restated Certificate of Incorporation to increase the number of shares of common stock authorized for issuance.  The total number of shares of stock which PMI has the authority to issue is 1,069,760,848, consisting of 625,000,000 shares of common stock, $0.01 par value per share, and 444,760,848 shares of preferred stock, $0.01 par value per share. As of March 31, 2018, 71,278,880 shares of common stock were issued and 70,342,945 shares of common stock were outstanding. As of December 31, 2017, 71,226,934 shares of common stock were issued and 70,290,999 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held.
Common Stock Issued upon Exercise of Stock Options
During the three months ended March 31, 2018, PMI issued 43,746 shares of common stock upon the exercise of vested options for cash proceeds of $10 thousand. Certain options are eligible for exercise prior to vesting. These unvested options may

28




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 March 31, 2018 and December 31, 2017, there were 6,875 and 11,565 shares, respectively, of restricted stock outstanding that remain unvested and subject to PMI’s right of repurchase.
For the three months ended March 31, 2018, PMI repurchased no shares of restricted stock upon termination of employment of employees.
13. Share Based Incentive Plan and Compensation
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2,which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, the "2015 Plan"). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms.
As of March 31, 2018, up to 93,235,260 shares of common stock are reserved for issuance under the 2015 Plan, and may be granted to employees, directors, and consultants by PMI’s board of directors and stockholders to promote the success of Prosper’s business. Options generally vest 25% one year from the vesting commencement date and 1/48th per month thereafter or vest 50% one year from the vesting 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 10 years after the date of grant.
At March 31, 2018, there were 20,406,520 shares available for grant under the 2015 Plan and zero shares available for grant under the 2005 Plan.
Stock Option Reprice
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2016 Reprice”), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock.  The repricing was effected on May 16, 2016 for eligible directors and employees located in the United States and on May 19, 2016 for eligible employees located in Israel.
On March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2017 Reprice” and together with the 2016 Reprice, the "Repricings"), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock.  The repricing was effected on March 17, 2017 for eligible directors and employees.
Prosper believes that the Repricings will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of the Repricings.
The financial statement impact of the above Repricings is $0.2 million in the three months ended March 31, 2018 and $1.1 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 1.2 years.
Early Exercised Stock Options
The balance of stock options that were early exercised under the 2005 Plan as of March 31, 2018 is not material.

29




Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized for the three months ended March 31, 2018 below: 
 
Options
Issued and
Outstanding
 
Weighted-
Average
Exercise
Price
Balance as of January 1, 2018
58,628,039

 
$
0.25

Options issued
17,567,641

 
0.54

Options exercised – vested
(43,746
)
 
0.22

Options forfeited
(422,088
)
 
0.34

Balance as of March 31, 2018
75,729,846

 
$
0.32

Options vested and expected to vest as of March 31, 2018
62,193,348

 
0.32

Options vested and exercisable at March 31, 2018
31,204,931

 
0.20

Other Information Regarding Stock Options
Additional information regarding common stock options outstanding as of March 31, 2018 is as follows: 
 
 
 
Options Outstanding
 
Options Vested and Exercisable
 
Range of
Exercise Prices
 
Number
Outstanding
 
Weighted – Avg.
Remaining Life
 
Weighted –Avg.
Exercise Price
 
Number
Vested
 
Weighted – Avg.
Exercise Price
$
0.02 - 0.20
 
4,768,290

 
5.79
 
$
0.11

 
4,768,290

 
$
0.11

 
0.21 - 0.50
 
46,019,257

 
8.44
 
0.22

 
26,278,879

 
0.22

 
0.51 - 1.13
 
24,942,299

 
9.86
 
0.54

 
157,762

 
0.61

$
0.02 - 1.13
 
75,729,846

 
8.74
 
$
0.32

 
31,204,931

 
$
0.20

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.

30




The fair value of PMI’s stock option awards granted during the three months ended March 31, 2018 and March 31, 2017 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
 
Three Months Ended
March 31,
 
2018
 
2017
Volatility of common stock
44.10
%
 
50.28
%
Risk-free interest rate
2.74
%
 
2.12
%
Expected life (in years)
6.0

 
5.7

Dividend yield
0
%
 
0
%
Restricted Stock Unit Activity
During the three months ended March 31, 2018, PMI granted restricted stock units (“RSUs”) to certain employees that are subject to three-year vesting terms or four-year vesting terms and the occurrence of a liquidity event.
The aggregate fair value of the RSUs granted was $1.9 million. The following table summarizes the activities for PMI’s RSUs during the three months ended March 31, 2018:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Unvested - January 1, 2018
1,399,180

 
$
2.16

Granted
3,569,586

 
0.54

Vested

 

Forfeited
(3,500
)
 
2.18

Unvested - March 31, 2018
4,965,266

 
$
0.99

The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations during the three months ended March 31, 2018 and March 31, 2017 (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Origination and servicing
$
216

 
$
217

Sales and marketing
107

 
171

General and administrative
2,008

 
3,112

Total stock based compensation
$
2,331

 
$
3,500

During the three months ended March 31, 2018 and March 31, 2017, Prosper capitalized $0.1 million and $0.1 million, respectively, of stock-based compensation as internal use software and website development costs. As of March 31, 2018, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to Prosper’s employees’ unvested stock-based awards was approximately $14.5 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.0 years.
14. Restructuring     
Summary of Restructuring Plan
During 2016, Prosper adopted a strategic restructuring of its business. This restructuring was intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location and its Tel Aviv location.
In the three months ended March 31, 2018 Prosper's only restructuring related activities related to office space that is no longer needed. Other than accretion and changes in sublease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.

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

 
$
3,244

Adjustments to expense
323

 
323

Sublease cash receipts
134

 
134

Less: Cash paid
(368
)
 
(368
)
Balance March 31, 2018
$
3,333

 
$
3,333

 
15. Income Taxes
For the three months ended March 31, 2018 and March 31, 2017, Prosper recognized $10 thousand and $164 thousand of income tax expense, respectively. The income tax expense relates to state income tax expense and the amortization of tax deductible goodwill which gives rise to an indefinite-lived deferred tax liability.  No other income tax expense or benefit was recorded for the three month periods ended March 31, 2018 and March 31, 2017 due to a full valuation allowance recorded against our deferred tax assets.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, it is not more likely than not that our deferred tax assets will be realized and therefore a full valuation allowance has been recorded.

16. Consortium Purchase Agreement
On February 27, 2017, Prosper entered into a series of agreements (the "Consortium Purchase Agreement") with a consortium of investors (the "Consortium"), pursuant to which the Consortium has agreed to purchase borrower loans in an aggregate principal amount of up to $5.0 billion (including certain loans purchased by one of the investors prior to the date of the Consortium Agreement). PFL will be obligated to offer for purchase minimum monthly volumes of eligible loans to the Consortium, for the Consortium to elect to purchase.
In connection with the Consortium Purchase Agreement, PMI issued to the Consortium, three warrants to purchase up to an aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
The Consortium’s right to exercise the Series F Warrant is subject to monthly vesting during the term of the Consortium Purchase Agreement based upon the volume of loans the Consortium elects to purchase (if any) in each month, subject to certain cure rights such as offering additional loans for sale in subsequent periods. Pursuant to these cure rights, if the Consortium fails to respond to offers for allocation, purchase or funding, the Consortium can take advantage of a designated period of time to cure such failure. There have been no such failures by the Consortium to date. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI, insolvency of PMI or PFL, certain breaches of contract by PMI or PFL that are not cured within a defined cure period and upon the occurrence of certain other events set forth in the Warrant Agreement.
On vesting of the Series F warrants, Prosper records a liability as "Convertible Preferred Stock Warrant Liability" on the Condensed Consolidated Balance Sheet at fair value and a corresponding amount as "Fair Value of Warrants Vested on Sale of Borrower Loans" on the Condensed Consolidated Statement of Operations. Subsequent changes in the fair value of the vested warrants are recorded in "Other Expenses" on the Condensed Consolidated Statement of Operations. Additionally, in connection with the execution of the Consortium Purchase Agreement, certain previously issued rebates were settled by an issuance of vested Series F Convertible Preferred Stock Warrants. The difference in fair value of these warrants over the cash settlement price is recorded in "Change in Fair Value of Convertible Preferred Stock Warrants" on the Condensed Consolidated Statement of Operations.
The following represents the loans purchased and warrants vested under the Consortium Purchase Agreement:

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

 
75,186,002

Loans Purchased by the Consortium during the quarter ended March 31, 2018
333,622

 
15,381,928

Total as of March 31, 2018
$
2,160,149

 
90,567,930

In addition to the $2.2 billion above, warrants vested on signing of the Consortium Purchase Agreement were issued to settle certain rebates on $0.3 billion of whole loan purchases by members of the Consortium prior to the signing of the Consortium Purchase Agreement.   This $0.3 billion also reduces the up to $5.0 billion aggregate amount under the Consortium Purchase Agreement.
17. Commitments and Contingencies
Future Minimum Lease Payments
Prosper has entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2022 and 2027.
The table below presents future minimum rental payments, net of minimum sublease rentals of $6.8 million, for the remaining terms of the operating leases (in thousands):
Remainder of 2018
3,419

2019
5,046

2020
5,534

2021
5,492

2022
5,377

Thereafter
5,602

Total
$
30,470

The payments in the above table include amounts that have been accrued for as part of the restructuring liability in Note 14. Restructuring accrual balances related to operating facility leases were $3.3 million at March 31, 2018.
Rental expense under operating lease arrangements was $1.1 million and $1.3 million for the three months ended March 31, 2018 and March 31, 2017, respectively.
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month.  To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency.  Accordingly, the minimum fee for the remaining nine months of 2018 is $1.3 million.  The minimum fee is $0.9 million for the year 2019.
Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15.0 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At March 31, 2018, Prosper was in compliance with the covenant.
Loan Purchase Commitments
Prosper has entered into an agreement with WebBank to purchase $42.1 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended March 31, 2018 and the first business day of the quarter ending June 30, 2018. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending June 30, 2018.
Repurchase and Indemnification Contingency

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Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this