UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 333-225797-01	PROSPER MARKETPLACE, INC. a Delaware corporation 221 Main Street, 3rd Floor San Francisco, CA 94105 Telephone: (415) 593-5400	73-1733867
333-179941 333-204880-01 333-225797	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 every Interactive Data File required to be submitted 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.

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As of November 6, 2018, there were 70,475,210 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.

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

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TABLE OF CONTENTS

		Page No.
	Forward-Looking Statements	4
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	6
	Prosper Marketplace, Inc.	6
	Condensed Consolidated Balance Sheets (Unaudited)	6
	Condensed Consolidated Statements of Operations (Unaudited)	7
	Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)	8
	Condensed Consolidated Statements of Cash Flows (Unaudited)	9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
	Prosper Funding LLC	36
	Condensed Consolidated Balance Sheets (Unaudited)	36
	Condensed Consolidated Statements of Operations (Unaudited)	37
	Condensed Consolidated Statements of Cash Flows (Unaudited)	38
	Notes to Condensed Consolidated Financial Statements (Unaudited)	39
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	67
PART II.	OTHER INFORMATION	68
Item 1.	Legal Proceedings	68
Item 1A.	Risk Factors	68
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	68
Item 3.	Defaults upon Senior Securities	68
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibit Index	69
Signatures		70

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.

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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.

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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.

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Item 1. Condensed Consolidated Financial Statements

Prosper Marketplace, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except for share and per share amounts)

	September 30, 2018		December 31, 2017
Assets
Cash and Cash Equivalents	$	58,447	$	45,795
Restricted Cash	145,233		152,668
Available for Sale Investments, at Fair Value	28,361		53,147
Accounts Receivable	5,471		683
Loans Held for Sale, at Fair Value	113,195		49
Borrower Loans, at Fair Value	268,549		293,005
Property and Equipment, Net	15,490		18,136
Prepaid and Other Assets	7,535		7,796
Servicing Assets	15,438		14,711
Goodwill	36,368		36,368
Intangible Assets, Net	1,088		1,377
Total Assets	$	695,175	$	623,735
Liabilities, Convertible Preferred Stock and Stockholders' Deficit
Accounts Payable and Accrued Liabilities	$	15,305	$	11,942
Payable to Investors	124,116		132,432
Notes at Fair Value	268,588		293,948
Warehouse Line	103,576		—
Other Liabilities	10,256		12,669
Convertible Preferred Stock Warrant Liability	153,954		116,366
Total Liabilities	675,795		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 September 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 September 30, 2018 and December 31, 2017.	323,793		323,793
Stockholders' Deficit
Common Stock – $0.01 par value; 625,000,000 shares authorized; 71,411,145 shares issued, and 70,475,210 shares outstanding, as of September 30, 2018; 625,000,000 shares authorized; 71,226,934 shares issued, and 70,290,999 shares outstanding, as of December 31, 2017.	229		228
Additional Paid-In Capital	143,394		136,653
Less: Treasury Stock	(23,417)		(23,417)
Accumulated Deficit	(424,581)		(380,806)
Accumulated Other Comprehensive Loss	(38)		(73)
Total Stockholders' Deficit	(304,413)		(267,415)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit	$	695,175	$	623,735

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

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Prosper Marketplace, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except for share and per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Revenues
Operating Revenues
Transaction Fees, Net	$	28,225	$	37,250	$	97,567	$	99,541
Servicing Fees, Net	7,339		6,976		22,009		19,922
Gain (Loss) on Sale of Borrower Loans	3,139		4,373		10,652		7,858
Fair Value of Warrants Vested on Sale of Borrower Loans	(19,561)		(21,772)		(55,473)		(41,966)
Other Revenue	1,453		1,390		3,820		3,525
Total Operating Revenues	20,595		28,217		78,575		88,880
Interest Income
Interest Income on Borrower Loans	15,088		12,065		42,005		35,572
Interest Expense on Notes and Warehouse Line	(11,772)		(11,247)		(33,972)		(33,102)
Net Interest Income	3,316		818		8,033		2,470
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net	(3,229)		(173)		(3,801)		(198)
Total Net Revenue	20,682		28,862		82,807		91,152
Expenses
Origination and Servicing	8,313		9,263		26,326		26,694
Sales and Marketing	23,415		21,947		63,150		61,634
General and Administrative	18,066		18,123		54,931		57,597
Restructuring Charges, Net	218		86		813		504
Change in Fair Value of Convertible Preferred Stock Warrants	(9,283)		6,323		(17,885)		29,140
Other Expenses (Income), Net	(276)		(25)		(776)		7,603
Total Expenses	40,453		55,717		126,559		183,172
Net Loss Before Taxes	(19,771)		(26,855)		(43,752)		(92,020)
Income Tax Expense	8		85		27		346
Net Loss Applicable to Common Stockholders	$	(19,779)	$	(26,940)	$	(43,779)	$	(92,366)
Net Loss Per Share – Basic and Diluted	$	(0.28)	$	(0.39)	$	(0.62)	$	(1.33)
Weighted-Average Shares – Basic and Diluted	70,394,269		69,811,534		70,353,819		69,562,795

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

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Prosper Marketplace, Inc.

Condensed Consolidated Statements of Other Comprehensive Loss (Unaudited)

(in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Net Loss	$	(19,779)	$	(26,940)	$	(43,779)	$	(92,366)
Other Comprehensive Income (Loss), Before Tax
Change in Net Unrealized Gain on Available for Sale Investments, at Fair Value	23		(2)		35		14
Realized (Gain) Loss on Sale of Available for Sale Investments, at Fair Value	—		—		—		(12)
Other Comprehensive Income, Before Tax	23		(2)		35		2
Income Tax Effect	—		—		—		—
Other Comprehensive Income, Net of Tax	23		(2)		35		2
Comprehensive Loss	(19,756)		(26,942)		(43,744)		(92,364)

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

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Prosper Marketplace, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2018		2017
Cash flows from Operating Activities:
Net Loss	$	(43,779)	$	(92,366)
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	3,801		198
Depreciation and Amortization	7,708		9,403
Gain on Sales of Borrower Loans	(10,658)		(10,660)
Change in Fair Value of Servicing Rights	9,891		8,858
Stock-Based Compensation Expense	6,412		9,652
Restructuring Liability	813		497
Fair Value of Warrants Vested	55,473		43,448
Change in Fair Value of Warrants	(17,885)		29,140
Impairment Losses on Assets Held for Sale	—		6,429
Other, Net	(873)		254
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value	(1,867,010)		(2,025,569)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value	1,751,517		2,026,111
Accounts Receivable	(4,788)		(136)
Prepaid and Other Assets	1,689		(2,359)
Accounts Payable and Accrued Liabilities	2,915		(3,324)
Payable to Investors	(8,316)		8,885
Other Liabilities	(3,134)		(1,775)
Net Cash (Used in) Provided by Operating Activities	(116,224)		6,686
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value	(134,671)		(152,461)
Principal Payments of Borrower Loans Held at Fair Value	133,945		147,051
Purchases of Property and Equipment	(4,239)		(3,489)
Maturities of Short Term Investments	—		1,280
Purchases of Short Term Investments	—		(1,262)
Purchases of Available for Sale Investments, at Fair Value	(14,841)		(20,070)
Proceeds from Sale of Available for Sale Investments	—		16,163
Maturities of Available for Sale Investments	40,000		12,100
Net Cash Provided by Investing Activities	20,194		(688)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value	134,490		151,893
Payments of Notes Held at Fair Value	(134,943)		(147,388)
Proceeds from Issuance of Preferred Stock, Net	—		47,855
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	31		20
Repurchase of Common Stock and Restricted Stock	—		(65)
Net Cash Provided by Financing Activities	101,247		52,315
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	5,217		58,313
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	$	203,680	$	244,557
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	33,895	$	33,207
Non-Cash Investing Activity- Accrual for Property and Equipment, Net	$	619	$	98

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

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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 nine 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 have 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 condensed consolidated balance sheets that sum to the total of the same such amount shown in the condensed consolidated statements of cash flows:

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	September 30, 2018		December 31, 2017		September 30, 2017		December 31, 2016
Cash and Cash Equivalents	$	58,447	45,795		$	73,026	$	22,337
Restricted Cash	145,233		152,668		171,531		163,907
Total Cash, Cash Equivalents and Restricted Cash shown in the consolidated statements of cash flows	$	203,680	$	198,463	$	244,557	$	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 September 30, 2018 Prosper had no material contract assets, contract liabilities or deferred contract costs. As of September 30, 2018, Prosper had no unsatisfied performance obligations related to transaction fees or other revenues.

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Recent Accounting Pronouncements

Accounting Standards Adopted In The Current Period

In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in US GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. Prosper 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 $145.2 million and $171.5 million of restricted cash on its condensed consolidated balance sheets as of September 30, 2018 and September 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 the 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 September 30, 2018 Prosper had a total of $25.7 million in non-cancelable operating lease commitments. Prosper expects to record an impairment charge on the right-of-use asset on adoption due to existing sublease agreements that were entered into at a loss. Prosper does not expect the impairment charge to have a material impact as it will be offset by a reduction of the existing restructuring liability for those properties.  

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.

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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. 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 may take place 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.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year and early adoption is permitted. 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):

	September 30, 2018		December 31, 2017
Property and equipment:
Computer equipment	$	14,816	$	14,499
Internal-use software and website development costs	21,492		19,910
Office equipment and furniture	3,010		3,010
Leasehold improvements	7,082		7,078
Assets not yet placed in service	2,831		1,216
Property and equipment	49,231		45,713
Less accumulated depreciation and amortization	(33,741)		(27,577)
Total property and equipment, net	$	15,490	$	18,136

Depreciation and amortization expense for property and equipment for the three months ended September 30, 2018 and September 30, 2017 was $2.3 million and $3.0 million, respectively. Depreciation and amortization expense for property and equipment for the nine months ended September 30, 2018 and September 30, 2017 was $7.4 million and $8.2 million, respectively. These charges are included in general and administrative expenses on the condensed consolidated statements of operations. Prosper capitalized internal-use software and website development costs in the amount of $1.5 million and $0.9 million for the three months ended September 30, 2018 and September 30, 2017, respectively. Prosper capitalized internal-use software and website development costs in the amount of $4.0 million and $3.0 million for the nine months ended September 30, 2018 and September 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 September 30, 2018 and December 31, 2017, are presented in the following table (in thousands):

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	Borrower Loans				Notes				Loans Held for Sale
	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Aggregate principal balance outstanding	$	274,857	$	296,668	$	(277,831)	$	(300,922)	$	115,495	$	59
Fair value adjustments	(6,308)		(3,663)		9,243		6,974		(2,300)		(10)
Fair value	$	268,549	$	293,005	$	(268,588)	$	(293,948)	$	113,195	$	49

At September 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 31.92%, and had various maturity dates through September 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 $1.5 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 nine months ending September 30, 2018 and September 30, 2017, respectively.

As of September 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 $1.0 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 September 30, 2018 and December 31, 2017, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0.3 million, respectively.

5. Loan Servicing Assets and Liabilities

Prosper 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 September 30, 2018 was a gain of $3.1 million and a loss of $19.6 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 nine months ended September 30, 2018 was a gain of $10.7 million and a loss of $55.5 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 $4.4 million during the three months ended September 30, 2017, and a loss of $21.8 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 $7.9 million during the nine months ended September 30, 2017, which included rebates provided to members of the Consortium prior to the closing of the Consortium transaction and a loss of $42.0 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 September 30, 2018, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.8 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through September 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.

$32.5 million and $28.4 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the nine months ended September 30, 2018 and September 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

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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. 

The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of September 30, 2018 and December 31, 2017, are as follows (in thousands): 

September 30, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities:
Treasury Bills	21,156		—		(12)		21,144
US Treasury securities	7,240		—		(23)		7,217
Total Available for Sale Investments	$	28,396	$	—	$	(35)	$	28,361

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 September 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
September 30, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturity securities:
Treasury Bills	$	21,144	$	(12)	$	—	$	—	$	21,144	$	(12)
US Treasury securities	$	4,223	$	(18)	$	2,994	$	(5)	$	7,217	$	(23)
Total Investments with Unrealized Losses	$	25,367	$	(30)	$	2,994	$	(5)	$	28,361	$	(35)

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	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 nine months ended September 30, 2018. 

The maturities of available for sale investments at September 30, 2018 and December 31, 2017 are as follows (in thousands):

September 30, 2018	Within 1 year		After 1 year through 5 years		After 5 years to 10 years		After 10 years		Total
Treasury Bills	21,144		—		—		—		21,144
US Treasury securities	7,217		—		—		—		7,217
Total Fair Value	$	28,361	$	—	$	—	$	—	$	28,361
Total Amortized Cost	$	28,396	$	—	$	—	$	—	$	28,396

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 nine months ended September 30, 2018, Prosper sold $0 of investments.

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.

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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.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):

September 30, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	268,549	$	268,549
Loans Held for Sale	—		—		113,195		113,195
Available for Sale Investments, at Fair Value	—		28,361				28,361
Servicing Assets	—		—		15,438		15,438
Total Assets	—		$	28,361	$	397,182	$	425,543
Liabilities:
Notes	$	—	$	—	$	268,588	$	268,588
Servicing Liabilities	—		—		19		19
Convertible Preferred Stock Warrant Liability	—		—		153,954		153,954
Loan Trailing Fee Liability	—		—		3,162		3,162
Total Liabilities	$	—	$	—	$	425,723	$	425,723

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

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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 September 30, 2018 and December 31, 2017:

Borrower Loans, Loans Held for Sale and Notes:

	Range
Unobservable Input	September 30, 2018	December 31, 2017
Discount rate	4.7% - 14.3%	4.0% - 14.4%
Default rate	2.0% - 15.6%	2.0% - 15.4%

Servicing Rights:

	Range
Unobservable Input	September 30, 2018		December 31, 2017
Discount rate	15% - 25%		15% - 25%
Default rate	1.6% - 16.6%		1.5% - 16.1%
Prepayment rate	15.1% - 33.9%		13.5% - 30.2%
Market servicing rate	0.625	%	0.625	%

Loan Trailing Fee Liability:

	Range
Unobservable Input	September 30, 2018	December 31, 2017
Discount rate	15% - 25%	15% - 25%
Default rate	1.6% - 16.6%	1.5% - 16.1%
Prepayment rate	15.1% - 33.9%	13.5% - 30.2%

At September 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	134,671		(134,490)		1,867,010		1,867,191
Principal repayments	(131,086)		134,943		(27,370)		(23,513)
Borrower Loans sold to third parties	(2,859)		—		(1,724,147)		(1,727,006)
Other changes	(314)		624		869		1,179
Change in fair value	(24,868)		24,283		(3,216)		(3,801)
Balance at September 30, 2018	$	268,549	$	(268,588)	$	113,195	$	113,156

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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	152,461		(151,894)		2,025,569		2,026,136
Principal repayments	(144,325)		147,388		(52)		3,011
Borrower Loans sold to third parties	(2,726)		—		(2,026,059)		(2,028,785)
Other changes	57		106		(4)		159
Change in fair value	(18,041)		17,837		6		(198)
Balance at September 30, 2017	$	303,053	$	(302,799)	$	84	$	338

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans		Notes		Loans Held for Sale		Total
Balance at July 1, 2018	$	277,361	$	(277,425)	$	116,817	$	116,753
Purchase of Borrower Loans/Issuance of Notes	43,596		(43,797)		542,910		542,709
Principal repayments	(42,139)		43,418		(13,105)		(11,826)
Borrower Loans sold to third parties	(843)		—		(530,496)		(531,339)
Other changes	24		(9)		73		88
Change in fair value	(9,450)		9,225		(3,004)		(3,229)
Balance at September 30, 2018	$	268,549	$	(268,588)	$	113,195	$	113,156

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans		Notes		Loans Held for Sale		Total
Balance at July 1, 2017	$	312,272	$	(311,410)	$	95	$	957
Purchase of Borrower Loans/Issuance of Notes	45,521		(45,388)		779,743		779,876
Principal repayments	(46,833)		47,114		(10)		271
Borrower Loans sold to third parties	(736)		—		(779,743)		(780,479)
Other changes	48		(160)		(1)		(113)
Change in fair value	(7,219)		7,045		—		(174)
Balance at September 30, 2017	$	303,053	$	(302,799)	$	84	$	338

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	10,658	—
Less: Changes in fair value	(9,931)	(40)
Fair Value at September 30, 2018	15,438	19

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	Servicing Assets	Servicing Liabilities
Fair Value at January 1, 2017	12,786	198
Additions	10,660	—
Less: Changes in fair value	(8,975)	(117)
Fair Value at September 30, 2017	14,471	81

	Servicing Assets	Servicing Liabilities
Fair Value at July 1, 2018	15,644	28
Additions	3,156	—
Less: Changes in fair value	(3,362)	(9)
Fair Value at September 30, 2018	15,438	19

	Servicing Assets	Servicing Liabilities
Fair Value at July 1, 2017	13,489	111
Additions	4,128	—
Less: Changes in fair value	(3,146)	(30)
Fair Value at September 30, 2017	14,471	81

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	55,473
Change in fair value of the preferred stock warrant liability	(17,885)
Balance as of September 30, 2018	$	153,954

Balance as of January 1, 2017	$	—
Add Issuances of Preferred Stock Warrant	69,068
Change in fair value of the preferred stock warrant liability	29,140
Balance as of September 30, 2017	$	98,208

Balance as of July 1, 2018	$	143,676
Add Issuances of Preferred Stock Warrant	19,561
Change in fair value of the preferred stock warrant liability	(9,283)
Balance as of September 30, 2018	$	153,954

Balance as of July 1, 2017	$	70,114
Add Issuances of Preferred Stock Warrant	21,771
Change in fair value of the preferred stock warrant liability	6,323
Balance as of September 30, 2017	$	98,208

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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	2,007
Cash payment of Loan Trailing Fee	(1,843)
Change in fair value	403
Balance at September 30, 2018	3,162

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at September 30, 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 September 30, 2018	$381,744				$268,588
Discount rate assumption:	8.42		%	*	8.42		%	*
Resulting fair value from:
100 basis point increase	$	378,060			$	265,991
200 basis point increase	374,465				263,458
Resulting fair value from:
100 basis point decrease	$	385,522			$	271,250
200 basis point decrease	389,396				273,980
Default rate assumption:	12.97		%	*	12.97		%	*
Resulting fair value from:
100 basis point increase	$	377,076			$	265,287
200 basis point increase	372,536				262,078
Resulting fair value from:
100 basis point decrease	$	386,447			$	271,913
200 basis point decrease	391,190				275,268

* Represents weighted average assumptions considering all credit grades.

The following table presents the estimated impact on Prosper’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of September 30, 2018 (in thousands, except percentages).

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	Servicing Assets			Servicing Liabilities
Fair Value as of September 30, 2018	$15,438			$19
Market servicing rate assumptions	0.625		%	0.625		%
Resulting fair value from:
Market servicing rate increase to 0.65%	$	14,518		$	21
Market servicing rate decrease to 0.60%	$	16,425		$	17
Weighted average prepayment assumptions	20.10		%	20.10		%
Resulting fair value from:
Applying a 1.1 multiplier to prepayment rate	$	15,283		$	19
Applying a 0.9 multiplier to prepayment rate	$	15,663		$	19
Weighted average default assumptions	12.53		%	12.53		%
Resulting fair value from:
Applying a 1.1 multiplier to default rate	$	15,289		$	19
Applying a 0.9 multiplier to default rate	$	15,658		$	19

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):

September 30, 2018	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Balance at Fair Value
Assets:
Cash and Cash Equivalents	$	58,447	$	58,447	$	—	$	—	$	58,447
Restricted Cash	145,233		—		145,233		—		145,233
Accounts Receivable	5,471		—		5,471		—		5,471
Total Assets	209,151		58,447		150,704		—		209,151
Liabilities:
Accounts Payable and Accrued Liabilities	$	15,305	$	—	$	15,305	$	—	$	15,305
Payable to Investors	124,116		—		124,116		—		124,116
Warehouse Line	103,576		—		103,576		—		103,576
Total Liabilities	$	242,997	$	—	$	242,997	$	—	$	242,997

8. Goodwill and Other Intangible Assets

Goodwill 

Prosper’s goodwill balance of $36.4 million at September 30, 2018 did not change during the nine months ended September 30, 2018. We did not record any goodwill impairment expense for the nine months ended September 30, 2018.

Other Intangible Assets 

The following table presents the detail of other intangible assets for the period presented (dollars in thousands):

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	September 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		(3,962)		$	1,088	6.6
Brand name	60		(60)		—		—
Total intangible assets subject to amortization	$	8,170	$	(7,082)	$	1,088

Prosper’s intangible asset balance was $1.1 million and $1.4 million at September 30, 2018 and December 31, 2017, respectively. During the nine months ended September 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 $6.4 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 years period. The technology and brand name intangible assets are being amortized on a straight line basis over three to five years and one year, respectively.

Amortization expense for the three months ended September 30, 2018 and September 30, 2017 was $0.1 million and $0.2 million, respectively. Amortization expense for the nine months ended September 30, 2018 and September 30, 2017 was $0.3 million and $1.2 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):

Year Ending December 31,
Remainder of 2018	$	89
2019	279
2020	220
2021	172
2022	136
Thereafter	$	192
Total	$	1,088

9. Other Liabilities

Other Liabilities includes the following:

	September 30, 2018		December 31, 2017
Loan trailing fee	3,162		2,595
Deferred revenue	461		452
Servicing liabilities	19		59
Deferred income tax liability	253		225
Deferred rent	3,529		3,904
Restructuring liability	1,218		3,355
Other	1,614		2,079
Total Other Liabilities	$	10,256	$	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

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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 indebtedness other than non-recourse securitization indebtedness, non-recourse or limited recourse warehouse indebtedness, and borrower dependent notes, to tangible net worth. As of September 30, 2018, Prosper was in compliance with the covenants under the Warehouse Agreement.

As of September 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 $114.6 million included in "Loans Held for Sale, at Fair Value" on the condensed consolidated balance sheet. At September 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 September 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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Numerator:
Net loss available to common stockholders for basic    and diluted EPS	$	(19,779)	$	(26,940)	$	(43,779)	$	(92,366)
Denominator:
Weighted average shares used in computing basic and diluted net loss per share	70,394,269		69,811,534		70,353,819		69,562,795
Basic and diluted net loss per share	$	(0.28)	$	(0.39)	$	(0.62)	$	(1.33)

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:

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	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
	(shares)	(shares)	(shares)	(shares)
Excluded securities:
Convertible preferred stock issued and outstanding	214,637,925	214,637,922	214,637,925	214,637,922
Stock options issued and outstanding	67,566,031	58,019,460	69,486,992	52,244,306
Unvested stock options exercised	—	16,250	—	16,250
Warrants issued and outstanding	1,080,349	1,191,430	1,082,055	1,196,716
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	496,549,150	487,129,907	498,471,817	481,360,039

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 September 30, 2018 are disclosed in the table below (amounts in thousands except share and per share amounts):

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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 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 condensed consolidated balance sheets. The preferred stock is not redeemable; however, in the event of a voluntary or involuntary liquidation, dissolution, change in

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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.

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

At present, the liquidation preferences are equal to $0.29 per share for the Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the Series B convertible preferred stock, $2.87 per share for the Series C convertible preferred stock, $6.91 per share for the Series D convertible preferred stock, $0.84 per share for the Series E-1 convertible preferred stock, $0.84 per share for the Series E-2 convertible preferred stock, $0.84 per share for the Series F convertible preferred stock and $1.34 per share for the Series G convertible preferred stock.

Voting

Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the Bylaws of PMI. 

Convertible Preferred Stock Warrant Liability

Series E-1 Warrants

In connection with the Settlement and Release Agreement dated November 17, 2016 among PMI, PFL and Colchis, on December 16, 2016, PMI issued the First Series E-1 Warrant. The Second Series E-1 Warrant for an additional 15,277,006 shares of Series E-1 convertible preferred stock was granted on the signing of the Consortium Purchase Agreement (as defined in Note 16) on February 27, 2017. The warrants expire ten years from the date of issuance. For the three months ended September 30, 2018, Prosper recognized $2.1 million of income from the re-measurement of the fair value of the warrants. For the nine months ended September 30, 2018, Prosper recognized $4.6 million of income from the re-measurement of the fair value of the warrants. The income is recorded through change in fair value of convertible preferred stock warrants in the condensed consolidated statement of operations.

To determine the fair value of the Series E-1 Warrants, the Company first determined the value of a share of a Series E-1 convertible preferred stock. To determine the fair value of the convertible preferred stock, the Company first derived the

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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:

	September 30, 2018	December 31, 2017
Volatility	40%	40%
Risk-free interest rate	3.03%	2.38%
Remaining contractual term (in years)	8.29 years	9.04 years
Dividend yield	—%	—%

The above assumptions were determined as follows:

Volatility. The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.

Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield in effect as of the period end date and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.

Remaining Contractual Term. The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant.

Dividend Yield. The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.

Series F Warrants

In connection with the Consortium Purchase Agreement (as described in Note 16), PMI issued warrants to purchase up to 177,720,706 shares of PMI's Series F convertible preferred stock at $0.01 per share. For the three months ended September 30, 2018, Prosper recognized $7.2 million of income from the re-measurement of the fair value of the warrants. For the nine months ended September 30, 2018, Prosper recognized $13.3 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:

	September 30, 2018	December 31, 2017
Volatility	40%	40%
Risk-free interest rate	3.03%	2.38%
Remaining contractual term (in years)	8.41 years	9.16 years
Dividend yield	—%	—%

The above assumptions were determined as follows:

Volatility. The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in

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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 nine months ended September 30, 2018 is as follows (in thousands):

Balance at January 1, 2018	$	116,366
Warrants Vested	55,473
Change in Fair Value	(17,885)
Balance at September 30, 2018	$	153,954

Common Stock

PMI, through its Amended and Restated Certificate of Incorporation, is the sole issuer of common stock and related options, RSUs and warrants. On February 16, 2016, PMI amended and restated its Certificate of Incorporation to, among other things, effect a 5-for-1 forward stock split. On September 20, 2017, PMI further amended its Amended and Restated Certificate of Incorporation to increase the number of shares of common stock authorized for issuance. The total number of shares of stock which PMI has the authority to issue is 1,069,760,848, consisting of 625,000,000 shares of common stock, $0.01 par value per share, and 444,760,848 shares of preferred stock, $0.01 par value per share. As of September 30, 2018, 71,411,145 shares of common stock were issued and 70,475,210 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 nine months ended September 30, 2018, PMI issued 176,011 shares of common stock upon the exercise of vested options for cash proceeds of $30 thousand. Certain options are eligible for exercise prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the same vesting schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the optionholder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At September 30, 2018 and December 31, 2017, there were 0 and 11,565 shares, respectively, of restricted stock outstanding that remain unvested and subject to PMI’s right of repurchase.

For the nine months ended September 30, 2018, PMI repurchased no shares of restricted stock upon termination of employment of employees.

13. Share Based Incentive Plan and Compensation

PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2,which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, the "2015 Plan"). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms.

As of September 30, 2018, up to 95,037,501 shares of common stock are reserved for issuance under the 2015 Plan, and may be granted to employees, directors, and consultants by PMI’s board of directors and stockholders to promote the success of Prosper’s business. Options generally vest (i) 25% one year from the vesting commencement date and 1/48th per month thereafter, (ii) 50% one year from the vesting date and 1/48th per month thereafter, (iii) 50% two years from the vesting commencement date and 1/48th per month thereafter, or (iv) 1/36th per month from the vesting commencement date. In no event are options exercisable more than 10 years after the date of grant.

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At September 30, 2018, there were 25,644,656 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 September 30, 2018 and $0.5 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 0.9 years.

Early Exercised Stock Options

The balance of stock options that were early exercised under the 2005 Plan as of September 30, 2018 is not material.

Stock Option Activity

Stock option activity under the 2005 Plan and 2015 Plan is summarized for the nine months ended September 30, 2018 below: 

	Options Issued and Outstanding	Weighted- Average Exercise Price
Balance as of January 1, 2018	58,628,039	$	0.25
Options issued	22,493,808	0.53
Options exercised – vested	(176,011)	0.17
Options forfeited	(10,478,766)	0.32
Balance as of September 30, 2018	70,467,070	$	0.33
Options vested and expected to vest as of September 30, 2018	57,712,076	0.33
Options vested and exercisable at September 30, 2018	33,346,918	0.23

Other Information Regarding Stock Options

Additional information regarding common stock options outstanding as of September 30, 2018 is as follows: 

		Options Outstanding				Options Vested and Exercisable
	Range of Exercise Prices	Number Outstanding	Weighted – Avg. Remaining Life  (In years)	Weighted –Avg. Exercise Price		Number Vested	Weighted – Avg. Exercise Price
$	0.02 - 0.20	4,206,140	5.29	$	0.11	4,206,140	$	0.11
	0.21 - 0.50	44,680,761	8.26	0.25		26,962,872	0.22
	0.51 - 1.13	21,580,169	9.35	0.54		2,177,906	0.54
$	0.02 - 1.13	70,467,070	8.42	$	0.33	33,346,918	$	0.23

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

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determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists, (ii) the prices for PMI’s preferred stock sold to outside investors, (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock, (iv) the lack of marketability of PMI’s common stock, (v) developments in the business, (vi) secondary transactions of PMI’s common and preferred shares, and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not publicly traded, volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of Prosper. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Prosper uses an expected dividend yield of zero as it does not anticipate paying any dividends in the foreseeable future.  

Prosper also estimates forfeitures of unvested stock options. Expected forfeitures are based on Prosper’s historical experience. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for options that do not vest.

The fair value of PMI’s stock option awards granted during the three and nine months ended September 30, 2018 and September 30, 2017 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:

	Three Months Ended September 30,			Nine Months Ended September 30,
	2018		2017	2018		2017
Volatility of common stock	43.76	%	N/A	44.06	%	50.28	%
Risk-free interest rate	2.85	%	N/A	2.76	%	2.12	%
Expected life (in years)	6.0 years		N/A	6.0 years		5.7 years
Dividend yield	—	%	N/A	—	%	—	%

Restricted Stock Unit Activity

During the nine months ended September 30, 2018, PMI granted restricted stock units (“RSUs”) to certain employees that are subject to three-year vesting terms or four-year vesting terms and the occurrence of a liquidity event.

The aggregate fair value of the RSUs granted was $1.9 million. The following table summarizes the activities for PMI’s RSUs during the nine months ended September 30, 2018:

	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested - January 1, 2018	1,399,180	$	2.16
Granted	3,569,586	0.54
Vested	—	—
Forfeited	(111,125)	2.17
Unvested - September 30, 2018	4,857,641	$	0.96

The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations during the three and nine months ended September 30, 2018 and September 30, 2017 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Origination and servicing	$	213	$	225	$	670	$	770
Sales and marketing	108		135		324		446
General and administrative	1,507		2,479		5,418		8,435
Total stock based compensation	$	1,828	$	2,839	$	6,412	$	9,651

During the three months ended September 30, 2018 and September 30, 2017, Prosper capitalized $0.1 million and $49 thousand, respectively, of stock-based compensation as internal use software and website development costs. As of September 30, 2018, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to Prosper’s employees’ unvested stock-based awards was approximately $9.0 million, which will be recognized over the remaining weighted-average vesting period of approximately 2 years.

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14. Restructuring     

Summary of Restructuring Plan

During 2016, Prosper adopted a strategic restructuring of its business. This restructuring was intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location and its Tel Aviv, Israel location.

In the nine months ended September 30, 2018, Prosper's only restructuring activities related to office space that is no longer needed. Other than accretion and changes in sublease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.

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	620		620
Sublease cash receipts	343		343
Less: Cash paid	(3,051)		(3,051)
Balance September 30, 2018	$	1,156	$	1,156

15. Income Taxes

For the three months ended September 30, 2018 and September 30, 2017, Prosper recognized $8 thousand and $85 thousand of income tax expense, respectively. For the nine months ended September 30, 2018 and September 30, 2017, Prosper recognized $27 thousand and $346 thousand of income tax expense, respectively. The income tax expense relates to state income tax expense and the amortization of tax deductible goodwill which gives rise to an indefinite-lived deferred tax liability.  No other income tax expense or benefit was recorded for the three or nine month periods ended September 30, 2018 and September 30, 2017 due to a full valuation allowance recorded against our deferred tax assets.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, it is not more likely than not that our deferred tax assets will be realized and therefore a full valuation allowance has been recorded.

16. Consortium Purchase Agreement

On February 27, 2017, Prosper entered into a series of agreements (the "Consortium Purchase Agreement") with a consortium of investors (the "Consortium"), pursuant to which the Consortium has agreed to purchase borrower loans in an aggregate principal amount of up to $5.0 billion (including certain loans purchased by one of the investors prior to the date of the Consortium Purchase Agreement). PFL will be obligated to offer for purchase minimum monthly volumes of eligible loans to the Consortium, for the Consortium to elect to purchase.

In connection with the Consortium Purchase Agreement, PMI issued to the Consortium, three warrants to purchase up to an aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).

The Consortium’s right to exercise the Series F Warrant is subject to monthly vesting during the term of the Consortium Purchase Agreement based upon the volume of loans the Consortium elects to purchase (if any) in each month, subject to certain cure rights such as offering additional loans for sale in subsequent periods. Pursuant to these cure rights, if the Consortium fails to respond to offers for allocation, purchase or funding, the Consortium can take advantage of a designated period of time to cure such failure. There have been no such failures by the Consortium to date. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI, insolvency of PMI or PFL, certain breaches of contract by PMI or PFL that are not cured within a defined cure period and upon the occurrence of certain other events set forth in the Warrant Agreement.

On vesting of the Series F warrants, Prosper records a liability as "Convertible Preferred Stock Warrant Liability" on the condensed consolidated balance sheets at fair value and a corresponding amount as "Fair Value of Warrants Vested on Sale of Borrower Loans" on the condensed consolidated statement of operations. Subsequent changes in the fair value of the vested warrants are recorded in "Change in Fair Value of Convertible Preferred Stock Warrants" on the condensed consolidated statement of operations. Additionally, in connection with the execution of the Consortium Purchase Agreement, certain

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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:

	Loans Acquired (in thousands)		Warrants Vested
Balance as of December 31, 2017	$	1,826,527	75,186,002
Nine Months Ended September 30, 2018	1,179,936		58,278,629
Balance as of September 30, 2018	$	3,006,463	133,464,631

In addition to the $3.0 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 $6.2 million, for the remaining terms of the operating leases (in thousands):

Remainder of 2018	1,233
2019	5,034
2020	5,180
2021	5,134
2022	5,018
Thereafter	4,113
Total	$	25,712

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 $1.2 million at September 30, 2018.

Rental expense under operating lease arrangements was $1.0 million and $1.1 million for the three months ended September 30, 2018 and September 30, 2017, respectively. Rental expense under operating lease arrangements was $3.2 million and $3.6 million for the nine months ended September 30, 2018 and September 30, 2017, respectively. 

Operating Commitments

Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining three months of September 30, 2018 is $0.4 million. The minimum fee is $0.9 million for the year 2019.

Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15.0 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. As of September 30, 2018, Prosper was in compliance with the covenant.

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Loan Purchase Commitments

Prosper has entered into an agreement with WebBank to purchase $25.5 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended September 30, 2018 and the first business day of the quarter ending December 31, 2018. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending December 31, 2018.

Repurchase and Indemnification Contingency

Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at September 30, 2018 is $3.7 billion. Prosper has accrued $1.0 million and $0.8 million as of September 30, 2018 and December 31, 2017, respectively, in regard to this obligation.

Regulatory Contingencies

Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, we record the amount we consider to be the best estimate within the range of potential losses that are both probable and estimable; however, if we cannot quantify the amount of the estimated loss, then we record the low end of the range of those potential losses.

SEC Inquiry

In April and May of 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to note investors. Although we have since corrected the error, we are currently subject to an investigation by the Securities and Exchange Commission (the “SEC”) as to whether violations of federal securities laws have occurred in connection with this error. We have been fully and voluntarily cooperating with the SEC.

We cannot predict the outcome of the investigation at this time and any potential fines or penalties, if any, that may arise from the investigation. Further, we are unable at this time to estimate a range of outcomes and as a result no accrual has been made. 

18. Related Parties

Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers, and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers, and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.

Prosper’s executive officers, directors who are not executive officers, and certain affiliates participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the three and nine months ended September 30, 2018 and September 30, 2017, as well as the Notes and Borrower Loans outstanding as of September 30, 2018 and December 31, 2017 are summarized below (in thousands):

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	Aggregate Amount of Notes and Borrower Loans Purchased Nine Months Ended September 30,				Interest Earned on Notes and Borrower Loans Nine Months Ended September 30,
Related Party	2018		2017		2018		2017
Executive officers and management	$	12	$	15	$	1	$	90
Directors (excluding executive officers and management)	315		270		33		30
Total	$	327	$	285	$	34	$	120

	Aggregate Amount of Notes and Borrower Loans Purchased Three Months Ended September 30,				Interest Earned on Notes and Borrower Loans Three Months Ended September 30,
Related Party	2018		2017		2018		2017
Executive officers and management	$	3	$	5	$	—	$	10
Directors (excluding executive officers and management)	107		97		11		10
Total	$	110	$	102	$	11	$	20

	Notes balance as of
Related Party	September 30, 2018		December 31, 2017
Executive officers and management	$	17	$	38
Directors (excluding executive officers and management)	564		553
	$	581	$	591

19. Significant Concentrations

Prosper is dependent on third party funding sources such as banks, asset managers, and investment funds to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the nine months ended September 30, 2018, the largest party purchased a total of 52% of those loans. This compares to 61%, 9% and 6% for the three largest parties for the nine months ended September 30, 2017. The party purchasing 9% for the nine months ended September 30, 2017 is a member of the Consortium and purchased these loans prior to the closing of the Consortium Purchase Agreement on February 27, 2017. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which 93% and 93% of Borrower Loans were originated through the Whole Loan Channel in the nine months ended September 30, 2018 and September 30, 2017, respectively.  

Prosper receives all of its transaction fee revenue from WebBank. Prosper earns a transaction fee from WebBank for our services in facilitating originations of Borrower Loans issued by WebBank. The rate of the transaction fee for each individual Borrower Loan is based on the term and credit grade of the Borrower Loan. No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented. 

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Prosper Funding LLC

Condensed Consolidated Balance Sheets (Unaudited)

(amounts in thousands)

	September 30, 2018		December 31, 2017
Assets
Cash and Cash Equivalents	$	9,643	$	8,223
Restricted Cash	132,573		140,092
Loans Held for Sale at Fair Value	11		49
Borrower Loans Receivable at Fair Value	268,549		293,005
Property and Equipment, Net	6,224		7,953
Servicing Assets	15,930		14,598
Other Assets	259		125
Total Assets	$	433,189	$	464,045
Liabilities and Member’s Equity
Accounts Payable and Accrued Liabilities	$	1,587	$	745
Payable to Related Party	3,591		2,889
Payable to Investors	123,871		132,112
Notes at Fair Value	268,588		293,948
Other Liabilities	4,670		3,985
Total Liabilities	402,307		433,679
Member's Equity
Member's Equity	24,904		24,904
Retained Earnings	5,978		5,462
Total Member's Equity	$	30,882	$	30,366
Total Liabilities and Member's Equity	$	433,189	$	464,045

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

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Prosper Funding LLC

Condensed Consolidated Statements of Operations (Unaudited)

(amounts in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Revenues
Operating Revenues
Administration Fee Revenue - Related Party	$	27,135	$	32,198	$	81,754	$	74,661
Servicing Fees, Net	7,098		6,626		21,119		19,027
Gain (Loss) on Sale of Borrower Loans	(16,379)		(17,399)		(44,133)		(34,108)
Other Revenue	70		45		206		109
Total Operating Revenues	17,924		21,470		58,946		59,689
Interest Income on Borrower Loans	10,939		12,066		32,797		35,572
Interest Expense on Notes	(10,209)		(11,247)		(30,597)		(33,102)
Net Interest Income	730		819		2,200		2,470
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net	(250)		(173)		(614)		(198)
Total Net Revenue	18,404		22,116		60,532		61,961
Expenses
Administration Fee - Related Party	16,864		19,078		55,036		53,359
Servicing	1,036		1,553		4,512		4,808
General and Administrative	97		186		464		503
Total Expenses	17,997		20,817		60,012		58,670
Total Net Income (Loss)	$	407	$	1,299	$	520	$	3,291

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

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Prosper Funding LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(amounts in thousands)

	Nine Months Ended September 30,
	2018		2017
Cash Flows from Operating Activities:
Net Income (Loss)	$	520	$	3,291
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes	614		198
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes	(310)		(159)
Gain on Sale of Borrower Loans	(11,345)		(10,661)
Change in Fair Value of Servicing Rights	9,973		8,681
Depreciation and Amortization	4,282		4,312
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value	(1,867,010)		(2,025,569)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value	1,867,019		2,026,111
Other Assets	(138)		(63)
Accounts Payable and Accrued Liabilities	842		(1,632)
Payable to Investors	(8,241)		9,547
Net Related Party Receivable/Payable	696		2,154
Other Liabilities	725		1,898
Net Cash (Used in) Provided by Operating Activities	(2,373)		18,108
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value	(134,671)		(152,461)
Principal Payment of Borrower Loans Held at Fair Value	133,945		147,051
Maturities of Short Term Investments	—		1,280
Purchases of Short Term Investments	—		—
Purchases of Property and Equipment	(2,547)		(3,554)
Net Cash Used in Investing Activities	(3,273)		(7,684)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value	134,490		151,894
Payments of Notes Held at Fair Value	(134,943)		(147,388)
Net Cash (Used in) Provided by Financing Activities	(453)		4,506
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	(6,099)		14,930
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period	148,315		154,912
Cash, Cash Equivalents and Restricted Cash at End of the Period	$	142,216	$	169,842
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	31,222	$	33,207
Non-Cash Investing Activity - Accrual for Property and Equipment, Net	$	(6)	1,135

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

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Prosper Funding LLC

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

Prosper Funding LLC (“PFL”) was formed in the state of Delaware on February 17, 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”). Except as the context otherwise requires, as used in these Notes to the condensed consolidated financial statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiaries, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, and Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2017. The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

Prosper Funding did not have any items of other comprehensive income (loss) during any of the periods presented in the condensed consolidated financial statements as of and for the nine months ended September 30, 2018 and September 30, 2017.

The preparation of Prosper Funding's condensed consolidated financial statements and related disclosures in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.

2. Significant Accounting Policies

Prosper Funding's significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2017. There have been no changes to these accounting policies during the first nine months of 2018.

Fair Value Measurements

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Short Term Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.

Restricted Cash

Restricted cash consists primarily of cash deposits and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors or Prosper has on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown in the consolidated statements of cash flows:

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	September 30, 2018		December 31, 2017		September 30, 2017		December 31, 2016
Cash and Cash Equivalents	$	9,643	8,223		$	11,716	$	6,929
Restricted Cash	132,573		140,092		158,126		147,983
Total Cash, Cash Equivalents and Restricted Cash show in the consolidated statements of cash flows	$	142,216	$	148,315	$	169,842	$	154,912

Borrower Loans, Loans Held for Sale and Notes

Through the Note Channel, Prosper Funding purchases Borrower Loans from WebBank, then issues Notes and holds the Borrower Loans until maturity. The obligation to repay a series of Notes funded through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes funded through the Note Channel are carried on Prosper Funding’s 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 Funding estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper Funding maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes. 

Recent Accounting Pronouncements

Accounting Standards Adopted In The Current Period

In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in US GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. Prosper Funding adopted the requirements of the ASU as of January 1, 2018, utilizing the modified retrospective approach. Administration fees are included in the scope of the new guidance, while servicing fees and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing. The impact of adopting the ASU is not significant to the Consolidated Financial Statements in the current period.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. Prosper Funding adopted standard effective January 1, 2018. The adoption of this standard did not have a material impact on Prosper Funding’s consolidated financial statements. 

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU2016-18)," which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Prosper Funding adopted standard effective January 1, 2018. Prosper Funding has $132.6 million and $158.1 million of restricted cash on its condensed consolidated balance sheets as of September 30, 2018 and 2017, respectively, whose cash flow statement classification changed to align with the new guidance.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Prosper Funding adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on Prosper Funding’s consolidated financial statements.

3. Property and Equipment

Property and equipment consist of the following (in thousands):

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	September 30, 2018		December 31, 2017
Property and equipment:
Internal-use software and web site development costs	$	21,492	$	19,911
Less accumulated depreciation and amortization	(15,268)		(11,958)
Total property and equipment, net	$	6,224	$	7,953

Depreciation expense for the three months ended September 30, 2018 and September 30, 2017 was $1.3 million and $1.7 million, respectively. Depreciation expense for the nine months ended September 30, 2018 and September 30, 2017 was $4.3 million and $4.3 million, respectively.

4. Borrower Loans, Loans Held For Sale, and Notes Held at Fair Value

The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale, and Notes as of September 30, 2018 and December 31, 2017, are presented in the following table (in thousands):

	Borrower Loans				Notes				Loans Held for Sale
	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Aggregate principal balance outstanding	$	274,857	$	296,668	$	(277,831)	$	(300,922)	$	30	$	59
Fair value adjustments	(6,308)		(3,663)		9,243		6,974		(19)		(10)
Fair value	$	268,549	$	293,005	$	(268,588)	$	(293,948)	$	11	$	49

At September 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 31.92% and had various maturity dates through September 2023. At December 31, 2017, outstanding Borrower Loans had original maturities of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 32.32%, and had various maturity dates through December 2022.

Approximately $0.6 million represents the loss that is attributable to changes in the instrument specific credit risks related to Borrower Loans that was recorded in the change in fair value during the nine months ended September 30, 2018.

As of September 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 $1.0 million. As of December 31, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.5 million and a fair value of $1.3 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of September 30, 2018 and December 31, 2017, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0.3 million, respectively.

5. Loan Servicing Assets and Liabilities

Prosper Funding accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper Funding sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The total losses recognized on the sale of such Borrower Loans were a loss of $16.4 million and $17.4 million for the three months ended September 30, 2018 and September 30, 2017, respectively. The total gains and losses recognized on the sale of such Borrower Loans were a loss of $44.1 million and $34.1 million for the nine months ended September 30, 2018 and September 30, 2017, respectively.

As of September 30, 2018, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.8 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 September 2023. At December 31, 2017, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through December 2022.

$11.3 million and $10.1 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended September 30, 2018 and September 30, 2017, respectively. $33.1 million and $27.9 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the nine months ended September 30, 2018 and September 30, 2017, respectively.

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Fair Value

Valuation Method. Prosper Funding uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.

Significant unobservable inputs presented in the table within Note 7 below are those that Prosper Funding considers significant to the estimated fair values of the level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.

Market Servicing Rate. Prosper Funding estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper Funding estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper Funding sells and services and information from a backup service provider.3

Discount Rate. The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper Funding’s servicing assets.

Default Rate. The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.

Prepayment Rate. The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues. 

6. Income Taxes

Prosper Funding incurred no income tax provision for the nine months ended September 30, 2018 and September 30, 2017. Prosper Funding is a US disregarded entity and its income and loss is included in the return of its parent, PMI. Since PMI is in a loss position, is not currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.

7. Fair Value of Assets and Liabilities

Prosper Funding measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.

Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.

Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.

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Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.

Financial Instruments Recorded at Fair Value

The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands): 

September 30, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	268,549	$	268,549
Servicing Assets	—		—		15,930		15,930
Loans Held for Sale	—		—		11		11
Total Assets	—		—		284,490		284,490
Liabilities:
Notes	$	—	$	—	$	268,588	$	268,588
Servicing Liabilities	—		—		19		19
Loan Trailing Fee Liability	—		—		3,162		3,162
Total Liabilities	$	—	$	—	$	271,769	$	271,769

December 31, 2017	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	293,005	$	293,005
Servicing Assets	—		—		14,598		14,598
Loans Held for Sale	—		—		49		49
Total Assets	—		—		307,652		307,652
Liabilities:
Notes	$	—	$	—	$	293,948	$	293,948
Servicing Liabilities	—		—		59		59
Loan Trailing Fee Liability	—		—		2,595		2,595
Total Liabilities	$	—	$	—	$	296,602	$	296,602

As Prosper Funding’s Borrower Loans, Loans Held for Sale, Notes and loan servicing rights do not trade in an active market with readily observable prices, Prosper Funding uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs used for Prosper Funding’s level 3 fair value measurements at September 30, 2018 and December 31, 2017: 

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Borrower Loans, Loans Held for Sale and Notes: 

	Range
Unobservable Input	September 30, 2018	December 31, 2017
Discount rate	4.7% - 14.3%	4.0% - 14.4%
Default rate	2.0% - 15.6%	2.0% - 15.4%

Servicing Assets and Liabilities:

	Range
Unobservable Input	September 30, 2018		December 31, 2017
Discount rate	15% - 25%		15% - 25%
Default rate	1.6% - 16.6%		1.5% - 16.1%
Prepayment rate	15.1% - 33.9%		13.5% - 30.2%
Market servicing rate	0.625	%	0.625	%

Loan Trailing Fee Liability:

	Range
Unobservable Input	September 30, 2018	December 31, 2017
Discount rate	15% - 25%	15% - 25%
Default rate	1.6% - 16.6%	1.5% - 16.1%
Prepayment rate	15.1% - 33.9%	13.5% - 30.2%

The changes in the Borrower Loans, Loans Held for Sale and Notes, which are level 3 assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower  Loans		Notes		Loans Held for Sale		Total
Balance at January 1, 2018	$	293,005	$	(293,948)	$	49	$	(894)
Originations	134,671		(134,490)		1,867,010		1,867,191
Principal repayments	(131,086)		134,943		(20)		3,837
Borrower Loans sold to third parties	(2,859)		—		(1,866,999)		(1,869,858)
Other changes	(314)		624		—		310
Change in fair value	(24,868)		24,283		(29)		(614)
Balance at September 30, 2018	$	268,549	$	(268,588)	$	11	$	(28)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower  Loans		Notes		Loans Held for Sale		Total
Balance at January 1, 2017	$	315,627	$	(316,236)	$	624	$	15
Originations	152,461		(151,894)		2,025,569		2,026,136
Principal repayments	(144,325)		147,388		(52)		3,011
Borrower Loans sold to third parties	(2,726)		—		(2,026,059)		(2,028,785)
Other changes	57		106		(4)		159
Change in fair value	(18,041)		17,837		6		(198)
Balance at September 30, 2017	$	303,053	$	(302,799)	$	84	$	338

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower  Loans		Notes		Loans Held for Sale		Total
Balance at July 1, 2018	$	277,361	$	(277,425)	$	31	$	(33)
Originations	43,596		(43,797)		542,910		542,709
Principal repayments	(42,139)		43,418		(6)		1,273
Borrower Loans sold to third parties	(843)		—		(542,899)		(543,742)
Other changes	24		(9)		—		15
Change in fair value	(9,450)		9,225		(25)		(250)
Balance at September 30, 2018	$	268,549	$	(268,588)	$	11	$	(28)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower  Loans		Notes		Loans Held for Sale		Total
Balance at July 1, 2017	$	312,272	$	(311,410)	$	95	$	957
Originations	45,521		(45,388)		779,743		779,876
Principal repayments	(46,833)		47,114		(10)		271
Borrower Loans sold to third parties	(736)		—		(779,743)		(780,479)
Other changes	48		(160)		(1)		(113)
Change in fair value	(7,219)		7,045		—		(174)
Balance at September 30, 2017	$	303,053	$	(302,799)	$	84	$	338

The following table presents additional information about level 3 servicing assets and liabilities recorded at fair value (in thousands):

	Servicing Assets	Servicing Liabilities
Fair Value at January 1, 2018	14,598	59
Additions	11,345	—
Less: Changes in fair value	(10,013)	(40)
Fair Value at September 30, 2018	15,930	19

	Servicing Assets	Servicing Liabilities
Fair Value at January 1, 2017	12,461	198
Additions	10,660	—
Less: Changes in fair value	(8,797)	(117)
Fair Value at September 30, 2017	14,324	81

	Servicing Assets	Servicing Liabilities
Fair Value at July 1, 2018	16,162	28
Additions	3,198	—
Less: Changes in fair value	(3,430)	(9)
Fair Value at September 30, 2018	15,930	19

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	Servicing Assets	Servicing Liabilities
Fair Value at July 1, 2017	13,297	111
Additions	4,128	—
Less: Changes in fair value	(3,101)	(30)
Fair Value at September 30, 2017	14,324	81

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):

Fair Value at January 1, 2018	2,595
Issuances	2,007
Cash payment of Loan Trailing Fee	(1,843)
Change in fair value	403
Fair Value at September 30, 2018	3,162

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at September 30, 2018 for Borrower Loans, Loans Held for Sale and Notes funded are presented in the following table (in thousands, except percentages):

	Borrower Loans and Loans Held for Sale				Notes
Fair Value at September 30, 2018	$	268,560			$	268,588
Discount rate assumption:	8.42		%	*	8.42		%	*
Resulting fair value from:
100 basis point increase	$	265,979			$	265,991
200 basis point increase	263,449				263,458
Resulting fair value from:
100 basis point decrease	$	271,228			$	271,250
200 basis point decrease	273,954				273,980
Default rate assumption:	12.97		%	*	12.97		%	*
Resulting fair value from:
100 basis point increase	$	265,287			$	265,287
200 basis point increase	262,093				262,078
Resulting fair value from:
100 basis point decrease	$	271,879			$	271,913
200 basis point decrease	275,216				275,268

 * Represents weighted average assumptions considering all credit grades.

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Servicing Asset and Liability Fair Value Input Sensitivity:

The following table presents the estimated impact on Prosper Funding’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of September 30, 2018 (in thousands, except percentages).

	Servicing Assets			Servicing Liabilities
Fair Value at September 30, 2018	$	15,930		$	19
Market servicing rate assumptions	0.625		%	0.625		%
Resulting fair value from:
Market servicing rate increase to 0.65%	14,954			21
Market servicing rate decrease to 0.60%	16,918			17
Weighted average prepayment assumptions	20.10		%	20.10		%
Resulting fair value from:
Applying a 1.1 multiplier to prepayment rate	15,742			19
Applying a 0.9 multiplier to prepayment rate	16,133			19
Weighted average default assumptions	12.53		%	12.53		%
Resulting fair value from:
Applying a 1.1 multiplier to default rate	15,748			19
Applying a 0.9 multiplier to default rate	16,129			19

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.

8. Commitments and Contingencies

Operating Commitments

Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency.  Accordingly, the minimum fee for the remaining nine months of September 30, 2018 is $0.4 million. The minimum fee is $0.9 million for the year 2019.

Loan Purchase Commitments

Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase $25.5 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended September 30, 2018 and first business day of the quarter ending December 31, 2018. Prosper Funding will purchase these Borrower Loans within the first three business days of the quarter ending December 31, 2018.

Repurchase and Indemnification Contingency

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

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September 30, 2018 is $3.8 billion. Prosper Funding had accrued $1.0 million and $0.8 million as of September 30, 2018 and December 31, 2017, respectively, in regard to this obligation.

Regulatory Contingencies

Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, we record the amount we consider to be the best estimate within the range of potential losses that are both probable and estimable; however, if we cannot quantify the amount of the estimated loss, then we record the low end of the range of those potential losses.

SEC Inquiry

In April and May of 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to note investors. Although we have since corrected the error, we are currently subject to an investigation by the Securities and Exchange Commission (the “SEC”) as to whether violations of federal securities laws have occurred in connection with this error. We have been fully and voluntarily cooperating with the SEC.

We cannot predict the outcome of the investigation at this time and any potential fines or penalties, if any, that may arise from the investigation. Further, we are unable at this time to estimate a range of outcomes and as a result no accrual has been made. 

9. Related Parties

Since inception, Prosper Funding has engaged in various transactions with its directors, executive officers, and sole member, and immediate family members and other affiliates of its directors, executive officers, and sole member. Prosper Funding believes that all of the transactions described below were made on terms no less favorable to Prosper Funding than could have been obtained from unaffiliated third parties.

Prosper Funding’s executive officers and directors who are not executive officers participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be related parties of Prosper Funding as of September 30, 2018 and December 31, 2017 are summarized below (in thousands):

	Aggregate Amount of Notes and Borrower Loans Purchased				Interest Earned on Notes and Borrower Loans
	Nine Months Ended September 30,				Nine Months Ended September 30,
Related Party	2018		2017		2018		2017
Executive officers and management	$	12	$	15	$	1	$	90
Directors (excluding executive officers and management)	—		—		—		—
Total	$	12	$	15	$	1	$	90

	Aggregate Amount of Notes and Borrower Loans Purchased				Interest Earned on Notes and Borrower Loans
	Three Months Ended March 31,				Three Months Ended March 31,
Related Party	2018		2017		2018		2017
Executive officers and management	$	3	$	5	$	—	$	10
Directors (excluding executive officers and management)	—		—		—		—
Total	$	3	$	5	$	—	$	10

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	Note and Borrower Loan Balance as of
Related Party	September 30, 2018		December 31, 2017
Executive officers and management	$	17	$	38
Directors  (excluding executive officers and management)	—		—
	$	17	$	38

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

PROSPER MARKETPLACE, INC.

This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks, and assumptions associated with these statements. This discussion should be read in conjunction with Prosper’s historical condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper’s Annual Report on Form 10-K for the year ended December 31, 2017.

Overview

Prosper is a pioneer of online marketplace lending that connects borrowers and investors. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return.

We believe our online marketplace model has key advantages relative to traditional bank lending, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology driven automation that increases efficiency and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure; instead, we use data and technology to drive automation and efficiency in our operations. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including portions of the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.

During the year ended December 31, 2017, our marketplace facilitated $2.9 billion in Borrower Loan originations, of which $2.7 billion were funded through our Whole Loan Channel, representing 93% of the total Borrower Loans originated through our marketplace during this period. From inception through September 30, 2018, our marketplace facilitated $13.4 billion in Borrower Loan originations, of which $11.9 billion were funded through our Whole Loan Channel, representing 89% of the total Borrower Loans originated through our marketplace during this period. In the three months ended September 30, 2018, our marketplace facilitated $640.3 million in Borrower Loan originations, a decrease of 22% from the same period in 2017. In the three months ended September 30, 2018, $596.5 million of the borrower loan originations originated through our marketplace were funded through our Whole Loan Channel, representing 93% of the total Borrower Loans originated through our marketplace during this period.

As a credit marketplace, we believe our customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate in our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.

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Results of Operations

Key Operating and Financial Metrics (in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Loan Originations	$	640,262	$	821,841	$	2,251,283	$	2,182,035
Transaction Fees, Net	28,225		37,250		97,567		99,541
Whole Loans Outstanding (1)	3,833,666		3,702,319		3,833,666		3,702,319
Servicing Fees, Net	7,339		6,976		22,009		19,922
Total Net Revenue	20,682		28,862		82,807		91,152
Core Revenue (2)	40,243		50,634		138,280		133,118
Net Loss	(19,779)		(26,940)		(43,779)		(92,366)
Adjusted EBITDA (2)	(5,435)		7,271		7,893		4,787

(1) Balance as of September 30.

(2) Core Revenue and Adjusted EBITDA are non-GAAP Financial measures. For more information regarding these measures and a reconciliation of these measures to the most comparable US GAAP measure, see “Non-GAAP Financial Measures”

Overview

The following tables summarize Prosper’s net loss for the three and nine months ended September 30, 2018 and 2017 (in thousands, except percentages):

	Three Months Ended September 30,
	2018		2017		$ Change	% Change
Total Net Revenue	$	20,682	$	28,862	(8,180)	(28)	%
Total Expenses	40,453		55,717		(15,264)	(27)	%
Net Loss Before Taxes	(19,771)		(26,855)		7,084	(26)	%
Income Tax Expense	8		85		(77)	(91)	%
Net Loss	$	(19,779)	$	(26,940)	7,161	(27)	%

	Nine Months Ended September 30,
	2018		2017		$ Change	% Change
Total Net Revenue	$	82,807	$	91,152	(8,345)	(9)	%
Total Expenses	126,559		183,172		(56,613)	(31)	%
Net Loss Before Taxes	(43,752)		(92,020)		48,268	(52)	%
Income Tax Expense	27		346		(319)	(92)	%
Net Loss	$	(43,779)	$	(92,366)	48,587	(53)	%

Total net revenue for the three months ended September 30, 2018 decreased $8.2 million, or 28%, when compared to the three months ended September 30, 2017, primarily due to fewer Borrower Loan originations, which decreased 22% on a dollar basis, due to the impact of credit tightening actions focused on borrowers' ability to pay and borrower rate increases in a rising interest rate environment. Total expenses for the three months ended September 30, 2018 decreased $15.3 million, a 27% decrease from the three months ended September 30, 2017, primarily due to a decrease in the fair value of the preferred stock warrant liability of $9.3 million in the three months ended September 30, 2018 compared to a $6.3 million increase in the three months ended September 30, 2017. Net loss for the three months ended September 30, 2018 increased $7.2 million, primarily due to the decrease in revenues explained above.

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Total net revenue for the nine months ended September 30, 2018 decreased 9% when compared to the nine months ended September 30, 2017, primarily due to an increase of $13.5 million of rebates that were issued to members of the Consortium via the issuance of Convertible Preferred Stock Warrants that vested during the nine months ended September 30, 2018. Total expenses for the nine months ended September 30, 2018 decreased $56.6 million, a 31% decrease from the nine months ended September 30, 2017, primarily due to a decrease in the fair value of the preferred stock warrant liability of $17.9 million in the nine months ended September 30, 2018 compared to a $29.1 million increase in the nine months ended September 30, 2017 and a $8.4 million decrease in other expenses for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The $8.4 million decrease in other expenses is partially driven by impairment charges, which we incurred in the nine months ended September 30, 2017 (see below for further details). Net loss for the nine months ended September 30, 2018 decreased $48.6 million, primarily due to the decrease in expenses explained above.

Origination Volume

From inception through September 30, 2018, a total of 1,050,918 Borrower Loans totaling $13.4 billion were originated through Prosper’s marketplace.

During the quarter ended September 30, 2018, 47,762 Borrower Loans totaling $640.3 million were originated through Prosper’s marketplace, compared to 63,582 Borrower Loans totaling $821.8 million during the quarter ended September 30, 2017. This represented a decrease of 25% in terms of the number of loans and a 22% decrease in the dollar amount of loans. The origination decrease experienced during the quarter ended September 30, 2018 versus the quarter ended September 30, 2017 was due to the impact of credit tightening actions focused on borrowers' ability to pay and borrower rate increases in a rising interest rate environment.  

Loan origination volume by Prosper Rating was as follows (in millions):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2018				2017				2018				2017
	Amount		%		Amount		%		Amount		%		Amount		%
AA	$	77.4	12	%	$	52.6	6	%	$	274.5	12	%	$	125.9	6	%
A	146.9		23	%	101.7		12	%	444.5		20	%	256.5		12	%
B	161.4		25	%	187.5		23	%	556.1		25	%	477.4		22	%
C	159.9		25	%	249.3		30	%	591.3		26	%	672.8		31	%
D	65.6		10	%	142.0		17	%	257.0		11	%	403.0		18	%
E	24.0		4	%	68.2		8	%	104.3		5	%	194.0		9	%
HR	5.1		1	%	20.5		2	%	23.6		1	%	52.4		2	%
Total	$	640.3			$	821.8			$	2,251.3			$	2,182.0

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

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Revenue

The following tables summarize Prosper’s revenue for the three and nine months ended September 30, 2018 and 2017 (in thousands, except percentages):

	Three Months Ended September 30,
	2018		2017		$ Change	% Change
Operating Revenues
Transaction Fees, Net	$	28,225	$	37,250	(9,025)	(24)	%
Servicing Fees, Net	7,339		6,976		363	5	%
Gain (Loss) on Sale of Borrower Loans	3,139		4,373		(1,234)	(28)	%
Fair Value of Warrants Vested on the Sale of Borrower Loans	(19,561)		(21,772)		2,211	(10)	%
Other Revenue	1,453		1,390		63	5	%
Total Operating Revenues	20,595		28,217		(7,622)	(27)	%
Interest Income
Interest Income on Borrower Loans	15,088		12,065		3,023	25	%
Interest Expense on Notes and Warehouse Line	(11,772)		(11,247)		(525)	5	%
Net Interest Income	3,316		818		2,498	305	%
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net	(3,229)		(173)		(3,056)	1,766	%
Total Net Revenue	20,682		28,862		(8,180)	(28)	%

	Nine Months Ended September 30,
	2018		2017		$ Change	% Change
Operating Revenues
Transaction Fees, Net	$	97,567	$	99,541	(1,974)	(2)	%
Servicing Fees, Net	22,009		19,922		2,087	10	%
Gain (Loss) on Sale of Borrower Loans	10,652		7,858		2,794	36	%
Fair Value of Warrants Vested on the Sale of Borrower Loans	(55,473)		(41,966)		(13,507)	32	%
Other Revenue	3,820		3,525		295	8	%
Total Operating Revenues	78,575		88,880		(10,305)	(12)	%
Interest Income
Interest Income on Borrower Loans	42,005		35,572		6,433	18	%
Interest Expense on Notes and Warehouse Line	(33,972)		(33,102)		(870)	3	%
Net Interest Income	8,033		2,470		5,563	225	%
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net	(3,801)		(198)		(3,603)	1,820	%
Total Net Revenue	82,807		91,152		(8,345)	(9)	%

Transaction Fees, Net

Prosper earns a transaction fee upon the successful origination of all Borrower Loans facilitated through Prosper’s marketplace. Prosper receives payments from WebBank as compensation for the activities Prosper performs on behalf of WebBank. Prosper’s fee is determined by the term and credit grade of the Borrower Loans that Prosper facilitates on its marketplace and WebBank originates. We record the transaction fee revenue net of any fees paid by us to WebBank.

Transaction fees decreased primarily due to lower origination volume through Prosper’s marketplace during the three months ended September 30, 2018, as well as a lower average transaction fee, which was 4.41% and 4.53% of the principal amount of originated loans facilitated through Prosper’s marketplace for the three months ended September 30, 2018 and 2017, respectively. The decrease in the average transaction fee was due to the higher proportion of loans with a Prosper rating of AA

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being originated on the platform during the three months ended September 30, 2018. These loans have a lower transaction fee rate.

Transaction fees decreased primarily due to the lower average transaction fee, which was 4.33% and 4.56% of the principal amount of originated loans facilitated through Prosper’s marketplace for the nine months ended September 30, 2018 and 2017, respectively. The decrease in the average transaction fee was due to the higher proportion of loans with a Prosper Rating of AA being originated on the platform during the nine months ended September 30, 2018. These loans have a lower transaction fee rate.

Servicing Fees, Net

Prosper earns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates us for the costs we incur in servicing the Borrower Loans, including managing payments from borrowers and payments to investors and maintaining investors’ account portfolios. Historically, the servicing fee has been generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has been set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The increase in servicing fees during the three months ended September 30, 2018 was due to an increase in the net collection fees collected and higher overall whole loan balance as compared to the three months ended September 30, 2017. The increase in servicing fees during the nine months ended September 30, 2018 was due to the increase in collection fees and higher overall whole loan balance as compared to the nine months ended September 30, 2017.

Gain (Loss) on Sale of Borrower Loans

Gain (Loss) on Sale of Borrower Loans consists of net gains and losses on Borrower Loans sold through the Whole Loan Channel. The decrease during the three months ended September 30, 2018 was due to a decrease in loans being originated through the platform as described above. The increase during the nine months ended September 30, 2018 was due to $3.3 million less of rebates that were issued in the nine months ended September 30, 2018 when compared to the nine months ended September 30, 2017.  

Fair Value of Warrants Vested on the Sale of Borrower Loans

Fair Value of Warrants Vested on the Sale of Borrower Loans relates to warrants to purchase Series F Convertible Preferred Stock issued to the Consortium that vest when the Consortium purchases whole loans under the Consortium Purchase Agreement that was signed in February 2017. The decrease of $2.2 million for the three months ended September 30, 2018 is primarily due to a lower per warrant value of the warrants that vested during that period. The increase of $13.5 million recognized primarily related to an increase in the number of warrants that vested during the nine months ended September 30, 2018.

Other Revenue

Other Revenue consist primarily of credit referral fees and securitization fees. Credit referral fees are where partner companies pay us an agreed upon amount for referrals of customers from our website. Securitization fees represent fees Prosper earns to facilitate securitizations for purchasers of borrower loans. The changes for three months and nine months ended September 30, 2018 were not significant.

Interest Income on Borrower Loans and Interest Expense on Notes and Warehouse Line

Prosper recognizes interest income on Borrower Loans funded through the Note Channel using the accrual method based on the stated interest rate to the extent we believe it to be collectible. We record interest expense on the corresponding Notes based on the contractual interest rates. The interest rate charged on the Borrower Loans is generally 1% higher than the corresponding interest rate on the Note to compensate us for servicing the Borrower Loans. The increase during the three and nine months ended September 30, 2018 was due to the net interest earned on the borrower loans purchased by Prosper with funding from the Warehouse Line.  

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

The fair value of Borrower Loans, Loans Held for Sale and Notes, Net is estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance, and discount rates. Loans held for sale are valued using the same approach as the Borrower Loans held at fair value.

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The following table summarizes the fair value adjustments for the three and nine months ended September 30, 2018 and 2017, respectively (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Borrower Loans	$	(9,450)	$	(7,219)	$	(24,868)	$	(18,041)
Loans Held for Sale	(3,004)		—		(3,216)		6
Notes, Net	9,225		7,045		24,283		17,837
Total	$	(3,229)	$	(174)	$	(3,801)	$	(198)

Expenses

The following tables summarize Prosper’s expenses for the three and nine months ended September 30, 2018 and 2017 (in thousands):

	Three Months Ended September 30,
	2018		2017		$ Change		% Change
Expenses
Origination and Servicing	$	8,313	$	9,263	(950)		(10)	%
Sales and Marketing	23,415		21,947		1,468		7	%
General and Administrative - Research and Development	4,338		3,981		357		9	%
General and Administrative - Other	13,728		14,142		(414)		(3)	%
Change in Fair Value of Convertible Preferred Stock Warrants	(9,283)		6,323		(15,606)		(247)	%
Restructuring Charges	218		86		132		153	%
Other Expenses (Income), Net	(276)		(25)		(251)		1,004	%
Total Expenses	$	40,453	$	55,717	$	(15,264)	(27)	%

	Nine Months Ended September 30,
	2018		2017		$ Change		% Change
Expenses
Origination and Servicing	$	26,326	$	26,694	(368)		(1)	%
Sales and Marketing	63,150		61,634		1,516		2	%
General and Administrative - Research and Development	12,759		12,063		696		6	%
General and Administrative - Other	42,172		45,534		(3,362)		(7)	%
Change in Fair Value of Convertible Preferred Stock Warrants	(17,885)		29,140		(47,025)		(161)	%
Restructuring Charges	813		504		309		61	%
Other Expenses (Income), Net	(776)		7,603		(8,379)		(110)	%
Total Expenses	$	126,559	$	183,172	$	(56,613)	(31)	%

As of September 30, 2018, Prosper had 405 full-time employees compared to 359 full-time employees as of September 30, 2017. The following table reflects full-time employees as of September 30, 2018 and 2017 by department:

	September 30, 2018	September 30, 2017
Origination and Servicing	167	154
Sales and Marketing	16	12
General and Administrative - Research and Development	94	78
General and Administrative - Other	128	115
Total Headcount	405	359

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Origination and Servicing

Origination and Servicing costs consist primarily of salaries, benefits, and stock-based compensation expense related to Prosper’s credit, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans. The decrease in the three months ending September 30, 2018 was due to a $0.4 million decrease in amortization for internal use software and a $0.5 million decrease in outsourced services.

The decrease in the nine months ended September 30, 2018 was not significant.

Sales and Marketing

Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations, and direct mail marketing, as well as the compensation expenses such as wages, benefits and stock based compensation for the employees who support these activities. For the three months ended September 30, 2018, the increase was driven by a $2.4 million, or 62%, increase in partnership costs as Prosper significantly increased partnership activities. The increase in these costs was partially offset by a $1.1 million or 7% decrease in direct mailing costs as Prosper decreased the volume of its direct mail campaigns and a $0.2 million or 8% decrease in online marketing costs as Prosper decreased its online marketing activities.  

For the nine months ended September 30, 2018, marketing costs increased by $1.5 million as Prosper was able to save on direct mail costs but increased partnership and digital marketing spend.  Partnership costs increased $8.6 million, or 87%, and online marketing costs increased $1.4 million, or 24%. Direct mail costs decreased $8.8 million or 20% as Prosper decreased the volume of its direct mail campaigns.

Research and Development

Research and Development costs consist primarily of salaries, benefits, and stock-based compensation expense related to engineering and product development employees and related vendor costs. The increase during the three months ended September 30, 2018 was due to a $0.2 million increase in compensation as Prosper increased its headcount in this area. The total expenses incurred for the three months ended September 30, 2018 do not reflect the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are amortized in origination and servicing expense. Prosper capitalized internal-use software and website development costs in the amount of $1.5 million and $0.9 million for the three months ended September 30, 2018 and 2017, respectively.

The increase during the nine months ended September 30, 2018 was due to a $0.5 million increase in compensation as Prosper increased its headcount in this area. The total expenses incurred for the nine months ended September 30, 2018 do not reflect the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are amortized in origination and servicing expense. Prosper capitalized internal-use software and website development costs in the amount of $4.0 million and $3.0 million for the nine months ended September 30, 2018 and September 30, 2017, respectively.

General and Administrative

General and Administrative expenses consists primarily of salaries, benefits, and stock-based compensation expense related to accounting and finance, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expense. The decrease for the three months ended September 30, 2018 was not significant.

The decrease for the nine months ended September 30, 2018 was primarily the result of a decrease in compensation expense of $1.6 million, a decrease in amortization of property and equipment of $0.7 million and a decrease in amortization of intangibles of $0.9 million.

Changes in the Fair Value of Convertible Preferred Stock Warrants

Changes in the Fair Value of Convertible Preferred Stock Warrants moved to a gain in the three and nine months ended September 30, 2018 due to a decrease in the fair value of the underlying convertible preferred stock.

Restructuring Charges

Restructuring costs consist of personnel and facilities related costs related to the strategic restructuring of the business that Prosper announced on May 3, 2016. For the nine months ended September 30, 2018 and 2017, the expenses relate to adjustments to fair value of the existing liabilities and accretion expense on the remaining liability.

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Other Expenses (Income)

Other Expenses (Income) includes interest income, impairment charges on assets held for sale, and fair value changes on Convertible Preferred Stock Warrants. During the nine months ended September 30, 2017, Prosper management actively marketed the assets related to the Prosper Daily application and as a result the related assets were marked down to fair value less costs to sell, resulting in impairment charges of $6.4 million.  Additionally, during the nine months ended September 30, 2017, Prosper settled certain rebates related to the purchase of whole loans by members of the Consortium prior to the closing of the Consortium transaction via the issuance of Convertible Preferred Stock Warrants at a loss of $1.5 million over the cash settlement amount.

Non-GAAP Financial Measures

Core Revenue

Core Revenue is a non-GAAP financial measure that we define as our Total Net Revenue adjusted to exclude the Fair Value of Warrants Vested on Sale of Borrower Loans. We believe it is useful to exclude the Fair Value of Warrants Vested on Sale of Borrower Loans from Total Net Revenue to derive a better measurement of our business performance. We believe that this adjustment also affords greater comparability to other marketplace lenders.

The Fair Value of Warrants Vested on the Sale of Borrower Loans relates to the Consortium Purchase Agreement. This agreement is set to expire in 2019 and Prosper currently does not expect to sign a similar agreement to replace it. As a result we believe that providing the Core Revenue metric that excludes the impact of our Fair Value of Warrants Vested on Sale of Borrower Loans is useful to investors. 

Core Revenue has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for Total Net Revenue which has been prepared in accordance with US GAAP. These limitations include the following:

•Core Revenue is net of Fair Value of Warrants Vested on Sale of Borrower Loans, which is our largest contra revenue item; and

•other companies, including companies in our industry, may calculate Core Revenue differently or not at all, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Core Revenue alongside other financial performance measures, including Total Net Revenue and our financial results presented in accordance with US GAAP. The following table presents a reconciliation of Total Net Revenue to Core Revenue for each of the periods indicated (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Total Net Revenue	$	20,682	$	28,862	$	82,807	$	91,152
Less: Fair Value of Warrants Vested on Sale of Borrower Loans	(19,561)		(21,772)		(55,473)		(41,966)
Core Revenue	$	40,243	$	50,634	$	138,280	$	133,118

Adjusted EBITDA 

Adjusted EBITDA is a non-GAAP financial measure that we define as Net Loss adjusted for interest income on available for sale securities and cash and cash equivalents, income tax expense, depreciation and amortization, impairment of intangible assets, stock based compensation expense, fair value of warrants vested on the sale of borrower loans, restructuring charges, and fair value adjustments for warrant liabilities. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with US GAAP.

We consider Adjusted EBITDA to be a helpful indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Management uses Adjusted EBITDA to, among other things, understand and compare operating results across accounting periods, evaluate our operations and financial performance, and for internal planning and forecasting purposes. Inclusion of Adjusted EBITDA is intended to provide investors insight into the manner in which management views the performance of the Company, enhance investors’ evaluation of our operating results, and to facilitate meaningful comparisons of our results between periods. These non-GAAP financial measures should not be considered an alternative to, or more meaningful than, the US GAAP financial information provided herein.

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Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•Adjusted EBITDA does not consider the potentially dilutive impact of equity-based charges;

•Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

•other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

The major non-GAAP adjustments, and our basis for excluding them, are outlined below:

•Fair value of warrants vested on the sale of borrower loans and change in the fair value of convertible preferred stock warrants liability. We exclude these charges primarily because they are non-cash charges and the fair value varies based on the fair value of the underlying preferred stock, varying valuation methodologies and subjective assumptions. This makes the comparison of our current financial results to previous and future periods difficult to evaluate.

•Stock-based compensation expense. This consists of expenses for equity awards under our equity incentive plans. Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to evaluate; therefore, we believe it is useful to exclude stock-based compensation. We also excluded these expenses because they are non-cash.

•Amortization or impairment of acquired intangible assets and impairment of goodwill. We incur amortization or impairment of acquired intangible assets and goodwill in connection with acquisitions and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.

•Restructuring charges. We have incurred restructuring charges that are included in our US GAAP financial statements, related to workforce reductions and estimated costs of exiting facility lease commitments due to our May 2016 restructuring. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or historical operations of our business.

The following table presents a reconciliation of Net Loss to Adjusted EBITDA for each of the periods indicated (in thousands):

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Net Loss	$	(19,779)	$	(26,940)	$	(43,779)	$	(92,366)
Fair Value of Warrants Vested on Sale of Borrower Loans	19,561		21,772		55,473		41,966
Depreciation expense:
Servicing and Origination	1,291		1,676		4,282		4,313
General & Administration - Other	994		1,279		3,136		3,883
Amortization of Intangibles	89		177		290		1,207
Impairment of Intangibles	—		67		—		6,374
Stock-based Compensation	1,828		2,839		6,412		9,651
Restructuring Charges	218		86		813		504
Change in the Fair Value of Warrants	(9,283)		6,323		(17,885)		29,140
Interest Income on Available for Sale Securities, Cash and Cash Equivalents	(362)		(93)		(876)		(231)
Income Tax Expense	8		85		27		346
Adjusted EBITDA	$	(5,435)	$	7,271	$	7,893	$	4,787

Expenses on the Condensed Consolidated Statement of Operations include the following amount of stock based compensation for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Origination and servicing	213		225		670		770
Sales and marketing	108		135		324		446
General and administrative	1,507		2,479		5,418		8,435
Total stock based compensation	$	1,828	$	2,839	$	6,412	$	9,651

Liquidity and Capital Resources

We currently anticipate that our available funds, Warehouse Line, and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future.

The following table summarizes Prosper’s cash flow activities for the nine months ended September 30, 2018 and 2017 (in thousands):

	Nine Months Ended September 30,
	2018		2017
Net Loss	$	(43,779)	$	(92,366)
Net cash (used in) provided by operating activities	(116,224)		6,686
Net cash provided by investing activities	20,194		(688)
Net cash provided by financing activities	101,247		52,315
Net increase (decrease) in cash, cash equivalents and restricted cash	5,217		58,313
Cash, cash equivalents and restricted cash at the beginning of the period	198,463		186,244
Cash, cash equivalents and restricted cash at the end of the period	$	203,680	$	244,557

Cash, cash equivalents and restricted cash ("net cash") increased for the nine months ended September 30, 2018 primarily due to $103.1 million provided by the Warehouse Line, $10.9 million of net income, net of non-cash items and net maturity of $25.2 million in available for sale securities, which was partially offset by the net $8.3 million less cash held on the platform by investors that is classified as restricted cash, $114.6 million of net purchases of borrower loans by Prosper, and $4.2 million in purchases of property and equipment. Net cash used in investing primarily represents acquisitions of Borrower Loans

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(excluding acquisition of Borrower Loans sold to unrelated third parties, which is included in cash flow from operating activities along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans and the net $25.2 million of available for sale securities that have been converted into cash. Net cash provided by financing activities primarily represents proceeds from the warehouse line and the issuance of Notes, partially offset by payments on Notes.

The following table summarizes Prosper’s cash flow activities for the three months ended September 30, 2018 and September 30, 2017 (in thousands):

	Three Months Ended September 30,
	2018		2017
Net Loss	$	(19,779)	$	(26,940)
Net cash (used in) provided by operating activities	5,615		(45)
Net cash provided by (used in) investing activities	4,469		(15,525)
Net cash provided by financing activities	392		46,129
Net increase (decrease) in cash, cash equivalents and restricted cash	10,476		30,559
Cash, cash equivalents and restricted cash at the beginning of the period	193,204		213,998
Cash, cash equivalents and restricted cash at the end of the period	$	203,680	$	244,557

Net cash increased for the three months ended September 30, 2018 primarily due to the net $11.5 million more cash held on the platform by investors that is classified as restricted cash. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties, which is included in cash flow from operating activities along with the corresponding proceeds from sale of Borrower Loans) and purchases of property and equipment. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes.  

Income Taxes

Prosper recognizes benefits from uncertain tax positions only if it believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

Given Prosper’s history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for its net operating loss carry-forwards. Based on the weight of available evidence, which includes historical operating performance and the reported cumulative net losses in prior years, Prosper has recorded a full valuation allowance against its net deferred tax assets. The income tax expense relates to state income tax expense and the amortization of goodwill from the acquisition of PHL for tax purposes which gives rise to an indefinite-lived deferred tax liability.

Off-Balance Sheet Arrangements

As a result of retaining servicing rights on the sale of Borrower Loans, Prosper is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as Prosper is not the primary beneficiary.

Critical Accounting Policies

Certain of Prosper's accounting policies that involve a higher degree of judgment and complexity are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Estimates" in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2017. There have been no significant changes to these critical accounting estimates during the first nine months of 2018.

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PROSPER FUNDING LLC

This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper Funding’s historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper Funding’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2017.

Prosper Funding was formed in the state of Delaware on February 17, 2012 as a limited liability company with its sole equity member being PMI. Prosper Funding was formed by PMI to hold Borrower Loans originated through the Note Channel and issue related Notes. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding would become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI.

PFL formed PAH on October 4, 2013 as a limited liability company with the sole equity member being PFL. PAH was formed to purchase certain Borrower Loans from PFL and, sell them to certain participants in the Whole Loan Channel. PFL formed Prosper Depositor LLC on March 29, 2017 as a limited liability company with the sole equity member being PFL.

As a credit marketplace, we believe our customers are more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.

Results of Operations

Overview

The following table summarizes Prosper Funding’s net income for the three and nine months ended September 30, 2018 and 2017 (in thousands, except percentages):

	Three Months Ended September 30,
	2018		2017		$ Change		% Change
Total Net Revenue	$	18,404	$	22,116	$	(3,712)	(17)	%
Total Expenses	17,997		20,817		(2,820)		(14)	%
Net Income (Loss)	$	407	$	1,299	$	(892)	(69)	%

	Nine Months Ended September 30,
	2018		2017		$ Change		% Change
Total Net Revenue	$	60,532	$	61,961	$	(1,429)	(2)	%
Total Expenses	60,012		58,670		1,342		2	%
Net Income (Loss)	$	520	$	3,291	$	(2,771)	(84)	%

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Total net revenue for the three months ended September 30, 2018 decreased $3.7 million, a 17% decrease from the three months ended September 30, 2017, primarily due to the decreased number of loan listings on the marketplace during the quarter, which resulted in decreased administration fee revenue for the listing driven portion of the administration fee. Total expenses for the three months ended September 30, 2018 decreased $2.8 million, a 14% decrease from the three months ended September 30, 2017, primarily due to lower corporate administration fees related to the origination driven portion during the current quarter.

Total net revenue for the nine months ended September 30, 2018 decreased $1.4 million, a 2% decrease from the nine months ended September 30, 2017, primarily due to the decreased number of loan listings on the marketplace during the quarter, which resulted in decreased administration fee revenue for the listing driven portion of the administration fee. Total expenses for the nine months ended September 30, 2018 increased $1.3 million, a 2% increase from the nine months ended September 30, 2017, primarily due to higher corporate administration fees related to the servicing portion during the current quarter.

Revenue

The following tables summarize Prosper Funding’s revenue for the three and nine months ended September 30, 2018 and 2017 (in thousands, except percentages):

	Three Months Ended September 30,
	2018		2017		$ Change	% Change
Revenues
Operating Revenues
Administration Fee Revenue - Related Party	$	27,135	$	32,198	(5,063)	(16)	%
Servicing Fees, Net	7,098		6,626		472	7	%
Gain (Loss) on Sale of Borrower Loans	(16,379)		(17,399)		1,020	(6)	%
Other Revenue	70		45		25	56	%
Total Operating Revenues	17,924		21,470		(3,546)	(17)	%
Interest Income on Borrower Loans	10,939		12,066		(1,127)	(9)	%
Interest Expense on Notes	(10,209)		(11,247)		1,038	(9)	%
Net Interest Income	730		819		(89)	(11)	%
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net	(250)		(173)		(77)	45	%
Total Net Revenue	$	18,404	$	22,116	(3,712)	(17)	%

	Nine Months Ended September 30,
	2018		2017		$ Change	% Change
Revenues
Operating Revenues
Administration Fee Revenue - Related Party	$	81,754	$	74,661	7,093	10	%
Servicing Fees, Net	21,119		19,027		2,092	11	%
Gain (Loss) on Sale of Borrower Loans	(44,133)		(34,108)		(10,025)	29	%
Other Revenue	206		109		97	89	%
Total Operating Revenues	58,946		59,689		(743)	(1)	%
Interest Income on Borrower Loans	32,797		35,572		(2,775)	(8)	%
Interest Expense on Notes	(30,597)		(33,102)		2,505	(8)	%
Net Interest Income	2,200		2,470		(270)	(11)	%
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net	(614)		(198)		(416)	210	%
Total Net Revenue	$	60,532	$	61,961	(1,429)	(2)	%

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Administration Fee Revenue - Related Party

Prosper Funding primarily generates revenue through license fees it earns under its Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the marketplace for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement. Effective July 1, 2016, the Administration Agreement was amended. The amendments included amending the license fee to include a fixed monthly fee alongside a reduced variable fee and the introduction of a rebates fee related to rebates given to investors. The decrease for the three months ended September 30, 2018 was the result of a decrease in the listing driven portion of administration fees as a result of lower listings in the three months ended September 30, 2018. The increase for the nine months ended September 30, 2018 was the result of an increase in the rebate fee due to an increase in the rebates given related to the Consortium Purchase Agreement.

Servicing Fees, Net

Prosper Funding earns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates Prosper Funding for the costs it incurs in servicing these Borrower Loans, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Historically, the servicing fee has been generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has been set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The increases in servicing fees were due to an increase in collection fees during the period and a higher outstanding Borrower Loan balance.

Gain (Loss) on Sale of Borrower Loans

Gain (Loss) on Sale of Borrower Loans consists of net gains (losses) on Borrower Loans sold through the Whole Loan Channel. The loss for the three months ended September 30, 2018 decreased $1.0 million due to a $2.2 million decrease in rebates primarily due losses from warrants issued by PMI to the Consortium.

The increase in the loss for the nine months ended September 30, 2018 was due to the increase in rebates of $9.7 million primarily due to losses from warrants issued by PMI to the Consortium.

Other Revenue

Other Revenue consist primarily of fees earned from assisting whole loan purchasers with securitizations of their holdings. The changes in Other Revenue were not significant.

Interest Income on Borrower Loans and Interest Expense on Notes

Prosper Funding recognizes interest income on Borrower Loans funded through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes it to be collectible. Prosper Funding records interest expense on the corresponding Notes based on the contractual interest rates. The interest rate charged on a Borrower Loan is generally 1% higher than the interest rate on the corresponding Notes to compensate Prosper Funding for servicing the Borrower Loan. This is recorded in interest income.

Overall, the decrease in net interest income for the periods above was primarily driven by the decrease in volume of Borrower Loans funded through the Note Channel.

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

The fair value of Borrower Loans, Loans Held for Sale and Notes is estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance, and discount rates. Loans Held for Sale are primarily comprised of Borrower Loans that are recorded using the same approach as the Borrower Loans held at fair value.

The following table summarizes the fair value adjustments for the nine month periods ended September 30, 2018 and 2017, respectively (in thousands):

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Borrower Loans	$	(9,450)	$	(7,219)	$	(24,868)	$	(18,041)
Loans Held for Sale	(25)		—		(29)		6
Notes	9,225		7,045		24,283		17,837
Total	$	(250)	$	(174)	$	(614)	$	(198)

Expenses

The following tables summarize Prosper Funding’s expenses for the three and nine month periods ended September 30, 2018 and 2017 (in thousands, except percentages):

	Three Months Ended September 30,
	2018		2017		$ Change	% Change
Expenses
Administration Fee Expense – Related Party	$	16,864	$	19,078	(2,214)	(12)	%
Servicing	1,036		1,553		(517)	(33)	%
General and Administrative	97		186		(89)	(48)	%
Total Expenses	$	17,997	$	20,817	(2,820)	(14)	%

	Nine Months Ended September 30,
	2018		2017		$ Change	% Change
Expenses
Administration Fee Expense – Related Party	$	55,036	$	53,359	1,677	3	%
Servicing	4,512		4,808		(296)	(6)	%
General and Administrative	464		503		(39)	(8)	%
Total Expenses	$	60,012	$	58,670	1,342	2	%

Administration Fee Expense - Related Party

Pursuant to an Administration Agreement between Prosper Funding and PMI, PMI manages the marketplace on behalf of Prosper Funding. Accordingly, each month, Prosper Funding is required to pay PMI a corporate administration fee, a fee for each Borrower Loan originated through the marketplace, a proportion of all servicing fees collected by or on behalf of Prosper Funding, and all nonsufficient funds fees collected by or on behalf of Prosper Funding. Effective July 1, 2016 the Administration Agreement was amended. The amendments included amending the corporate administration fee to a fixed amount of $500,000 per month, increasing the loan platform servicing fee to $150 per Borrower Loan originated through the marketplace and reducing the loan and note servicing fee to 62.5% of all servicing fees collected by or on behalf of Prosper Funding. The decrease in fees for the three months ended September 30, 2018 was due to a lower amount of fees paid on a decreased origination volume of Borrower Loans. The increase in fees for the nine months ended September 30, 2018 was due to higher fees paid related to servicing of existing Borrower Loans.

Servicing

Servicing costs consists primarily of vendor costs and depreciation of internal use software costs associated with servicing Borrower Loans. The decrease for the three months ended September 30, 2018 was primarily due to a decrease in amortization of internal use software. The decrease for the nine months ended September 30, 2018 was not significant.

General and Administrative

General and Administrative costs consist primarily of bank service charges and professional fees. The decreases for the three months and nine months ended September 30, 2018 were not significant.

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Liquidity and Capital Resources

We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future.

The following table summarizes Prosper Funding’s cash flow activities for the nine months ended September 30, 2018 and 2017 (in thousands):

	Nine Months Ended September 30,
	2018		2017
Net Income	$	520	$	3,291
Net cash provided by (used in) operating activities	(2,373)		$	18,108
Net cash used in investing activities	(3,273)		(7,684)
Net cash (used in) provided by financing activities	(453)		4,506
Net increase (decrease) in cash, cash equivalents and restricted cash	(6,099)		14,930
Cash, cash equivalents and restricted cash at the beginning of the period	148,315		154,912
Cash, cash equivalents and restricted cash at the end of the period	$	142,216	$	169,842

The net decrease in cash, cash equivalents and restricted cash for the nine months ended September 30, 2018, is primarily due to the net $8.2 million less cash held on the platform by investors that is classified as restricted cash. Net cash used in investing activities primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties which is included in cash flow from operating activities along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes.

Income Taxes

Prosper Funding incurred no income tax expense for the three months ended September 30, 2018 and 2017. Prosper Funding is a US disregarded entity for income tax purposes and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses, it is difficult to accurately forecast how Prosper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.

Off-Balance Sheet Arrangements

As a result of retaining servicing rights on the sale of Borrower Loans, Prosper Funding is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special interest entities are consolidated as Prosper Funding is not the primary beneficiary. Otherwise as of September 30, 2018, Prosper Funding has not engaged in any off-balance sheet financing activities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk and Interest Rate Risk

Prosper Marketplace, Inc.

Market Rate Sensitivity

Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.

Through the Warehouse Line we invest in Borrower Loans classified as held for sale. Investments in interest-earning instruments carry a degree of interest rate risk. Changes in U.S. interest rates affect the market value of these Borrower Loans held on our balance sheet. The Company’s future investment income may fall short of expectations, or the Company may suffer a loss in principal if the Company is forced to sell Borrower Loans, which have declined in market value due to changes in interest rates as stated above. Changes in the market value of Borrower Loans classified as held for sale are recorded through the Statement of Operations. The fair value of Borrower Loans which are held on our balance sheet as held for sale is $113.2 million as of September 30, 2018.

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The fair values of Borrower Loans, Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. For Borrower Loans and Notes presented on our Balance Sheet on behalf of our fractional loan pool investors, the fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment-dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.

The Company is also exposed to variable interest rate risk under the debt from the Warehouse Line, which had an outstanding balance of $103.6 million as of September 30, 2018. To reduce the impact of large fluctuations in interest rates, we hedged a portion of our interest rate risk by entering into a derivative agreement with a financial institution, which is currently out of the money. The derivative agreement that we use to manage the risk associated with fluctuations in interest rates may not be able to eliminate the exposure to these changes. Interest rates are sensitive to numerous factors outside of our control, such as government and central bank monetary policy in the United States. Depending on the size of the exposures and the relative movements of interest rates, if we choose not to hedge or fail to effectively hedge our exposure, we could experience a material adverse effect on our results of operations and financial condition.

Prosper had cash and cash equivalents of $58.4 million as of September 30, 2018, and $45.8 million as of December 31, 2017. These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities which may include money market funds, U.S. Treasury securities, and U.S. agency securities. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, Prosper believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will moderately increase the interest income earned on these cash balances.  

Interest Rate Sensitivity

Prosper holds available for sale investments. The fair value of Prosper’s available for sale investment portfolio was $28.4 million and $53.1 million as of September 30, 2018 and December 31, 2017, respectively. These investments consisted of U.S. Treasury bills, and U.S. Treasury securities. To mitigate the risk of loss, Prosper’s investment policy and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns. To manage this risk, Prosper limits and monitors maturities, credit ratings, and concentrations within the investment portfolio. Changes in U.S. interest rates affect the interest earned on Prosper’s available for sale investments and the market value of those investments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $0.1 million in the fair value of Prosper’s available for sale investments as of September 30, 2018, and of approximately $0.3 million in the fair value of Prosper’s available for sale investments as of December 31, 2017. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $0.1 million in the fair value of Prosper’s available for sale investments as of September 30, 2018, and of approximately $0.3 million in the fair value of Prosper’s available for sale investments as of December 31, 2017. Any realized gains or losses resulting from such interest rate changes would only be recorded if Prosper sold the investments prior to maturity and the investments were not considered other-than-temporarily impaired.

Prosper’s investment in Borrower Loans held for sale was $113.2 million as of September 30, 2018. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $1.1 million in the fair value of Prosper’s investment in Borrower Loans held for sale as of September 30, 2018. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $1.1 million in the fair value of Prosper’s investment in Borrower Loans held for sale as of September 30, 2018. Any realized gains or losses resulting from such interest rate change would be recorded in our statement of operations so long as we hold these Borrower Loans on our balance sheet.

Prosper Funding LLC 

Market Rate Sensitivity

Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.

Because balances, interest rates, and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net of our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.

The fair values of Borrower Loans, Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by

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the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.

Prosper Funding had cash and cash equivalents of $9.6 million as of September 30, 2018, and $8.2 million as of December 31, 2017. These amounts were held in various unrestricted deposits with highly rated financial institutions and short term, highly liquid marketable securities which may include money market funds, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, Prosper Funding believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will moderately increase the interest income earned on these cash balances.  

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Registrants’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including to each Registrant’s Principal Executive Officer (PEO) and Principal Financial Officer (PFO), to allow timely decisions regarding required disclosures. The management of each Registrant, with the participation of such Registrant’s PEO and PFO, has evaluated the effectiveness of such Registrant’s disclosure controls and procedures as of September 30, 2018. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control Over Financial Reporting

There were no changes in either Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Prosper's disclosure under this Item is incorporated by reference to the matters referenced in "Note 17 – Commitments and Contingencies – SEC Inquiry" of PMI’s Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Prosper Funding's disclosure under this Item is incorporated by reference to the matters referenced in "Note 8 – Commitments and Contingencies – SEC Inquiry" of Prosper Funding's Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

This Item should be read in conjunction with the disclosures contained in Part I, Item 3, "Legal Proceedings" of our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 1A. Risk Factors 

You should carefully consider all information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and related notes, and the risks described in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2017.

RISKS RELATED TO PFL AND PMI, OUR MARKETPLACE AND OUR ABILITY TO SERVICE THE NOTES

If the security of PFL's investors' and borrowers' confidential information stored in our systems is breached or otherwise subjected to unauthorized access, users' secure information may be stolen, our reputations may be harmed, and we may be exposed to liability.

As with any entity with a significant Internet presence, we and the third parties that Prosper uses for website hosting occasionally have experienced cyber-attacks, breaches of our and their systems and other similar incidents, which to-date have not had a material effect on our business, operations or reputation. Future attacks are likely to occur. Our marketplace stores PFL's investors' and borrowers' bank information and other personally-identifiable sensitive data. Any accidental or willful security breaches or other unauthorized access could cause users' secure information to be stolen and used for criminal purposes. Security breaches or unauthorized access to secure information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee or contractor error, malfeasance, faulty password management or otherwise, or if design flaws in the relevant software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any investors' or borrowers' data, PFL's relationships with its users could be severely damaged, and PFL (or PMI) could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and PMI's third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause our users to lose confidence in the effectiveness of PFL’s and PMI's data security measures. Any security breach, whether actual or perceived, would harm our reputations, and we could lose users.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

Prosper – None.

Prosper Funding – Information for this Item is not required for Prosper Funding because it meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q; Prosper Funding is therefore filing this Form with the reduced disclosure format.

Item 3. Defaults upon Senior Securities

Not applicable. 

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Item 4. Mine Safety Disclosures

Not applicable. 

Item 5. Other Information

None.

Item 6. Exhibits

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

EXHIBIT INDEX

Exhibit Number	Exhibit Description
3.1	Fifth Amended and Restated Limited Liability Company Agreement of PFL, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of the Post-Effective Amendment No. 3 to the Registration Statement on Form S-1, filed October 23, 2013 by PFL and PMI)
3.2	Amended and Restated Certificate of Incorporation of PMI, as further amended on October 15, 2018 (1)
3.3	PFL Certificate of Formation (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1/A, filed April 23, 2012 by PFL)
3.4	Bylaws of PMI, as amended by an Amendment No. 1 dated February 15, 2016 (incorporated by reference to Exhibit 3.2 of PMI's and PFL's Form 10-Q, filed on August 15, 2016)
4.1	Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5)
4.2	Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4)
4.3	Supplemental Indenture, dated January 22, 2013, between PMI, PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
4.4	Indenture, dated June 15, 2009, between PMI and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed June 26, 2009)
4.5	Amended and Restated Indenture, dated January 22, 2013, between PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (1)
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (1)
31.3	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (1)
31.4	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (1)
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (1)
32.2	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (1)

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101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL  Taxonomy Extension Schema Document
101.CAL	Taxonomy Extension Calculation Linkbase Document
101.LAB	Taxonomy Extension Label Linkbase Document
101.PRE	Taxonomy Extension Presentation Linkbase Document
101.DEF	Taxonomy Extension Definition Linkbase Document
(1)	Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

	PROSPER MARKETPLACE, INC.
	PROSPER FUNDING LLC
November 13, 2018	/s/ David Kimball
	David Kimball
	Chief Executive Officer of Prosper Marketplace, Inc.
	Chief Executive Officer of Prosper Funding LLC
	(Principal Executive Officer)
November 13, 2018	/s/ Usama Ashraf
	Usama Ashraf
	Chief Financial Officer of Prosper Marketplace, Inc.
	Chief Financial Officer of Prosper Funding LLC
	(Principal Financial and Accounting Officer)

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