10-Q 1 prosper-63018x10q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
Commission
File Number
 
Exact Name of Registrant as Specified in its Charter
 
I.R.S. Employer
Identification Number
333-147019
333-179941-01
333-204880
 
PROSPER MARKETPLACE, INC.
a Delaware corporation
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5400
 
73-1733867
 
 
 
 
 
333-179941
333-204880-01
 
PROSPER FUNDING LLC
a Delaware limited liability company
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5479
 
45-4526070
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Prosper Marketplace, Inc.
Yes x No ¨
Prosper Funding LLC
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Prosper Marketplace, Inc.
Yes x No ¨
Prosper Funding LLC
Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large
Accelerated
Filer
 
Accelerated
Filer
 
Non-
Accelerated
Filer
 
Smaller
Reporting
Company
 
Emerging Growth Company
Prosper Marketplace, Inc.
o
 
o
 
x
 
o
 
o
Prosper Funding LLC
o
 
o
 
x
 
o
 
o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Prosper Marketplace, Inc.
Yes¨ No x
Prosper Funding LLC
Yes¨ No x
Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
As of August 6, 2018, there were 70,381,991 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.

1



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

2



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


3



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

4



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

5



Item 1. Condensed Consolidated Financial Statements
Prosper Marketplace, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except for share and per share amounts)
 
June 30, 2018
 
December 31, 2017
Assets
 

 
 

Cash and Cash Equivalents
$
58,652

 
$
45,795

Restricted Cash
134,552

 
152,668

Available for Sale Investments, at Fair Value
34,841

 
53,147

Accounts Receivable
3,539

 
683

Loans Held for Sale, at Fair Value
116,817

 
49

Borrower Loans, at Fair Value
277,361

 
293,005

Property and Equipment, Net
16,081

 
18,136

Prepaid and Other Assets
7,776

 
7,796

Servicing Assets
15,644

 
14,711

Goodwill
36,368

 
36,368

Intangible Assets, Net
1,177

 
1,377

Total Assets
$
702,808

 
$
623,735

Liabilities, Convertible Preferred Stock and Stockholders' Deficit
 

 
 

Accounts Payable and Accrued Liabilities
$
14,652

 
$
11,942

Payable to Investors
112,580

 
132,432

Notes at Fair Value
277,425

 
293,948

Warehouse Line
103,553

 

Other Liabilities
13,718

 
12,669

Convertible Preferred Stock Warrant Liability
143,676

 
116,366

Total Liabilities
665,604

 
567,357

Commitments and Contingencies (see Note 17)


 


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

 
323,793

Stockholders' Deficit
 

 
 

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

 
228

Additional Paid-In Capital
141,463

 
136,653

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

 
$
623,735

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

6




Prosper Marketplace, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except for share and per share amounts) 
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 

 
 

 
 
 
 
Operating Revenues
 

 
 

 
 
 
 
Transaction Fees, Net
$
37,988

 
$
35,423

 
$
69,343

 
$
62,291

Servicing Fees, Net
7,487

 
6,793

 
14,671

 
12,947

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

 
3,803

 
7,512

 
3,485

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

 
1,415

 
2,367

 
2,135

Total Operating Revenues
30,020

 
30,547

 
57,981

 
60,664

Interest Income
 
 
 
 
 
 
 
Interest Income on Borrower Loans
14,556

 
12,007

 
26,916

 
23,507

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

 
830

 
4,716

 
1,652

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

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

 
31,447

 
62,125

 
62,292

Expenses
 
 
 
 
 
 
 
Origination and Servicing
9,192

 
8,873

 
18,013

 
17,278

Sales and Marketing
20,907

 
20,131

 
39,735

 
39,687

General and Administrative
18,151

 
18,758

 
36,865

 
39,473

Restructuring Charges, Net
271

 
647

 
595

 
572

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

 
(8,602
)
 
22,817

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

 
(500
)
 
7,629

Total Expenses
44,265

 
72,755

 
86,106

 
127,456

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

 
97

 
19

 
262

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

 
69,691,841

 
70,333,145

 
69,436,365

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

7




Prosper Marketplace, Inc.
Condensed Consolidated Statements of Other Comprehensive Loss (Unaudited)
(in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net Loss
$
(12,599
)
 
$
(41,405
)
 
$
(24,000
)
 
$
(65,426
)
Other Comprehensive Income (Loss), Before Tax
 

 
 

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

 
(1
)
 
12

 
16

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

 

 

 
(12
)
Other Comprehensive Income, Before Tax
27

 
(1
)
 
12

 
4

Income tax effect

 

 

 

Other Comprehensive Income, Net of Tax
27

 
(1
)
 
12

 
4

Comprehensive Loss
(12,572
)
 
(41,406
)
 
(23,988
)
 
(65,422
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

8




Prosper Marketplace, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from Operating Activities:
 

 
 

Net Loss
$
(24,000
)
 
$
(65,426
)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
 
 
 
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes
572

 
24

Depreciation and Amortization
5,334

 
6,270

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

 
5,742

Stock-Based Compensation Expense
4,584

 
6,812

Restructuring Liability
595

 
412

Fair Value of Warrants Vested
35,912

 
21,677

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

Impairment Losses on Assets Held for Sale

 
6,319

Other, Net
(358
)
 
199

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

 
1,246,358

Accounts Receivable
(2,856
)
 
25

Prepaid and Other Assets
1,448

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

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

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

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

 
99,482

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

 
1,280

Purchases of Short Term Investments

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

Proceeds from Sale of Available for Sale Investments

 
16,163

Maturities of Available for Sale Investments
24,000

 
8,600

Net Cash Provided by Investing Activities
15,725

 
14,837

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

 
106,506

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

 

Payment for debt issuance costs
(1,428
)
 

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

 
18

Repurchase of Common Stock and Restricted Stock

 
(64
)

9




Net Cash Provided by Financing Activities
100,855

 
6,186

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

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

 
186,244

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

 
$
213,998

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

 
$
22,121

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

 
$
169

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

10




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

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


11




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

 
45,795

 
$
34,667

 
$
22,337

Restricted Cash
134,552

 
152,668

 
179,331

 
163,907

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

 
$
198,463

 
$
213,998

 
$
186,244

Borrower Loans, Loans Held for Sale and Notes
Through the Note Channel, Prosper purchases Borrower Loans from WebBank, then issues Notes and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s condensed consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.
Debt
For debt instruments carried at amortized cost, the Company defers specific incremental costs directly related to issuing debt or entering into revolving debt arrangements. Debt issuance costs associated with revolving debt arrangements are presented as an asset and subsequently amortized over the term of the revolving debt arrangement.
Revenues
Revenue primarily results from fees and net interest income earned. Fees include transaction fees for our services performed on behalf of WebBank to originate a loan. We also have other smaller sources of revenue reported as other revenue, including referral fees and securitization fees. For more information about Prosper's revenues, see Note 2 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2017.
Transaction Fees
Prosper has a customer contract with WebBank to facilitate the origination of all Borrower Loans through Prosper’s marketplace. In exchange for these services, Prosper earns a transaction fee from WebBank that is recognized when performance is complete, which is upon the successful origination of a Borrower Loan and which is similar to the recognition prior to the adoption of ASC 606. The transaction fee Prosper earns is determined by the term and credit grade of the Borrower Loan that is facilitated on Prosper’s marketplace, and ranges from 1.00% to 5.00% of the original principal amount of such Borrower Loan that WebBank originates. Prosper records the transaction fee net of any fees paid to WebBank because Prosper does not receive an identifiable benefit from WebBank other than the Borrower Loan that has been recognized at fair value.
Other Revenues
Other Revenues consist primarily of securitization fees and credit referral fees. Credit referral fees are where partner companies pay us an agreed upon amount for successful referrals of customers from our marketplace. The transaction price is a fixed amount per referral and is recognized by the Company upon a successful referral which is similar to the recognition prior to the adoption of ASC 606. Securitization fees represent fees Prosper earns to facilitate securitizations for purchasers of Borrower Loans and is recognized as other revenue when the securitization is completed which is similar to the recognition prior to the adoption of ASC 606. In some instances Prosper may also provide a guarantee, which requires us to first determine the fair value of the guarantee and allocate the remaining transaction price to the securitization performance obligation.
As of June 30, 2018 Prosper had no material contract assets, contract liabilities or deferred contract costs. As of June 30, 2018, Prosper had no unsatisfied performance obligations related to transaction fee or other revenues.

12




Recent Accounting Pronouncements
Accounting Standards Adopted In The Current Period
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. Prosper adopted the requirements of the ASU as of January 1, 2018, utilizing the modified retrospective approach. Transaction fees, securitization fees and credit referral fees are included in the scope of the new guidance, while servicing fees, net interest income and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing or ASC topic 310. The impact of adopting the ASU did not result in a material cumulative effect adjustment upon the date of adoption. Additionally, the impact of adoption on the Consolidated Financial Statements for the current period is insignificant.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. Prosper adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on Prosper’s consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16)," which requires companies to recognize the income-tax consequences of an intra-entity transfer
of an asset other than inventory. Prosper adopted the standard effective January 1, 2018, the adoption of this standard did not have a material impact on Prosper’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18)," which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Prosper adopted the standard effective January 1, 2018. Prosper had $134.6 million and $179.3 million of restricted cash on its consolidated balance sheet as of June 30, 2018 and June 30, 2017, respectively, whose cash flow statement classification changed to align with the new guidance.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Prosper adopted standard effective January 1, 2018. The adoption of this standard did not have a material impact on Prosper’s consolidated financial statements.
Accounting Standards Issued, To Be Adopted By The Company In Future Periods
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures.  This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements. We do expect that this guidance will have a material impact on Prosper's consolidated financial statements. As of June 30, 2018 Prosper had a total of $35.9 million in non-cancelable operating lease commitments.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The standard eliminates Step 2 from the goodwill impairment test, which requires a hypothetical purchase price allocation. Prosper will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The standard should be applied on a prospective basis. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, "Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." The ASU is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718, Compensation-Stock Compensation, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned.

13




This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year and early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
3. Property and Equipment, Net
Property and equipment consist of the following (in thousands):
 
June 30,
2018
 
December 31,
2017
Property and equipment:
 

 
 

Computer equipment
$
14,785

 
$
14,499

Internal-use software and website development costs
21,372

 
19,910

Office equipment and furniture
3,010

 
3,010

Leasehold improvements
7,078

 
7,078

Assets not yet placed in service
1,893

 
1,216

Property and equipment
48,138

 
45,713

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

 
$
18,136

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

 
$
296,668

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

 
$
59

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

 
6,974

 
(211
)
 
(10
)
Fair value
$
277,361

 
$
293,005

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

 
$
49

At June 30, 2018, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 32.32%, and had various maturity dates through June 2023. At December 31, 2017, outstanding Borrower Loans had original maturities of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 32.32%, and had various maturity dates through December 2022
Approximately $0.6 million and $1.2 million represents the loss that is attributable to changes in the instrument-specific credit risks related to Borrower Loans that were recorded in the change in fair value during the six months ending June 30, 2018 and June 30, 2017, respectively.
As of June 30, 2018, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.6 million and a fair value of $1.1 million. As of December 31, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.5 million and a fair value of $1.3 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of June 30, 2018 and December 31, 2017, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0.3 million, respectively.
5. Loan Servicing Assets and Liabilities

14




Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains and losses recognized on the sale of such Borrower Loans for the three months ended June 30, 2018 was a gain of $4.2 million and a loss of $20.6 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium (as defined in Note 16). The total gains and losses recognized on the sale of such Borrower Loans for the six months ended June 30, 2018 was a gain of $7.5 million and a loss of $35.9 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium. The total gains recognized on the sale of such Borrower Loans were $3.8 million during the three months ended June 30, 2017, which included rebates provided to members of the Consortium prior to the closing of the Consortium transaction and a loss of $16.9 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium after the closing of the Consortium transaction. The total gains recognized on the sale of such Borrower Loans were $3.5 million during the six months ended June 30, 2017, which included rebates provided to members of the Consortium prior to the closing of the Consortium transaction and a loss of $20.2 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium after the closing of the Consortium transaction.
As of June 30, 2018, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.9 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through June 2023. At December 31, 2017, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through December 2022.
$21.6 million and $18.2 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the six months ended June 30, 2018 and June 30, 2017, respectively.
Fair Value
Valuation Method. Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.
Market Servicing Rate. Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider.
Discount Rate. The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets.
Default Rate. The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate. The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.

15





6. Available for Sale Investments, at Fair Value 
Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired . 
The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of June 30, 2018 and December 31, 2017, are as follows (in thousands): 
June 30, 2018
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed maturity securities:
 

 
 

 
 

 
 

Treasury Bills
20,668

 

 
(23
)
 
20,645

US Treasury securities
14,232

 

 
(36
)
 
14,196

Total Available for Sale Investments
$
34,900

 
$

 
$
(59
)
 
$
34,841

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

 
 

 
 

 
 

Treasury Bills
$
34,014

 
$

 
$
(36
)
 
$
33,978

US Treasury securities
19,207

 

 
(38
)
 
19,169

Total Available for Sale Investments
$
53,221

 
$

 
$
(74
)
 
$
53,147

A summary of available for sale investments with unrealized losses as of June 30, 2018, and December 31, 2017, aggregated by category and period of continuous unrealized loss, is as follows (in thousands):
 
Less than 12 months
 
12 months or longer
 
Total
June 30, 2018
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Fixed maturity securities:
 

 
 

 
 

 
 

 
 

 
 

Treasury Bills
$
20,645

 
$
(23
)
 
$

 
$

 
$
20,645

 
$
(23
)
US Treasury securities
$
14,196

 
$
(36
)
 
$

 
$

 
$
14,196

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

 
$
(59
)
 
$

 
$

 
$
34,841

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

 
 

 
 

 
 

 
 

 
 

Treasury Bills
$
33,978

 
$
(36
)
 
$

 
$

 
$
33,978

 
$
(36
)
US Treasury securities
$
19,169

 
$
(38
)
 
$

 
$

 
$
19,169

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

 
$
(74
)
 
$

 
$

 
$
53,147

 
$
(74
)


16




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

 

 

 

 
20,645

US Treasury securities
14,196

 

 

 

 
14,196

Total Fair Value
$
34,841

 
$

 
$

 
$

 
$
34,841

Total Amortized Cost
$
34,900

 
$

 
$

 
$

 
$
34,900

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

 

 

 

 
33,978

US Treasury securities
14,947

 
4,222

 

 

 
19,169

Total Fair Value
$
48,925

 
$
4,222

 
$

 
$

 
$
53,147

Total Amortized Cost
$
48,992

 
$
4,229

 
$

 
$

 
$
53,221

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

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

17




assets. Prosper's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts. 
The Convertible Preferred Stock Warrant Liability is valued using a Black-Scholes option pricing model. Refer to Note 12 for further details.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
June 30, 2018
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total
Assets:
 

 
 

 
 

 
 

Borrower Loans
$

 
$

 
$
277,361

 
$
277,361

Loans Held for Sale

 

 
116,817

 
116,817

Available for Sale Investments, at Fair Value

 
34,841

 

 
34,841

Servicing Assets

 

 
15,644

 
15,644

Total Assets

 
34,841

 
409,822

 
444,663

Liabilities:
 

 
 

 
 

 
 

Notes
$

 
$

 
$
277,425

 
$
277,425

Servicing Liabilities

 

 
28

 
28

Convertible Preferred Stock Warrant Liability

 

 
143,676

 
143,676

Loan Trailing Fee Liability

 

 
3,078

 
3,078

Total Liabilities
$

 
$

 
$
424,207

 
$
424,207

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

 
 

 
 

 
 

Borrower Loans
$

 
$

 
$
293,005

 
$
293,005

Loans Held for Sale

 

 
49

 
49

Available for Sale Investments, at Fair Value

 
53,147

 

 
53,147

Servicing Assets

 

 
14,711

 
14,711

Total Assets

 
53,147

 
307,765

 
360,912

Liabilities:
 

 
 

 
 

 
 

Notes
$

 
$

 
$
293,948

 
$
293,948

Servicing Liabilities

 

 
59

 
59

Convertible Preferred Stock Warrant Liability

 

 
116,366

 
116,366

Loan Trailing Fee Liability

 

 
2,595

 
2,595

Total Liabilities
$

 
$

 
$
412,968

 
$
412,968

As Prosper’s Borrower Loans, Loans Held for Sale, Notes, and loan servicing rights do not trade in an active market with readily observable prices, Prosper uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at June 30, 2018 and December 31, 2017:

18




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

 
15% - 25%

Default rate
 
1.6% - 16.5%

 
1.5% - 16.1%

Prepayment rate
 
15.2% - 32.9%

 
13.5% - 30.2%

Market servicing rate
 
0.625
%
 
0.625
%
Loan Trailing Fee Liability:
 
 
Range
Unobservable Input
 
June 30, 2018
 
December 31, 2017
Discount rate
 
15% - 25%
 
15% - 25%
Default rate
 
1.6% - 16.5%
 
1.5% - 16.1%
Prepayment rate
 
15.2% - 32.9%
 
13.5% - 30.2%
At June 30, 2018, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
The following tables present additional information about level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at January 1, 2018
$
293,005

 
$
(293,948
)
 
$
49

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

 
(90,693
)
 
1,324,100

 
1,324,482

Principal repayments
(88,947
)
 
91,525

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

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

 
796

 
1,091

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

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

 
$
(277,425
)
 
$
116,817

 
$
116,753


19




Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 
Notes
 
Loans Held
for Sale
 
Total
Balance at January 1, 2017
$
315,627

 
$
(316,236
)
 
$
624

 
$
15

Purchase of Borrower Loans/Issuance of Notes
106,940

 
(106,506
)
 
1,245,826

 
1,246,260

Principal repayments
(97,492
)
 
100,274

 
(42
)
 
2,740

Borrower Loans sold to third parties
(1,990
)
 

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

 
266

 
(3
)
 
272

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

 
6

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

 
$
(311,410
)
 
$
95

 
$
957

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

 
$
(285,095
)
 
$
82,803

 
$
83,292

Purchase of Borrower Loans/Issuance of Notes
44,799

 
(44,468
)
 
728,901

 
729,232

Principal repayments
(43,990
)
 
44,423

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

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

 
255

 
139

Change in fair value
(7,880
)
 
7,629

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

 
$
(277,425
)
 
$
116,817

 
$
116,753

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

 
$
(316,944
)
 
$
109

 
$
701

Purchase of Borrower Loans/Issuance of Notes
50,260

 
(49,692
)
 
721,829

 
722,397

Principal repayments
(48,048
)
 
48,695

 
(14
)
 
633

Borrower Loans sold to third parties
(869
)
 

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

 
(156
)
 

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

 

 
70

Balance at June 30, 2017
$
312,272

 
$
(311,410
)
 
$
95

 
$
957


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

 
59

Additions
7,502

 

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

 
28

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

 
198

Additions
6,532

 

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

 
111


20




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

 
41

Additions
4,163

 

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

 
28

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

 
147

Additions
3,768

 

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

 
111


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

Add Issuances of Preferred Stock Warrant
35,912

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

Balance as of January 1, 2017
$

Add Issuances of Preferred Stock Warrant
47,297

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

Balance at June 30, 2017
$
70,114

Balance as of April 1, 2018
$
127,041

Add Issuances of Preferred Stock Warrant
20,633

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

Balance as of April 1, 2017
$
30,811

Add Issuances of Preferred Stock Warrant
16,887

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

Balance at June 30, 2017
$
70,114


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

21




Balance at January 1, 2018
 
2,595

Issuances
 
1,529

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

Balance as of June 30, 2018
 
3,078

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity 
Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at June 30, 2018 for Borrower Loans, Loans Held for Sale and Notes funded through the Note Channel are presented in the following table (in thousands, except percentages):
 
Borrower Loans and
Loans Held for Sale
 
Notes
 
Fair Value as of June 30, 2018
$394,178
 
$277,425
 
Discount rate assumption:
7.52
%
*
7.52
%
*
Resulting fair value from:
 

 
 

 
100 basis point increase
$
390,255

 
$
274,660

 
200 basis point increase
386,431

 
271,964

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
398,202

 
$
280,262

 
200 basis point decrease
402,333

 
283,173

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

 
 

 
100 basis point increase
$
389,288

 
$
273,967

 
200 basis point increase
384,542

 
270,612

 
Resulting fair value from:
 

 
 

 
100 basis point decrease
$
399,107

 
$
280,911

 
200 basis point decrease
404,079

 
284,428

 
* Represents weighted average assumptions considering all credit grades.
The following table presents the estimated impact on Prosper’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of June 30, 2018 (in thousands, except percentages).
 
Servicing
Assets
 
Servicing
Liabilities
Fair Value as of June 30, 2018
$15,644
 
$28
Market servicing rate assumptions
0.625
%
 
0.625
%
Resulting fair value from:
 

 
 

Market servicing rate increase to 0.65%
$
14,691

 
$
31

Market servicing rate decrease to 0.60%
$
16,634

 
$
25

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

 
 

Applying a 1.1 multiplier to prepayment rate
$
15,471

 
$
28

Applying a 0.9 multiplier to prepayment rate
$
15,857

 
$
29

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

 
 

Applying a 1.1 multiplier to default rate
$
15,473

 
$
28

Applying a 0.9 multiplier to default rate
$
15,857

 
$
28


22




These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Financial Instruments, Assets and Liabilities not Recorded at Fair Value
The following tables present the fair value hierarchy for financial instruments, assets, and liabilities not recorded at fair value (in thousands):
June 30, 2018
Carrying Amount
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Balance at Fair Value
Assets:
 
 
 

 
 

 
 

 
 

Cash and Cash Equivalents
$
58,652

 
$
58,652

 
$

 
$

 
$
58,652

Restricted Cash
134,552

 

 
134,552

 

 
134,552

Accounts Receivable
3,539

 

 
3,539

 

 
3,539

Total Assets
196,743

 
58,652

 
138,091

 

 
196,743

Liabilities:
 
 
 

 
 

 
 

 
 

Accounts Payable and Accrued Liabilities
$
14,652

 
$

 
$
14,652

 
$

 
$
14,652

Payable to Investors
112,580

 

 
112,580

 

 
112,580

Warehouse Line
103,553

 

 
103,553

 

 
103,553

Total Liabilities
$
230,785

 
$

 
$
230,785

 
$

 
$
230,785

 

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

 
$
(3,060
)
 
$

 

User base and customer relationships
5,050

 
(3,873
)
 
$
1,177

 
6.8

Brand name
60

 
(60
)
 

 

Total intangible assets subject to amortization
$
8,170

 
$
(6,993
)
 
$
1,177

 
 

Prosper’s intangible asset balance was $1.2 million and $1.4 million at June 30, 2018 and December 31, 2017, respectively. During the six months ended June 30, 2017, certain intangible assets were made available for sale and as a result they were written down to fair value. This resulted in an impairment loss of $6.3 million, which is recorded in Other Expenses on the Condensed Consolidated Statement of Operations.
The user base and customer relationship intangible assets are being amortized on an accelerated basis over a three to ten year period. The technology and brand name intangible assets are being amortized on a straight line basis over three to five years and one year, respectively.

23




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

2019
279

2020
220

2021
172

2022
136

Thereafter
$
192

Total
$
1,177


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

 
2,595

Deferred revenue
436

 
452

Servicing liabilities
28

 
59

Deferred income tax liability
244

 
225

Deferred rent
3,651

 
3,904

Restructuring liability
3,457

 
3,355

Other
2,824

 
2,079

Total Other Liabilities
$
13,718

 
$
12,669


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

24




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

 
 

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

 
69,691,841

 
70,333,145

 
69,436,365

Basic and diluted net loss per share
$
(0.18
)
 
$
(0.59
)
 
$
(0.34
)
 
$
(0.94
)
The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(shares)
 
(shares)
 
(shares)
 
(shares)
Excluded securities:
 

 
 

 
 
 
 
Convertible preferred stock issued and outstanding
214,637,925

 
177,388,428

 
214,637,925

 
177,388,428

Stock options issued and outstanding
75,206,928

 
60,938,265

 
66,403,696

 
53,040,604

Unvested stock options exercised
2,190

 
20,940

 
2,190

 
20,940

Restricted stock units

 

 

 

Warrants issued and outstanding
1,080,349

 
1,199,403

 
1,082,917

 
1,199,403

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

 
35,544,141

 
35,544,141

 
35,544,141

Series F convertible preferred stock warrants
177,720,704

 
177,720,704

 
177,720,704

 
177,720,704

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

 
452,811,881

 
495,391,573

 
444,914,220



25




12. Convertible Preferred Stock, Warrant Liability and Stockholders’ Deficit
Convertible Preferred Stock and Warrants
Under PMI’s amended and restated certificate of incorporation, preferred stock is issuable in series, and the Board of Directors is authorized to determine the rights, preferences, and terms of each series.
On February 27, 2017, PMI issued to Pinecone Investments LLC a second warrant (the “Second Series E-1 Warrant,” and together with a previously issued First Series E-1 Warrant, the “Series E-1 Warrants”) to purchase 15,277,006 shares of Series E-1 convertible preferred stock at an exercise price of $0.01 per share. The Series E-1 Warrants are immediately exercisable, in whole or in part, by paying in cash the full purchase price payable in respect of the number of shares purchased. The Series E-1 Warrants were issued pursuant to the Warrant Agreement, dated December 16, 2016, between PMI and Colchis Capital Management, L.P. ("Colchis"), as previously described in PMI’s Current Report on Form 8-K as filed with the SEC on December 22, 2016.
In connection with the Consortium Purchase Agreement (as defined in Note 16) entered into with affiliates of the Consortium (as defined in Note 16, such affiliates, "Warrant Holders'") a warrant agreement was signed (the "Warrant Agreement"). Pursuant to the Warrant Agreement, PMI issued to the Consortium, three warrants (together, the “Series F Warrant”) to purchase up to an aggregate of 177,720,706 shares of PMI’s Series F convertible preferred stock at an exercise price of $0.01 per share (the “Warrant Shares”).
The Warrant Holders' right to exercise the Series F Warrant is subject to monthly vesting during the term of the Consortium Purchase Agreement based upon the volume of loans the Consortium elects to purchase (if any) in each month, subject to certain cure rights such as offering additional loans for sale in subsequent periods. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI, insolvency of PMI or PFL certain breaches of contract by PMI or PFL that are not cured within a defined cure period and upon the occurrence of certain events set forth in the Warrant Agreement.
The Series F Warrant will be exercisable with respect to vested Warrant Shares, in whole or in part, at any time prior to the tenth anniversary of its date of issuance. The number of shares underlying the Series F Warrant may be adjusted following certain events such as stock splits, dividends, reclassifications, and certain other issuances by PMI.
On September 20, 2017, Prosper issued and sold 37,249,497 shares of Series G convertible preferred stock in a private placement at a purchase price of $1.34 per share for proceeds of approximately $47.9 million, net of issuance costs. The Series G convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(a)(2) of the Securities Act regarding sales by an issuer not involving a public offering. The purpose of the Series G private placement was to raise funds for general corporate purposes.
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of June 30, 2018 are disclosed in the table below (amounts in thousands except share and per share amounts): 
Convertible Preferred Stock
 
Par Value
 
Authorized
Shares
 
Outstanding
and Issued
Shares
 
Liquidation
Preference (Outstanding Shares)
Series A
 
$
0.01

 
68,558,220

 
68,558,220

 
$
19,774

Series A-1
 
0.01

 
24,760,915

 
24,760,915

 
49,522

Series B
 
0.01

 
35,775,880

 
35,775,880

 
21,581

Series C
 
0.01

 
24,404,770

 
24,404,770

 
70,075

Series D
 
0.01

 
23,888,640

 
23,888,640

 
165,000

Series E-1
 
0.01

 
35,544,141

 

 

Series E-2
 
0.01

 
16,858,078

 

 

Series F
 
0.01

 
177,720,707

 
3

 

Series G
 
0.01

 
37,249,497

 
37,249,497

 
50,000

 
 
 

 
444,760,848

 
214,637,925

 
$
375,952

Dividends
Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series

26




E-1, Series E-2, Series F, and Series G convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights. To date, no dividends have been declared on any of the PMI’s preferred stock or common stock.
Conversion
Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an Initial Public Offering (“IPO”) that values Prosper at least at $2 billion and that results in aggregate proceeds to Prosper of at least $100 million or (ii) upon a written request from the holders of at least 60% of the voting power of the outstanding preferred stock (on an as-converted basis), provided that (i) the Series A-1 convertible preferred stock shall not be converted without at least 14% of the voting power of the outstanding Series A-1 convertible preferred stock; (ii) the Series D shall not be converted without at least 60% of the voting power of the outstanding Series D; (iii) the Series E-1 and Series E-2 shall not be converted without at least 60% of the voting power of the outstanding Series E-1 and Series E-2, voting together as a single class; (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F, and (v) the shares of Series G Preferred Stock will not be automatically converted unless the holders of at least 60% of the outstanding shares of Series G Preferred Stock approve such conversion. In addition, if a holder of the Series A convertible preferred stock has converted any of the Series A convertible preferred stock, then all of such holder’s shares of Series A-1 convertible preferred stock also will be converted upon a liquidation event. In lieu of any fractional shares of common stock to which a holder would otherwise be entitled, PMI shall pay such holder cash in an amount equal to the fair market value of such fractional shares, as determined by its Board of Directors. At present, each of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and the Series G convertible preferred stock converts into PMI common stock at a 1:1 ratio while the Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio.
The conversion price of the Series G convertible preferred stock shall be reduced to a number equal to the Series G Preferred Stock original issuance price divided by the quotient obtained by dividing the series G true up amount by the total number of Series G Preferred Stock issued as of the Series G closing date. The Series G true up amount means the aggregate number of shares of Series G Preferred Stock that would have been issued to the purchasers of the Series G Preferred Stock on the Series G closing date, if warrants to purchase shares of Series E-2 Preferred Stock or Series F Preferred Stock that were exercisable or exercised as of the true up time (end of vesting period) were exercisable or exercised as of the Series G Preferred Stock closing date.
Liquidation Rights
PMI’s convertible preferred stock has been classified as temporary equity on the Consolidated Balance Sheets. The preferred stock is not redeemable; however, in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of Series E-1, Series E-2, and Series F convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A, Series B, Series C, Series D, Series G and Series A-1 convertible preferred stock or common stock, an amount per share for (i) each share of Series E-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, (ii) each share of Series E-2 convertible preferred stock equal to the sum of two-thirds the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (iii) each share of Series F convertible preferred stock equal to the sum of two-thirds of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series E-1, Series E-2, and Series F convertible preferred stock, each holder of Series A, Series B, Series C and Series D, Series E-2, Series F, and Series G convertible preferred stock is entitled to receive, on a pari passu basis, prior to and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 convertible preferred stock or common stock, (i) an amount per share for each share of Series E-2 and Series F convertible preferred stock equal to the sum of one-third of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (ii) an amount per share for each share of Series A, Series B, Series C, Series D and Series G convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock, an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.

27




After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, Series G, and Series A-1 convertible preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of Series A convertible preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the Series A convertible preferred stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum aggregate amount per share of Series A convertible preferred stock which the holders of Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the Series A convertible preferred stock.
At present, the liquidation preferences ar