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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.
1


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.

2


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

3


Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
PFL’s ability to make payments on the Notes;
our ability to attract potential borrowers and investors to our marketplace;
the reliability of the information about borrowers that is supplied by borrowers, including actions by some borrowers to defraud investors;
our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
credit risks posed by the credit worthiness of borrowers, including the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes, and the effectiveness of our credit rating systems;
the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;
our compliance with applicable regulations and regulatory developments or court decisions affecting our business;
potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;
our compliance with applicable local, state and federal law, including the Securities Act, the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace;
the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
the lack of a public trading market for the Notes and the lack of any trading platform on which investors can resell the Notes;
the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our marketplace or adversely impact our ability to service Borrower Loans.
There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does occur, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” sections of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2017 for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
4


Where You Can Find More Information
The following filings are available for download free of charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public at the SEC’s website at www.sec.gov.
5


Item 1. Condensed Consolidated Financial Statements
Prosper Marketplace, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except for share and per share amounts)
September 30, 2018December 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.
6


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, 
2018201720182017
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.
7


Prosper Marketplace, Inc.
Condensed Consolidated Statements of Other Comprehensive Loss (Unaudited)
(in thousands)
Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
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.
8


Prosper Marketplace, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30, 
20182017
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.
9


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

1. Basis of Presentation
Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005. Except as the context requires otherwise, as used in these notes to the condensed consolidated financial statements of 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:

10


September 30, 2018December 31, 2017September 30, 2017December 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.
11


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.
12


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, 2018December 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):
13


Borrower Loans
Notes
Loans Held for Sale
September 30, 2018December 31, 2017September 30, 2018December 31, 2017September 30, 2018December 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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