UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2019 

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

Securities registered pursuant to Section 12(b) of the Act:

Registrant	Title of Each Class	Name of Each Exchange on Which Registered
Prosper Marketplace, Inc.	None	None
Prosper Funding LLC	None	None

Securities registered pursuant to Section 12(g) of the Act:

Registrant	Title of Each Class	Name of Each Exchange on Which Registered
Prosper Marketplace, Inc.	None	None
Prosper Funding LLC	None	None

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Prosper Marketplace, Inc.	Yes ¨ No x
Prosper Funding LLC	Yes ¨ No x

Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

As of May 6, 2019, there were 70,491,295 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)	8
	Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)	9
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit	10
	Condensed Consolidated Statements of Cash Flows (Unaudited)	11
	Notes to Condensed Consolidated Financial Statements (Unaudited)	13
	Prosper Funding LLC	39
	Condensed Consolidated Balance Sheets (Unaudited)	39
	Condensed Consolidated Statements of Operations (Unaudited)	40
	Condensed Consolidated Statements of Member’s Equity	41
	Condensed Consolidated Statements of Cash Flows (Unaudited)	42
	Notes to Condensed Consolidated Financial Statements (Unaudited)	43
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 4.	Controls and Procedures	66
PART II.	OTHER INFORMATION	67
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	67
Item 3.	Defaults upon Senior Securities	67
Item 4.	Mine Safety Disclosures	68
Item 5.	Other Information	68
Item 6.	Exhibit Index	68
Signatures		69

Except as the context requires otherwise, as used herein, “Registrants” refers to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “we,” “us,” “our,” “Prosper,” and the “Company” refer to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. (“BillGuard”), a Delaware corporation, Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, and Prosper Warehouse I Trust, a Delaware statutory trust, 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. PAH was dissolved on November 28, 2018. As a result, references to Prosper Funding do not include PAH for periods subsequent to the year ended December 31, 2018. 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.” 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. The Notes available to Note Channel investors are distinguishable from notes held by certain third party investors pursuant to Prosper’s securitization transactions, which are referred to herein as “Notes Issued by Securitization Trust.” 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 corresponding PMI Management Rights, each of which is an "investment contract," a concept under federal securities law that refers to an arrangement where investors invest money in a common enterprise with the expectation of profits, primarily from the efforts of others;

•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, 2018 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

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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.

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. 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)

	March 31, 2019		December 31, 2018
Assets
Cash and Cash Equivalents	$	64,188	$	57,945
Restricted Cash (1)	148,798		149,114
Available for Sale Investments, at Fair Value	4,259		22,173
Accounts Receivable (1)	987		5,119
Loans Held for Sale, at Fair Value (1)	106,640		183,788
Borrower Loans, at Fair Value (1)	448,710		263,522
Property and Equipment, Net	31,394		15,273
Prepaid and Other Assets (1)	7,478		4,643
Servicing Assets	13,814		14,687
Goodwill	36,368		36,368
Intangible Assets, Net	929		999
Total Assets	$	863,565	$	753,631
Liabilities, Convertible Preferred Stock and Stockholders' Deficit
Accounts Payable and Accrued Liabilities	$	17,463	$	19,967
Payable to Investors	117,676		127,538
Notes, at Fair Value	258,722		264,003
Notes Issued by Securitization Trust (1)	163,125		—
Certificates Issued by Securitization Trust, at Fair Value (1)	19,134		—
Warehouse Lines (1)	93,629		162,488
Other Liabilities	25,992		10,629
Convertible Preferred Stock Warrant Liability	163,483		143,679
Total Liabilities	859,224		728,304
Commitments and Contingencies (see Note 18)
Convertible Preferred Stock – $0.01 par value; 444,760,848 shares authorized as of March 31, 2019 and December 31, 2018; 214,637,925 issued and outstanding as of March 31, 2019 and December 31, 2018. Aggregate liquidation preference of $375,952 as of March 31, 2019 and December 31, 2018.	323,793		323,793
Stockholders' Deficit
Common Stock – $0.01 par value; 625,000,000 shares authorized; 71,427,230 shares issued and 70,491,295 shares outstanding, as of March 31, 2019; 71,411,145 shares issued and 70,475,210 shares outstanding, as of December 31, 2018	229		229
Additional Paid-In Capital	147,204		145,486
Less: Treasury Stock	(23,417)		(23,417)
Accumulated Deficit	(443,465)		(420,751)
Accumulated Other Comprehensive Loss	(3)		(13)
Total Stockholders' Deficit	(319,452)		(298,466)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit	$	863,565	$	753,631

(1) Includes amounts in consolidated variable interest entities (VIEs) presented separately in the table below.

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The following table presents the assets and liabilities of consolidated variable interest entities (VIEs), which are included in the condensed consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. See Note 7 - Securitizations and Note 11 - Debt, to our Notes to Condensed Consolidated Financial Statements for additional information.

	March 31, 2019		December 31, 2018
Assets of consolidated VIEs, included in total assets above
Restricted Cash	$	15,278	$	—
Accounts Receivable	$	—	$	3,902
Prepaid and Other Assets	3,340		$	1,393
Loans Held for Sale, at Fair Value	106,640		$	183,788
Borrower Loans, at Fair Value	186,768		$	—
Total assets of consolidated variable interest entities	$	312,026	$	189,083
Liabilities of consolidated VIEs, included in total liabilities above
Notes Issued by Securitization Trust	163,125		$	—
Warehouse Line	93,629		$	162,488
Certificates Issued by Securitization Trust, at Fair Value	19,134		$	—
Total liabilities of consolidated variable interest entities	$	275,888	$	162,488

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 March 31,
	2019		2018
Revenues
Operating Revenues
Transaction Fees, Net	$	26,294	$	31,354
Servicing Fees, Net	6,202		7,184
Gain (Loss) on Sale of Borrower Loans	2,697		3,350
Fair Value of Warrants Vested on Sale of Borrower Loans	(9,747)		(15,279)
Other Revenue	1,036		1,352
Total Operating Revenues	26,482		27,961
Interest Income
Interest Income on Borrower Loans	18,428		12,360
Interest Expense on Notes, Certificates Issued by Securitization Trust, and Warehouse Lines	(13,120)		(10,729)
Net Interest Income	5,308		1,631
Change in Fair Value of Financial Instruments, Net	(1,713)		858
Total Net Revenue	30,077		30,450
Expenses
Origination and Servicing	8,161		8,821
Sales and Marketing	16,341		18,828
General and Administrative	18,768		18,715
Restructuring Charges, Net	82		323
Change in Fair Value of Convertible Preferred Stock Warrants	10,058		(4,604)
Other Expenses (Income), Net	(648)		(242)
Total Expenses	52,762		41,841
Net Loss Before Taxes	(22,685)		(11,391)
Income Tax Expense	29		10
Net Loss	$	(22,714)	$	(11,401)
Net Loss Per Share – Basic and Diluted	$	(0.32)	$	(0.16)
Weighted-Average Shares – Basic and Diluted	70,487,006		70,302,910

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 March 31,
	2019		2018
Net Loss	$	(22,714)	$	(11,401)
Other Comprehensive Income (Loss), Before Tax
Change in Net Unrealized Gain on Available for Sale Investments, at Fair Value	10		(15)
Realized (Gain) Loss on Sale of Available for Sale Investments, at Fair Value	—		—
Other Comprehensive Income (Loss), Before Tax	10		(15)
Income Tax Effect	—		—
Other Comprehensive Income (Loss), Net of Tax	10		(15)
Comprehensive Loss	(22,704)		(11,416)

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

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Prosper Marketplace, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except for share amounts)

	Convertible Preferred Stock		Common Stock		Treasury Stock
	Shares	Amount	Shares	Amount	Shares	Amount	Additional Paid-In Capital	Accumulated Other Comprehensive Income	Accumulated Deficit	Total
Balance as of January 1, 2018	214,637,925	323,793	75,468,234	228	(5,177,235)	(23,417)	136,653	(73)	(380,806)	(267,415)
Exercise of Vested Stock Options	—	—	43,746	—	—	—	8	—	—	8
Restricted Stock Vested	—	—	—	—	—	—	5	—	—	5
Exercise of Warrants	—	—	8,200	—	—	—	—	—	—	—
Stock-based Compensation Expense	—	—	—	—	—	—	2,425	—	—	2,425
Change in Net Unrealized Loss on Available for Sale Investments, at Fair Value	—	—	—	—	—	—	—	(16)	—	(16)
Net Loss	—	—	—	—	—	—	—	—	(11,401)	(11,401)
Balance as of March 31, 2018	214,637,925	323,793	75,520,180	228	(5,177,235)	(23,417)	139,091	(89)	(392,207)	(276,394)
Balance as of January 1, 2019	214,637,925	323,793	75,652,445	229	(5,177,235)	(23,417)	145,486	(13)	(420,751)	(298,466)
Exercise of Vested Stock Options	—	—	16,085	—	—	—	4	—	—	4
Stock-based Compensation Expense	—	—	—	—	—	—	1,714	—	—	1,714
Change in Net Unrealized Loss on Available for Sale Investments, at Fair Value	—	—	—	—	—	—	—	10	—	10
Net Loss	—	—	—	—	—	—	—	—	(22,714)	(22,714)
Balance as of March 31, 2019	214,637,925	323,793	75,668,530	229	(5,177,235)	(23,417)	147,204	(3)	(443,465)	(319,452)

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

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Prosper Marketplace, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Three Months Ended March 31,
	2019		2018
Cash flows from Operating Activities:
Net Loss	$	(22,714)	$	(11,401)
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	2,214		(858)
Depreciation and Amortization	2,679		2,825
Gain on Sales of Borrower Loans	(2,742)		(3,339)
Change in Fair Value of Servicing Rights	3,246		3,278
Stock-Based Compensation Expense	1,614		2,331
Restructuring Liability	—		323
Fair Value of Warrants Vested	9,747		15,279
Change in Fair Value of Warrants	10,058		(4,604)
Other, Net	(252)		(532)
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value	(490,855)		(595,199)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value	464,660		513,953
Accounts Receivable	4,132		(3,156)
Prepaid and Other Assets	(701)		2,540
Accounts Payable and Accrued Liabilities	(2,167)		(183)
Payable to Investors	(9,862)		18,632
Other Liabilities	(679)		(722)
Net Cash Used in Operating Activities	(31,622)		(60,833)
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value	(44,225)		(46,276)
Principal Payments of Borrower Loans Held at Fair Value	45,155		46,023
Purchases of Property and Equipment	(2,830)		(1,358)
Purchases of Available for Sale Investments, at Fair Value	—		(1,504)
Maturities of Available for Sale Investments	18,010		7,000
Net Cash Provided by Investing Activities	16,110		3,885
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value	44,939		46,225
Payments of Notes Held at Fair Value	(44,117)		(47,102)
Principal Payments on Notes Issued by Securitization Trust	(6,766)		—
Principal Payments on Certificates Issued by Securitization Trust	(1,133)		—
Proceeds from Securitization Issuance	1,177		—
Proceeds from Revolving Debt Facilities	31,751		71,600
Payment for Debt Issuance Costs	(4,417)		(873)
Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock	5		9
Net Cash Provided by Financing Activities	21,439		69,859
Net Increase in Cash, Cash Equivalents and Restricted Cash	5,927		12,911
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period	207,059		198,463
Cash, Cash Equivalents and Restricted Cash at End of the Period	$	212,986	$	211,374

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Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	13,295	$	10,941
Non-Cash Investing Activity- Accrual for Property and Equipment, Net	$	293	$	153
Non-Cash Financing Activity Issuance of Securitization Notes and Certificates	$	191,591	$	—
Non-Cash Financing Activity Derecognition of Warehouse Line debt	$	(100,422)	$	—

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, 2018. The balance sheet at December 31, 2018 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, its wholly-owned subsidiaries and consolidated variable interest entities ("VIEs"). All intercompany balances have been eliminated in consolidation.

Securitization Notes are notes held by certain third party investors pursuant to Prosper’s securitization transactions, and are distinguishable from the borrower payment dependent Notes available to investors through our Note Channel.

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, 2018. There have been no changes to these accounting policies during the first three months of 2019 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, Certificates Issued by Securitization Trust 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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	March 31, 2019		December 31, 2018		March 31, 2018		December 31, 2017
Cash and Cash Equivalents	$	64,188	57,945		$	39,309	$	45,795
Restricted Cash	148,798		149,114		172,065		152,668
Total Cash, Cash Equivalents and Restricted Cash shown in the consolidated statements of cash flows	$	212,986	$	207,059	$	211,374	$	198,463

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. 

Leases

We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are included on our consolidated balance sheets in the Property and Equipment, Net and the Other Liabilities sections, respectively.

If a contract contains a lease, we evaluate whether it should be classified as an operating or finance lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.  Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For certain leases with original terms of twelve months or less we recognize the lease expense as incurred and we do not recognize ROU assets and lease liabilities.

Consolidation of Variable Interest Entities

The determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment regarding whether we are the primary beneficiary of a VIE due to our holding a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support and (ii) whether a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity.

Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.

Recent Accounting Pronouncements

Accounting Standards Adopted In The Current Period

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

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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. Prosper adopted the standard effective January 1, 2019. The adoption of this standard did not have a material impact on Prosper’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. Prosper adopted the standard effective January 1, 2019.  In accordance with ASU 2018-11, "Leases (Topic 842), Target Improvements", Prosper has elected not to restate prior periods and has presented the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings on January 1, 2019. The standard had a material impact on our consolidated balance sheets, but did not materially impact on our consolidated statement of operations. The most significant impact is the recognition of ROU assets and lease obligation liabilities for operating leases. Additionally, Prosper recorded an impairment charge to its ROU asset upon adoption due to existing sublease arrangements that were entered into at a loss. The impairment charge did not have a material impact as it will be offset by a reduction of the existing restructuring liability for those leases.

Prosper has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets. The Company also elected a practical expedient that allowed it to not separate non-lease components from lease components and instead to account for each lease and non-lease component as a single lease component. The adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of ROU assets of approximately $16.1 million, lease liabilities for operating leases of approximately $21.6 million, a reduction in existing other liabilities of $5.1 million related to deferred rent and restructuring liabilities, and no cumulative-effect adjustment on retained earnings on Prosper's Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations.

Accounting Standards Issued, To Be Adopted By The Company In Future Periods

In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which will be effective for interim and annual periods beginning after December 15, 2019. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. Prosper accounts for its Borrower Loans at fair value through net income, which is outside the scope of Topic 326. For available for sale investments, the guidance will require recognition of expected credit losses by recognizing an allowance for credit losses when the fair value of the security is below amortized cost and the recognition of this allowance is limited to the difference between the security’s amortized cost basis and fair value. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

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

In 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

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year and early adoption is permitted. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In March 2019, the FASB issued ASU No. 2019-01, "Leases (Topic 842): Codification Improvements." This ASU aligns the fair value treatment of the underlying asset by lessors that are not manufacturers or dealers as defined under Topic 842, presentation on the Statement of Cash Flows for sales and direct financing leases, and a clarification of interim disclosure requirements in the year of adoption, among other things. 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):

	March 31, 2019		December 31, 2018
Property and Equipment:
Operating lease right-of-use assets	$	16,138	$	—
Computer equipment	15,558		15,193
Internal-use software and website development costs	25,120		22,505
Office equipment and furniture	3,015		3,015
Leasehold improvements	7,157		7,157
Assets not yet placed in service	2,303		2,745
Property and equipment	69,291		50,615
Less accumulated depreciation and amortization	(37,897)		(35,342)
Total Property and Equipment, Net	$	31,394	$	15,273

Depreciation and amortization expense for Property and Equipment for the three months ended March 31, 2019 and March 31, 2018 was $1.8 million and $2.7 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 $2.1 million and $1.1 million for the three months ended March 31, 2019 and March 31, 2018, respectively. Additionally, disclosures around the operating lease right-of-use assets are included in Note 17.

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

The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale, and Notes as of March 31, 2019 and December 31, 2018, are presented in the following table (in thousands):

	Borrower Loans				Notes				Loans Held for Sale
	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Aggregate principal balance outstanding	$	455,563	$	269,093	$	(265,961)	$	(272,430)	$	106,707	$	185,657
Fair value adjustments	(6,853)		(5,571)		7,239		8,427		(67)		(1,869)
Fair value	$	448,710	$	263,522	$	(258,722)	$	(264,003)	$	106,640	$	183,788

Borrower Loans

At March 31, 2019, 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 March 2024. At December 31, 2018, outstanding Borrower Loans had original maturities 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 December 2023. 

Approximately $0.3 million and $0.4 million represents the loss that is attributable to changes in the instrument-specific credit risks related to Borrower Loans that were recorded in the change in fair value during the three months ending March 31, 2019 and March 31, 2018, respectively.

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As of March 31, 2019, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.4 million and a fair value of $1.0 million. As of December 31, 2018, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.5 million and a fair value of $1.1 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of March 31, 2019 and December 31, 2018, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.3 million, respectively. 

Loans Held for Sale

At March 31, 2019, outstanding Loans Held for Sale had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.82%, and had various maturity dates through March 2024. At December 31, 2018, outstanding Loans Held for Sale had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.82% and had various maturity dates through December 2023. Fair value adjustments recorded in earnings on loans invested in by the Company was a net loss of $0.1 million during the quarter ended March 31, 2019. Interest income earned on Loans Held for Sale by the Company was $4.0 million and $1.4 million during the quarters ended March 31, 2019 and March 31, 2018, respectively.

As of March 31, 2019, Loans Held for Sale that were 90 days or more delinquent, had an aggregate principal amount of $0.9 million and a fair value of $0.4 million. As of December 31, 2018, Loans Held for Sale that were 90 days or more delinquent had an aggregate principal amount of $0.8 million and a fair value of $0.3 million.

5. Loan Servicing Assets and Liabilities

Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains and losses recognized on the sale of such Borrower Loans for the three months ended March 31, 2019 was a gain of $2.7 million and a loss of $9.7 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium. The total gains recognized on the sale of such Borrower Loans were $3.4 million during the three months ended March 31, 2018, and a loss of $15.3 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium.

As of March 31, 2019, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.3 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 March 2024. At December 31, 2018, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.6 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 35.52%, and various maturity dates through December 2023.

$10.1 million and $10.6 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended March 31, 2019 and March 31, 2018, 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 8 below are those that Prosper considers significant to the estimated fair values of the level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.

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

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

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Default Rate. The default rate presented in Note 8 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 8 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 March 31, 2019 and December 31, 2018, are as follows (in thousands): 

March 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities:
Treasury Bills	—		—		—		—
US Treasury securities	4,261		—		(2)		4,259
Total Available for Sale Investments	$	4,261	$	—	$	(2)	$	4,259

December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities:
Treasury Bills	$	17,940	$	—	$	(3)	$	17,937
US Treasury securities	4,246		—		(10)		4,236
Total Available for Sale Investments	$	22,186	$	—	$	(13)	$	22,173

A summary of available for sale investments with unrealized losses as of March 31, 2019, and December 31, 2018, aggregated by category and period of continuous unrealized loss, is as follows (in thousands):

	Less than 12 months				12 months or longer				Total
March 31, 2019	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturity securities:
Treasury Bills	$	—	$	—	$	—	$	—	$	—	$	—
US Treasury securities	$	4,259	$	(2)	$	—	$	—	$	4,259	$	(2)
Total Investments with Unrealized Losses	$	4,259	$	(2)	$	—	$	—	$	4,259	$	(2)

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	Less than 12 months				12 months or longer				Total
December 31, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturity securities:
Treasury Bills	$	17,937	$	(3)	$	—	$	—	$	17,937	$	(3)
US Treasury securities	$	—	$	—	$	4,236	$	(10)	$	4,236	$	(10)
Total Investments with Unrealized Losses	$	17,937	$	(3)	$	4,236	$	(10)	$	22,173	$	(13)

There were no impairment charges recognized during the three months ended March 31, 2019. 

The maturities of available for sale investments at March 31, 2019 and December 31, 2018 are as follows (in thousands):

March 31, 2019	Within 1 year		After 1 year through 5 years		After 5 years to 10 years		After 10 years		Total
Treasury Bills	—		—		—		—		—
US Treasury securities	4,259		—		—		—		4,259
Total Fair Value	$	4,259	$	—	$	—	$	—	$	4,259
Total Amortized Cost	$	4,261	$	—	$	—	$	—	$	4,261

December 31, 2018	Within 1 year		After 1 year through 5 years		After 5 years to 10 years		After 10 years		Total
Treasury Bills	17,937		—		—		—		17,937
US Treasury securities	4,236		—		—		—		4,236
Total Fair Value	$	22,173	$	—	$	—	$	—	$	22,173
Total Amortized Cost	$	22,186	$	—	$	—	$	—	$	22,186

During the three months ended March 31, 2019, Prosper sold $0 of investments.

7.  Securitizations

On February 7, 2019, Prosper completed a securitization of approximately $205.1 million in unsecured personal whole loans facilitated through the Company’s platform through a securitization trust ("PMIT 2019-1") which Prosper consolidated. PMIT 2019-1 issued notes, residual certificates and a risk retention interest to finance the purchase of Borrower Loans. The resulting notes were sold to third party investors for $171.7 million in net proceeds. Prosper retained 65.5% of the resulting residual certificates. The remaining residual certificates and the risk retention interests are held by third party investors.

PMIT 2019-1 was deemed a VIE that the Company consolidates because the Company is the primary beneficiary of the VIE. The creditors of PMIT 2019-1 have no recourse to the general credit of PMI as the primary beneficiary of the VIEs and the liabilities of the VIEs can only be settled by the respective VIE’s assets. Additionally, Prosper's continued involvement includes loan servicing responsibilities over the life of the underlying loans. As a result, Prosper has included PMIT 2019-1's Borrower Loans under "Borrower Loans, at Fair Value", the notes held by third party investors under "Notes Issued by Securitization Trust" and the risk retention and residual certificates held by third party investors under "Certificates Issued by Securitization Trust, at Fair Value" in Prosper's condensed consolidated balance sheets.

The notes under the PMIT 2019-1 were issued in three classes: Class A in the amount of $127.3 million, Class B in the amount of $25.0 million and Class C in the amount of $19.3 million (collectively, the “2019-1 Notes”).  The Class A, Class B and Class C notes bear interest at a fixed rate of 3.54%, 4.03% and 5.27%, respectively. Principal and interest payments began in March 2019 and are payable monthly. These notes are recorded at amortized cost on the balance sheet. The associated debt issuance costs of $2.3 million are deferred and amortized into interest expense over the contractual life of the notes. The notes held by third-party investors and the unamortized debt issuance costs are included in “Notes Issued by Securitization Trust” with a balance of $163.1 million on the condensed consolidated balance sheets as of March 31, 2019 and are secured by an aggregate outstanding principal balance of $188.8 million of borrower loans included in “Borrower Loans, at Fair Value” on the condensed consolidated balance sheets as of March 31, 2019. The risk retention and residual certificates are carried at fair value

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and the risk retention interest represents the right to receive 5.0% of all amounts collected on the Borrower Loans held by PMIT 2019-1, net of its pro-rata share of ongoing fees and expenses of PMIT 2019-1.

8.  Fair Value of Assets and Liabilities 

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

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

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

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

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

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

Financial Instruments Recorded at Fair Value

The fair value of the Borrower Loans, Loans Held for Sale, Certificates Issued by Securitization Trust 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, Certificates Issued by Securitization Trust, 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 13 for further details.

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

March 31, 2019	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	448,710	$	448,710
Loans Held for Sale	—		—		106,640		106,640
Available for Sale Investments, at Fair Value	—		4,259		—		4,259
Servicing Assets	—		—		13,814		13,814
Total Assets	—		$	4,259	$	569,164	$	573,423
Liabilities:
Notes	$	—	$	—	$	258,722	$	258,722
Servicing Liabilities	—		—		7		7
Certificates Issued by Securitization Trust, at Fair Value	—		—		19,134		$	19,134
Convertible Preferred Stock Warrant Liability	—		—		163,483		$	163,483
Loan Trailing Fee Liability	—		—		3,084		$	3,084
Total Liabilities	—		$	—	$	607,555	$	607,555

December 31, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	263,522	$	263,522
Loans Held for Sale	—		—		183,788		183,788
Available for Sale Investments, at Fair Value	—		22,173		—		22,173
Servicing Assets	—		—		14,687		14,687
Total Assets	$	—	$	22,173	$	461,997	$	484,170
Liabilities:
Notes	$	—	$	—	$	264,003	$	264,003
Servicing Liabilities	—		—		12		12
Convertible Preferred Stock Warrant Liability	—		—		143,679		143,679
Loan Trailing Fee Liability	—		—		3,118		3,118
Total Liabilities	$	—	$	—	$	410,812	$	410,812

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

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at March 31, 2019 and December 31, 2018:

Borrower Loans, Loans Held for Sale and Notes:

	Range
Unobservable Input	March 31, 2019	December 31, 2018
Discount rate	4.8% - 12.9%	4.7% - 13.8%
Default rate	1.9% - 16.4%	2.0% - 15.8%

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Servicing Rights:

	Range
Unobservable Input	March 31, 2019		December 31, 2018
Discount rate	15.0% - 25.0%		15.0% - 25.0%
Default rate	1.5% - 17.4%		1.6% - 16.7%
Prepayment rate	16.0% - 25.9%		15.5% - 25.1%
Market servicing rate	0.625	%	0.625	%

Loan Trailing Fee Liability:

	Range
Unobservable Input	March 31, 2019	December 31, 2018
Discount rate	15.0% - 25.0%	15.0% - 25.0%
Default rate	1.5% - 17.4%	1.6% - 16.7%
Prepayment rate	16.0% - 25.9%	15.5% - 25.1%

At March 31, 2019, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans.

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		Certificates Issued by Securitization Trust		Loans Held for Sale		Total
Balance at January 1, 2019	$	263,522	$	(264,003)	$	—	$	183,788	$	183,307
Purchase of Borrower Loans/Issuance of Notes	135,259		(44,939)		(20,616)		490,855		560,559
Transfers in (Transfers out)	114,316		—		—		(114,316)		—
Principal repayments	(56,629)		44,117		1,133		(14,739)		(26,118)
Borrower Loans sold to third parties	(974)		—		—		(437,473)		(438,447)
Other changes	139		601		(167)		(166)		407
Change in fair value	(6,923)		5,502		516		(1,309)		(2,214)
Balance at March 31, 2019	$	448,710	$	(258,722)	$	(19,134)	$	106,640	$	277,494

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans		Notes		Loans Held for Sale		Total
Balance at January 1, 2018	$	293,005	$	(293,948)	$	49	$	(894)
Purchase of Borrower Loans/Issuance of Notes	46,276		(46,225)		595,199		595,250
Principal repayments	(44,957)		47,102		(3,849)		(1,704)
Borrower Loans sold to third parties	(1,066)		—		(510,104)		(511,170)
Other changes	(136)		547		541		952
Change in fair value	(7,538)		7,429		967		858
Balance at March 31, 2018	$	285,584	$	(285,095)	$	82,803	$	83,292

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The following tables present additional information about level 3 servicing assets measured at fair value on a recurring basis (in thousands):

	Servicing Assets
Fair Value at January 1, 2019	14,687
Additions	2,742
Derecognition	(364)
Less: Changes in fair value	(3,251)
Fair Value at March 31, 2019	13,814

	Servicing Assets
Fair Value at January 1, 2018	14,711
Additions	3,339
Less: Changes in fair value	(3,296)
Fair Value at March 31, 2018	14,754

The following table presents additional information about level 3 Preferred Stock Warrant Liability measured at fair value on a recurring basis (in thousands):

	Preferred Stock Warrant Liability
Balance as of January 1, 2019	$	143,679
Add Issuances of Preferred Stock Warrant	9,747
Change in Fair Value of the Preferred Stock Warrant Liability	10,057
Balance as of March 31, 2019	$	163,483

	Preferred Stock Warrant Liability
Balance as of January 1, 2018	$	116,366
Add Issuances of Preferred Stock Warrant	15,279
Change in Fair Value of the Preferred Stock Warrant Liability	(4,604)
Balance as of March 31, 2018	$	127,041

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):

	Loan Trailing Fee Liability
Balance at January 1, 2019	3,118
Issuances	566
Cash Payment of Loan Trailing Fee	(658)
Change in Fair Value	58
Balance at March 31, 2019	3,084

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Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at March 31, 2019 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 March 31, 2019	$555,350				$258,722
Discount rate assumption:	7.97		%	*	7.97		%	*
Resulting fair value from:
100 basis point increase	$	550,089			$	252,907
200 basis point increase	544,953				250,542
Resulting fair value from:
100 basis point decrease	$	560,742			$	257,813
200 basis point decrease	566,269				260,358
Default rate assumption:	12.68		%	*	12.68		%	*
Resulting fair value from:
100 basis point increase	$	548,679			$	252,246
200 basis point increase	542,179				249,243
Resulting fair value from:
100 basis point decrease	$	562,168			$	258,479
200 basis point decrease	569,006				261,640

* Represents weighted average assumptions considering all credit grades.

The following table presents the estimated impact on Prosper’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of March 31, 2019 (in thousands, except percentages).

	Servicing Assets
Fair Value as of March 31, 2019	$13,814
Market servicing rate assumptions	0.625		%
Resulting fair value from:
Market servicing rate increase to 0.65%	$	12,966
Market servicing rate decrease to 0.60%	$	14,662
Weighted average prepayment assumptions	20.41		%
Resulting fair value from:
Applying a 1.1 multiplier to prepayment rate	$	13,649
Applying a 0.9 multiplier to prepayment rate	$	13,982
Weighted average default assumptions	12.17		%
Resulting fair value from:
Applying a 1.1 multiplier to default rate	$	13,655
Applying a 0.9 multiplier to default rate	$	13,977

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):

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March 31, 2019	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Balance at Fair Value
Assets:
Cash and Cash Equivalents	$	64,188	$	64,188	$	—	$	—	$	64,188
Restricted Cash	148,798		—		148,798		—		148,798
Accounts Receivable	987		—		987		—		987
Total Assets	$	213,973	$	64,188	$	149,785	$	—	$	213,973
Liabilities:
Accounts Payable and Accrued Liabilities	$	17,463	$	—	$	17,463	$	—	$	17,463
Payable to Investors	117,676		—		117,676		—		117,676
Notes Issued by Securitization Trust	163,125		—		—		163,125		163,125
Warehouse Line	93,629		—		93,629		—		93,629
Total Liabilities	$	228,768	$	—	$	228,768	$	163,125	$	391,893

9. Goodwill and Other Intangible Assets

Goodwill 

Prosper’s goodwill balance of $36.4 million at March 31, 2019 did not change during the three months ended March 31, 2019. We did not record any goodwill impairment expense for the three months ended March 31, 2019.

Other Intangible Assets 

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

	March 31, 2019
	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		(4,121)		$	929	6.1
Brand name	60		(60)		—		—
Total Intangible Assets Subject to Amortization	$	8,170	$	(7,241)	$	929

Prosper’s intangible asset balance was $0.9 million and $1.0 million at March 31, 2019 and December 31, 2018, respectively.

The user base and customer relationships intangible assets are being amortized on an accelerated basis over a three to ten years period. The developed 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 March 31, 2019 and March 31, 2018 was $0.1 million and $0.1 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):

Year Ending December 31,	Estimated Amortization of Purchased Intangible Assets
2019 (remainder thereof)	$	210
2020	219
2021	172
2022	136
2023	107
Thereafter	$	85
Total	$	929

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10. Other Liabilities

Other Liabilities includes the following:

	March 31, 2019		December 31, 2018
Loan trailing fee	3,084		3,118
Deferred revenue	839		396
Servicing liabilities	7		12
Deferred income tax liability	334		373
Deferred rent	—		3,408
Restructuring liability	—		2,106
Operating lease liability	20,605		—
Other	1,123		1,216
Total Other Liabilities	$	25,992	$	10,629

Additionally, disclosures around the operating lease liabilities are included in Note 17.

11. Debt

PWIT 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 "PWIT Warehouse Line"). PWIT was deemed a VIE that the Company consolidates because the Company is the primary beneficiary of the VIE. In connection with the Warehouse Agreement, PWIT entered into a security agreement with a bank as administrative agent and a national banking association as collateral trustee and paying agent. Proceeds under the PWIT 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 PWIT 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 PWIT Warehouse Line bears interest.

Under the amended agreement, proceeds of loans made under the PWIT 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 PWIT Warehouse Line bears interest at a rate of LIBOR plus 3.00% and has an advance rate of 89%. Additionally, the PWIT 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 payment dependent Notes, to tangible net worth. As of March 31, 2019, Prosper was in compliance with the covenants under the Warehouse Agreement.

As of March 31, 2019, Prosper had $93.6 million in debt outstanding and accrued interest under the PWIT Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $106.1 million included in Loans Held for Sale, at Fair Value on the condensed consolidated balance sheet. At March 31, 2019 the undrawn portion available under the PWIT Warehouse Line was $106.9 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

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the Change in Fair Value of Financial Instruments, Net on the condensed consolidated statement of operations. The fair value of the swaptions was not material at March 31, 2019.

PWIIT Warehouse Line

On March 28, 2019, through a wholly-owned subsidiary, Prosper Warehouse II Trust ("PWIIT"), Prosper entered into an agreement (the "PWIIT Warehouse Agreement") for a $300 million committed revolving line of credit (the "PWIIT Warehouse Line" and, together with the PWIT Warehouse Line, the "Warehouse Lines"), with a different national banking association than PWIT. PWIIT was deemed a VIE that the Company consolidates because the Company is the primary beneficiary of the VIE. In connection with the PWIIT Warehouse Agreement, PWIIT entered into a security agreement with a bank as administrative agent and a national banking association as collateral trustee and paying agent. Proceeds under the PWIIT 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 PWIIT Warehouse Line.

Under the agreement, proceeds of loans made under the PWIIT Warehouse Line may be borrowed, repaid, and reborrowed until the earlier of March 28, 2021 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 March 28, 2023, excluding the occurrence of any accelerated amortization event or event of default.

Under the agreement, the PWIIT Warehouse Line bears interest at a rate of LIBOR or the lender's asset-backed commercial paper rate plus a spread of 2.90%. The spread increases by 0.375% during the first 12 months immediately following the termination of the revolving period with an additional increase of 0.375% one year later. The PWIIT Warehouse Line has an advance rate of 90%. Additionally, the PWIIT Warehouse Line bears a monthly unused commitment fee of 0.50% per annum on the undrawn portion available under the PWIIT Warehouse Line.

The PWIIT Warehouse Agreement contains certain covenants applicable to PWIIT, including restrictions on PWIIT’s ability to incur indebtedness, pledge assets, merge or consolidate, and enter into certain affiliate transactions. The PWIIT 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 March 31, 2019, Prosper was in compliance with the covenants under the PWIIT Warehouse Agreement.

As of March 31, 2019, Prosper had no debt outstanding under the PWIIT Warehouse Line. At March 31, 2019 the undrawn portion available under the PWIIT Warehouse Line was $300 million. Prosper incurred $2.1 million of capitalized debt issuance costs, which will be recognized as interest expense through March 28, 2023.

12. Net Loss Per Share

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

Basic and diluted net loss per share was calculated as follows:

	Three Months Ended March 31,
	2019		2018
Numerator:
Net loss available to common stockholders for basic    and diluted EPS	$	(22,714)	$	(11,401)
Denominator:
Weighted average shares used in computing basic and diluted net loss per share	70,487,006		70,302,910
Basic and diluted net loss per share	$	(0.32)	$	(0.16)

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 March 31,
	2019	2018
	(shares)	(shares)
Excluded securities:
Convertible preferred stock issued and outstanding	214,637,925	214,637,925
Stock options issued and outstanding	70,384,625	60,695,848
Unvested stock options exercised	—	6,875
Restricted stock units	—	2,371
Warrants issued and outstanding	1,080,349	1,081,630
Series E-1 convertible preferred stock warrants	35,544,141	35,544,141
Series F convertible preferred stock warrants	177,720,704	177,720,704
Total common stock equivalents excluded from diluted    net loss per common share computation	499,367,744	489,689,494

13. 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.

The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of March 31, 2019 are disclosed in the table below (amounts in thousands except share and per share amounts):

Convertible Preferred Stock	Par Value		Authorized Shares	Outstanding and Issued Shares	Liquidation Preference (Outstanding Shares)
Series A	$	0.01	68,558,220	68,558,220	$	19,774
Series A-1	0.01		24,760,915	24,760,915	49,522
Series B	0.01		35,775,880	35,775,880	21,581
Series C	0.01		24,404,770	24,404,770	70,075
Series D	0.01		23,888,640	23,888,640	165,000
Series E-1	0.01		35,544,141	—	—
Series E-2	0.01		16,858,078	—	—
Series F	0.01		177,720,707	3	—
Series G	0.01		37,249,497	37,249,497	50,000
			444,760,848	214,637,925	$	375,952

Dividends

Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights. To date, no dividends have been declared on any of the PMI’s preferred stock or common stock.

Conversion

Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an initial public offering that values Prosper at least at $2 billion and that

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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 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.

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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 March 31, 2019, Prosper recognized $2.1 million of expense 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 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  Series E-1 Warrants utilizing the following assumptions as of the following dates:

	March 31, 2019	December 31, 2018
Volatility	40%	40%
Risk-free interest rate	2.34%	2.62%
Remaining contractual term (in years)	7.80 years	8.04 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 March 31, 2019, Prosper recognized $7.9 million of income from the re-measurement of the fair value of the warrants. The income is

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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 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 Series F Warrants utilizing the following assumptions as of the following dates:

	March 31, 2019	December 31, 2018
Volatility	40%	40%
Risk-free interest rate	2.34%	2.63%
Remaining contractual term (in years)	7.91 years	8.16 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 the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.

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

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

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

The combined activity of the Convertible Preferred Stock Warrant Liability for the three months ended March 31, 2019 is as follows (in thousands):

	Warrant Activity
Balance at January 1, 2019	$	143,679
Warrants Vested	9,747
Change in Fair Value	10,058
Balance at March 31, 2019	$	163,484

Common Stock

PMI, through its Amended and Restated Certificate of Incorporation, is the sole issuer of common stock and related options, restricted stock units ("RSUs") and warrants. On February 16, 2016, PMI amended and restated its Certificate of Incorporation to, among other things, effect a 5-for-1 forward stock split. On September 20, 2017, PMI further amended its Amended and Restated Certificate of Incorporation to increase the number of shares of common stock authorized for issuance. The total number of shares of stock which PMI has the authority to issue is 1,069,760,848, consisting of 625,000,000 shares of common stock, $0.01 par value per share, and 444,760,848 shares of preferred stock, $0.01 par value per share. As of March 31, 2019, 71,427,230 shares of common stock were issued and 70,491,295 shares of common stock were outstanding. As of December 31, 2018, 71,411,145 shares of common stock were issued and 70,475,210 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held. 

Common Stock Issued upon Exercise of Stock Options

During the three months ended March 31, 2019, PMI issued 16,085 shares of common stock upon the exercise of vested options for cash proceeds of $4 thousand.

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14. 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, Amendment No. 2 and Amendment No. 3, which were approved by PMI's stockholders effective as of February 15, 2016, May 31, 2016, and September 5, 2018 respectively (as amended, the "2015 Plan"). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms.

As of March 31, 2019, up to 95,183,821 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.

At March 31, 2019, there were 26,049,250 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 was $0.1 million in the three months ended March 31, 2019 and $0.2 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 0.6 years.

Early Exercised Stock Options

The balance of stock options that were early exercised under the 2005 Plan as of March 31, 2019 is not material.

Stock Option Activity

Stock option activity under the 2005 Plan and 2015 Plan is summarized for the three months ended March 31, 2019 below:

	Options Issued and Outstanding	Weighted- Average Exercise Price
Balance as of January 1, 2019	71,021,698	$	0.33
Options exercised – vested	(16,085)	0.22
Options forfeited	(947,722)	0.50
Balance as of March 31, 2019	70,057,891	$	0.33
Options vested and expected to vest as of March 31, 2019	57,912,921	0.33
Options vested and exercisable at March 31, 2019	42,422,280	0.26

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Other Information Regarding Stock Options

Additional information regarding common stock options outstanding as of March 31, 2019 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	4,156,140	4.79	$	0.11	4,156,140	$	0.11
	0.21 - 0.50	45,150,406	4.81	0.25		31,434,389	0.22
	0.51 - 1.13	20,751,345	8.85	0.54		6,831,751	0.54
$	0.02 - 1.13	70,057,891	7.94	$	0.33	42,422,280	$	0.26

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

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

No option awards were granted during the three months ended March 31, 2019 and March 31, 2018.

Restricted Stock Unit Activity

During the three months ended March 31, 2019, PMI did not grant any RSUs to employees. In previous reporting periods, PMI granted certain employees RSUs that are subject to three-year or four-year vesting terms and the occurrence of a liquidity event.

The following table summarizes the number of PMI’s outstanding RSUs and their weighted-average grant date fair value during the three months ended March 31, 2019:

	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested - January 1, 2019	4,856,141	$	0.96
Forfeited	(10,000)	2.18
Unvested - March 31, 2019	4,846,141	$	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 months ended March 31, 2019 and March 31, 2018 (in thousands):

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	Three Months Ended March 31,
	2019		2018
Origination and servicing	$	196	$	216
Sales and marketing	83		107
General and administrative	1,335		2,008
Total stock based compensation	$	1,614	$	2,331

During the three months ended March 31, 2019 and March 31, 2018, Prosper capitalized $0.1 million and $0.1 million, respectively, of stock-based compensation as internal use software and website development costs. As of March 31, 2019, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to Prosper’s employees’ unvested stock-based awards was approximately $5.7 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.0 years.

15. Income Taxes

For the three months ended March 31, 2019 and March 31, 2018, Prosper recognized $29 thousand and $10 thousand of income tax expense, respectively. The income tax expense relates to state income tax expense and the amortization of tax deductible goodwill which gives rise to an indefinite-lived deferred tax liability. No other income tax expense or benefit was recorded for the three month periods ended March 31, 2019 and March 31, 2018 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. The obligation to offer for purchase minimum monthly volumes of eligible loans and the related vesting is scheduled to end on May 31, 2019.  

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 Warrants 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 previously issued rebates were settled by an issuance of vested Series F Convertible Preferred Stock Warrants. The difference in fair value of these warrants over the cash settlement price is recorded in "Change in Fair Value of Convertible Preferred Stock Warrants" on the condensed consolidated statement of operations.

The following represents the loans purchased and warrants vested under the Consortium Purchase Agreement:

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	Loans Acquired (in thousands)		Warrants Vested
Balance as of December 31, 2018	$	3,067,332	154,912,980
Three Months Ended March 31, 2019	88,295		12,692,879
Balance as of March 31, 2019	$	3,155,627	167,605,859

In addition to the $3.2 billion above, warrants vested on signing of the Consortium Purchase Agreement were issued to settle certain rebates on $0.3 billion of whole loan purchases by members of the Consortium prior to the signing of the Consortium Purchase Agreement. This $0.3 billion also reduces the up to $5.0 billion aggregate amount under the Consortium Purchase Agreement.

17. Leases

Prosper has operating leases for corporate offices and datacenters. Our leases have remaining lease terms of one year to eight years. Rental expense under operating lease arrangements was $1.3 million and $1.1 million for the three months ended March 31, 2019 and March 31, 2018, respectively. Additionally, Prosper subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income from operating lease arrangements was $0.3 million for the three months ended March 31, 2019.

Operating lease right-of-use ("ROU") assets

The following represents the operating lease right-of-use assets as of March 31, 2019 were as follows:

	March 31, 2019
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
ROU Assets - Office buildings	$	15,846	$	752	$	15,094
ROU Assets - Other	292		57		$	235
Total right-of-use assets subject to amortization	$	16,138	$	809	$	15,329

Lease Liabilities

Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows (in thousands):

	Minimum Lease Payments
Remainder of 2019	3,960
2020	5,240
2021	5,134
2022	5,018
2023	1,567
Thereafter	2,546
Total future minimum lease payments	$	23,465
Less imputed interest	(2,860)
Total	$	20,605

The table below presents future minimum rental payments at December 31, 2018, net of minimum sublease rentals of $5.3 million, for the remaining terms of the operating leases (in thousands):

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2019	4,536
2020	4,683
2021	4,456
2022	4,319
2023	847
Thereafter	387
Total future operating lease obligations	$	19,228

Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. Other information related to leases was as follows ($ in thousands):

	March 31, 2019
Cash paid for operating leases	$	1,720
Right of use assets obtained in exchange for new operating lease obligations (1)	$	21,630
Weighted Average Remaining Lease Term	4.72 years
Weighted Average Discount Rate	5.53		%

(1) Consists of $21.6 million for operating leases existing on January 1, 2019.

18. 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 March 31, 2019 is $1.3 million. The minimum fee is $1.7 million for the years 2020 and 2021, and $0.1 million for the year 2022.

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 March 31, 2019, Prosper was in compliance with the covenant.

Loan Purchase Commitments

Prosper has entered into an agreement with WebBank to purchase $29.9 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended March 31, 2019 and the first business day of the quarter ending June 30, 2019. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending June 30, 2019.

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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. 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 March 31, 2019 is $3.3 billion. Prosper has accrued $0.8 million and $0.9 million as of March 31, 2019 and December 31, 2018, 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 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to Note investors. The Company was advised by the SEC that it was investigating whether violations of federal securities laws had occurred in connection with the error. On April 19, 2019, the SEC accepted an offer of settlement from PFL to resolve the matter. Under the settlement, the SEC alleged a violation of Section 17(a)(2) of the Securities Act and ordered PFL to cease and desist from any future violations of that provision. PFL neither admitted nor denied any wrongdoing, and agreed to pay a civil monetary penalty of $3.0 million. The SEC credited PFL’s prompt remedial acts in response to the error and the Company’s cooperation with the SEC staff during the investigation. 

The penalty of $3.0 million has been accrued as of March 31, 2019 in Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheet and in Other Expenses, Net on the Consolidated Statement of Operations. This penalty was paid in full in April 2019.

19. 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 months ended March 31, 2019 and March 31, 2018, as well as the Notes and Borrower Loans outstanding as of March 31, 2019 and December 31, 2018 are summarized below (in thousands):

	Aggregate Amount of Notes and Borrower Loans Purchased Three Months Ended March 31,				Interest Earned on Notes and Borrower Loans Three Months Ended March 31,
Related Party	2019		2018		2019		2018
Executive officers and management	$	6	$	11	$	1	$	1
Directors (excluding executive officers and management)	109		101		12		11
Total	$	115	$	112	$	13	$	12

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	Notes balance as of
Related Party	March 31, 2019		December 31, 2018
Executive officers and management	$	33	$	32
Directors (excluding executive officers and management)	586		569
	$	619	$	601

20. 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 three months ended March 31, 2019, two parties purchased 15% and 14% of such loans, respectively. This compares to 45% for the largest purchasing party for the three months ended March 31, 2018. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, through which 93% and 93% of Borrower Loans were originated in the three months ended March 31, 2019 and March 31, 2018, 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)

	March 31, 2019		December 31, 2018
Assets
Cash and Cash Equivalents	$	13,216	$	11,163
Restricted Cash	123,305		136,018
Borrower Loans Receivable at Fair Value	259,899		263,522
Related Party Receivable	174		—
Property and Equipment, Net	6,272		6,426
Servicing Assets	15,174		15,550
Other Assets	428		323
Total Assets	$	418,468	$	433,002
Liabilities and Member’s Equity
Accounts Payable and Accrued Liabilities	$	5,342	$	4,690
Payable to Related Party	—		1,283
Payable to Investors	117,526		127,253
Notes at Fair Value	258,722		264,003
Other Liabilities	4,342		4,528
Total Liabilities	385,932		401,757
Member's Equity
Member's Equity	24,904		24,904
Retained Earnings	7,632		6,341
Total Member's Equity	$	32,536	$	31,245
Total Liabilities and Member's Equity	$	418,468	$	433,002

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

39

Prosper Funding LLC

Condensed Consolidated Statements of Operations (Unaudited)

(amounts in thousands)

	Three Months Ended March 31,
	2019		2018
Revenues
Operating Revenues
Administration Fee Revenue - Related Party	$	16,975	$	23,783
Servicing Fees, Net	6,645		6,812
Gain (Loss) on Sale of Borrower Loans	(6,827)		(11,574)
Other Revenue	57		63
Total Operating Revenues	16,850		19,084
Interest Income on Borrower Loans	10,331		10,951
Interest Expense on Notes	(9,649)		(10,211)
Net Interest Income	682		740
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net	(87)		(109)
Total Net Revenue	17,445		19,715
Expenses
Administration Fee - Related Party	14,991		17,887
Servicing	1,067		1,814
General and Administrative	96		183
Total Expenses	16,154		19,884
Total Net Income (Loss)	$	1,291	$	(169)

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

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Prosper Funding LLC

Condensed Consolidated Statements of Member’s Equity

(amounts in thousands)

	Member’s Equity		Retained Earnings (Accumulated Deficit)		Total
Balance as of January 1, 2018	$	24,904	$	5,462	$	30,366
Net Income	$	—	$	(169)	$	(169)
Balance as of March 31, 2018	$	24,904	$	5,293	$	30,197
Balance as of January 1, 2019	$	24,904	$	6,341	$	31,245
Net Income	$	—	$	1,291	$	1,291
Balance as of March 31, 2019	$	24,904	$	7,632	$	32,536

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

41

Prosper Funding LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(amounts in thousands)

	Three Months Ended March 31,
	2019		2018
Cash Flows from Operating Activities:
Net Income (Loss)	$	1,291	$	(169)
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	87		109
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes	(516)		(411)
Gain on Sale of Borrower Loans	(2,966)		(3,695)
Change in Fair Value of Servicing Rights	3,337		3,253
Depreciation and Amortization	1,097		1,578
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value	(490,855)		(595,199)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value	490,855		595,207
Other Assets	(105)		(53)
Accounts Payable and Accrued Liabilities	(2,348)		194
Payable to Investors	(9,727)		18,745
Net Related Party Receivable/Payable	(802)		1,055
Other Liabilities	2,819		345
Net Cash (Used in) Provided by Operating Activities	(7,833)		20,959
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value	(44,223)		(46,276)
Principal Payment of Borrower Loans Held at Fair Value	42,172		46,023
Purchases of Property and Equipment	(1,598)		(499)
Net Cash Used in Investing Activities	(3,649)		(752)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value	44,939		46,225
Payments of Notes Held at Fair Value	(44,117)		(47,102)
Net Cash (Used in) Provided by Financing Activities	822		(877)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash	(10,660)		19,330
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period	147,181		148,315
Cash, Cash Equivalents and Restricted Cash at End of the Period	$	136,521	$	167,645
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	10,250	$	10,758
Non-Cash Investing Activity - Accrual for Property and Equipment, Net	$	446	(163)

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

42

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. PAH was dissolved on November 28, 2018. As a result, references to Prosper Funding do not include PAH for periods subsequent to the year ended December 31, 2018.

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, 2018. The balance sheet at December 31, 2018 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 three months ended March 31, 2019 and March 31, 2018.

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, 2018. There have been no changes to these accounting policies during the first three months of 2019.

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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	March 31, 2019		December 31, 2018		March 31, 2018		December 31, 2017
Cash and Cash Equivalents	$	13,216	11,163		$	9,978	$	8,223
Restricted Cash	123,305		136,018		157,667		140,092
Total Cash, Cash Equivalents and Restricted Cash show in the consolidated statements of cash flows	$	136,521	$	147,181	$	167,645	$	148,315

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

No accounting standards were adopted in the current period for Prosper Funding LLC.

Accounting Standards Issued, To Be Adopted By The Company In Future Periods

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 Funding is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

3. Property and Equipment

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

	March 31, 2019		December 31, 2018
Property and equipment:
Internal-use software and web site development costs	$	23,395	$	22,505
Less accumulated depreciation and amortization	(17,123)		(16,079)
Total property and equipment, net	$	6,272	$	6,426

Depreciation expense for the three months ended March 31, 2019 and March 31, 2018 was $1.1 million and $1.6 million, respectively.

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4. Borrower Loans and Notes Held at Fair Value

The aggregate principal balances outstanding and fair values of Borrower Loans and Notes as of March 31, 2019 and December 31, 2018, are presented in the following table (in thousands):

	Borrower Loans				Notes
	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Aggregate principal balance outstanding	$	264,362	$	269,093	$	(265,961)	$	(272,430)
Fair value adjustments	(4,463)		(5,571)		7,239		8,427
Fair value	$	259,899	$	263,522	$	(258,722)	$	(264,003)

At March 31, 2019, 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 March 2024. At December 31, 2018, outstanding Borrower Loans had original maturities of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and had various maturity dates through December 2023.

Within the change in fair value of Borrower Loans, Prosper Funding recorded a loss of approximately $0.2 million that is attributable to changes in the credit risks related to Borrower Loans during the three months ended March 31, 2019.

As of March 31, 2019, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.4 million and a fair value of $0.9 million. As of December 31, 2018, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.5 million and a fair value of $1.1 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of March 31, 2019 and December 31, 2018, Borrower Loans in non-accrual status had a fair value of $0.2 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 $6.8 million and $11.6 million for the three months ended March 31, 2019 and March 31, 2018, respectively.

As of March 31, 2019, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.6 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 March 2024. At December 31, 2018, 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 2023.

$10.8 million and $10.6 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended March 31, 2019 and March 31, 2018, respectively.

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.

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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 three months ended March 31, 2019 and March 31, 2018. 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.

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.

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

March 31, 2019	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	259,899	$	259,899
Servicing Assets	—		—		15,174		15,174
Total Assets	—		—		275,073		275,073
Liabilities:
Notes	$	—	$	—	$	258,722	$	258,722
Servicing Liabilities	—		—		7		7
Loan Trailing Fee Liability	—		—		3,084		3,084
Total Liabilities	$	—	$	—	$	261,813	$	261,813

December 31, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	263,522	$	263,522
Servicing Assets	—		—		15,550		15,550
Total Assets	—		—		279,072		279,072
Liabilities:
Notes	$	—	$	—	$	264,003	$	264,003
Servicing Liabilities	—		—		12		12
Loan Trailing Fee Liability	—		—		3,118		3,118
Total Liabilities	$	—	$	—	$	267,133	$	267,133

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 March 31, 2019 and December 31, 2018: 

Borrower Loans, Loans Held for Sale and Notes:

	Range
Unobservable Input	March 31, 2019	December 31, 2018
Discount rate	4.8% - 12.9%	4.7% - 13.8%
Default rate	1.9% - 16.4%	2.0% - 15.8%

Servicing Assets and Liabilities:

	Range
Unobservable Input	March 31, 2019		December 31, 2018
Discount rate	15.0% - 25.0%		15.0% - 25.0%
Default rate	1.5% - 17.4%		1.6% - 16.7%
Prepayment rate	16.0% - 25.9%		15.5% - 25.1%
Market servicing rate	0.625	%	0.625	%

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Loan Trailing Fee Liability:

	Range
Unobservable Input	March 31, 2019	December 31, 2018
Discount rate	15.0% - 25.0%	15.0% - 25.0%
Default rate	1.5% - 17.4%	1.6% - 16.7%
Prepayment rate	16.0% - 25.9%	15.5% - 25.1%

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, 2019	$	263,522	$	(264,003)	$	—	$	(481)
Originations	44,223		(44,939)		490,855		490,139
Principal repayments	(41,198)		44,117		—		2,919
Borrower Loans sold to third parties	(974)		—		(490,855)		(491,829)
Other changes	(85)		601		—		516
Change in fair value	(5,589)		5,502		—		(87)
Balance at March 31, 2019	$	259,899	$	(258,722)	$	—	$	1,177

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	46,276		(46,225)		595,199		595,250
Principal repayments	(44,957)		47,102		(8)		2,137
Borrower Loans sold to third parties	(1,066)		—		(595,199)		(596,265)
Other changes	(136)		547		—		411
Change in fair value	(7,538)		7,429		—		(109)
Balance at March 31, 2018	$	285,584	$	(285,095)	$	41	$	530

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

	Servicing Assets
Fair Value at January 1, 2019	15,550
Additions	2,966
Less: Changes in fair value	(3,342)
Fair Value at March 31, 2019	15,174

	Servicing Assets
Fair Value at January 1, 2018	14,598
Additions	3,695
Less: Changes in fair value	(3,270)
Fair Value at March 31, 2018	15,023

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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):

	Loan Trailing Fee Liability
Fair Value at January 1, 2019	3,118
Issuances	566
Cash payment of Loan Trailing Fee	(658)
Change in fair value	58
Fair Value at March 31, 2019	3,084

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at March 31, 2019 for Borrower Loans, Loans Held for Sale and Notes funded are presented in the following table (in thousands, except percentages):

	Borrower Loans				Notes
Fair Value at March 31, 2019	$	259,899			$	258,722
Discount rate assumption:	7.97		%	*	7.97		%	*
Resulting fair value from:
100 basis point increase	$	257,437			$	252,907
200 basis point increase	255,033				250,542
Resulting fair value from:
100 basis point decrease	$	262,422			$	257,813
200 basis point decrease	265,009				260,358
Default rate assumption:	12.68		%	*	12.68		%	*
Resulting fair value from:
100 basis point increase	$	256,777			$	252,246
200 basis point increase	253,735				249,243
Resulting fair value from:
100 basis point decrease	$	263,089			$	258,479
200 basis point decrease	266,290				261,640

* Represents weighted average assumptions considering all credit grades.

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The following table presents the estimated impact on Prosper Funding’s estimated fair value of servicing assets, calculated using different market servicing rates and different default rates as of March 31, 2019 (in thousands, except percentages).

	Servicing Assets
Fair Value at March 31, 2019	$	15,174
Market servicing rate assumptions	0.625		%
Resulting fair value from:
Market servicing rate increase to 0.65%	14,242
Market servicing rate decrease to 0.60%	16,105
Weighted average prepayment assumptions	20.41		%
Resulting fair value from:
Applying a 1.1 multiplier to prepayment rate	14,992
Applying a 0.9 multiplier to prepayment rate	15,358
Weighted average default assumptions	12.17		%
Resulting fair value from:
Applying a 1.1 multiplier to default rate	14,999
Applying a 0.9 multiplier to default rate	15,352

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 March 31, 2019 is $1.3 million. The minimum fee is $1.7 million for the years 2020 and 2021, and the minimum fee is $0.1 million for the year 2022. Additionally, under the agreement with WebBank, Prosper is required to maintain minimum net liquidity of $15 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 March 31, 2019, the Company was in compliance with the covenant.

Loan Purchase Commitments

Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase $29.9 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended March 31, 2019 and first business day of the quarter ending June 30, 2019. Prosper Funding will purchase these Borrower Loans within the first three business days of the quarter ending June 30, 2019.

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

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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 as of March 31, 2019 is $3.6 billion. Prosper Funding had accrued $0.8 million and $0.9 million as of March 31, 2019 and December 31, 2018, 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 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to Note investors. The Company was advised by the SEC that it was investigating whether violations of federal securities laws had occurred in connection with the error. On April 19, 2019, the SEC accepted an offer of settlement from PFL to resolve the matter. Under the settlement, the SEC alleged a violation of Section 17(a)(2) of the Securities Act and ordered PFL to cease and desist from any future violations of that provision. PFL neither admitted nor denied any wrongdoing, and agreed to pay a civil monetary penalty of $3 million. The SEC credited PFL’s prompt remedial acts in response to the error and the Company’s cooperation with the SEC staff during the investigation.

The proposed penalty of $3.0 million has been accrued as of March 31, 2019 in Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheet and in Other Expenses, Net on the Consolidated Statement of Operations. This penalty was paid in full in April 2019.

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 March 31, 2019 and December 31, 2018 are summarized below (in thousands):

	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	2019		2018		2019		2018
Executive officers and management	$	6	$	11	$	1	$	1
Directors (excluding executive officers and management)	—		—		—		—
Total	$	6	$	11	$	1	$	1

	Note and Borrower Loan Balance as of
Related Party	March 31, 2019		December 31, 2018
Executive officers and management	$	33	$	32
Directors  (excluding executive officers and management)	—		—
	$	33	$	32

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2018.

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, 2018, our marketplace facilitated $2.8 billion in Borrower Loan originations, of which $2.7 billion were funded through our Whole Loan Channel, representing 94% of the total Borrower Loans originated through our marketplace during this period. From inception through March 31, 2019, our marketplace facilitated $14.6 billion in Borrower Loan originations, of which $13.0 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 March 31, 2019, our marketplace facilitated $598 million in Borrower Loan originations, a decrease of 20% from the same period in 2018.

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 March 31,
	2019		2018
Loan Originations	$	598,197	$	744,127
Transaction Fees, Net	26,294		31,354
Whole Loans Outstanding (1)	3,649,839		3,746,979
Servicing Fees, Net	6,202		7,184
Total Net Revenue	30,077		30,450
Core Revenue (2)	39,824		45,729
Net Loss	(22,714)		(11,401)
Adjusted EBITDA (2)	357		4,520

(1) Balance as of March 31.

(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 months ended March 31, 2019 and 2018 (in thousands, except percentages): 

	Three Months Ended March 31,
	2019		2018		$ Change	% Change
Total Net Revenue	$	30,077	$	30,450	(373)	(1)	%
Total Expenses	52,762		41,841		10,921	26	%
Net Loss Before Taxes	(22,685)		(11,391)		(11,294)	99	%
Income Tax Expense	29		10		19	190	%
Net Loss	$	(22,714)	$	(11,401)	(11,313)	99	%

Total net revenue for the three months ended March 31, 2019 decreased $0.4 million, or 1%, when compared to the three months ended March 31, 2018, primarily due to fewer Borrower Loan originations, which decreased 20% on a dollar basis in light of credit tightening actions and borrower rate increases to meet investor return expectations. This was offset by a decrease in the fair value of warrants vested on the sale of borrower loans due to fewer warrants vesting during the period. Total expenses for the three months ended March 31, 2019 increased $10.9 million, a 26% increase from the three months ended March 31, 2018, primarily due to an increase in the fair value of the preferred stock warrant liability of $10.1 million in the three months ended March 31, 2019 compared to a $4.6 million decrease in the three months ended March 31, 2018. Net loss for the three months ended March 31, 2019 increased $11.3 million, primarily due to the increase in expenses explained above.

Origination Volume

From inception through March 31, 2019, a total of 1,138,922 Borrower Loans totaling $14.6 billion were originated through Prosper’s marketplace.

During the quarter ended March 31, 2019, 43,133 Borrower Loans totaling $598.2 million were originated through Prosper’s marketplace, compared to 53,009 Borrower Loans totaling $744.1 million during the quarter ended March 31, 2018. This represented a decrease of 19% in terms of the number of loans and a 20% decrease in the dollar amount of loans. The origination decrease experienced during the quarter ended March 31, 2019 versus the quarter ended March 31, 2018 was due to the impact of credit tightening actions and borrower rate increases to meet investor return expectations.

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

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	Three Months Ended March 31,
	2019				2018
	Amount		%		Amount		%
AA	$	83.7	14	%	$	96.4	13	%
A	143.6		24	%	130.8		18	%
B	161.1		27	%	178.5		24	%
C	138.7		23	%	204.1		27	%
D	52.6		9	%	89.3		12	%
E	13.8		2	%	36.7		5	%
HR	4.7		1	%	8.3		1	%
Total	$	598.2			$	744.1

During the three and three months ended March 31, 2019, the mix of originations on the Prosper platform was relatively lower risk when compared to the three months ended March 31, 2018, as Prosper tightened its credit underwriting to reduce borrower defaults across its platform after March 31, 2018.

Revenue

The following tables summarize Prosper’s revenue for the three months ended March 31, 2019 and 2018 (in thousands, except percentages):

	Three Months Ended March 31,
	2019		2018		$ Change	% Change
Operating Revenues
Transaction Fees, Net	$	26,294	$	31,354	(5,060)	(16)	%
Servicing Fees, Net	6,202		7,184		(982)	(14)	%
Gain (Loss) on Sale of Borrower Loans	2,697		3,350		(653)	(19)	%
Fair Value of Warrants Vested on the Sale of Borrower Loans	(9,747)		(15,279)		5,532	(36)	%
Other Revenue	1,036		1,352		(316)	(23)	%
Total Operating Revenues	26,482		27,961		(1,479)	(5)	%
Interest Income
Interest Income on Borrower Loans	18,428		12,360		6,068	49	%
Interest Expense on Notes and Warehouse Line	(13,120)		(10,729)		(2,391)	22	%
Net Interest Income	5,308		1,631		3,677	225	%
Change in Fair Value of Financial Instruments, Net	(1,713)		858		(2,571)	(300)	%
Total Net Revenue	30,077		30,450		(373)	(1)	%

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 March 31, 2019, which was offset by a higher average transaction fee, which was 4.40% and 4.21% of the principal amount of originated loans facilitated through Prosper’s marketplace for the three months ended March 31, 2019 and 2018, respectively. The increase in the average transaction fee was due to an increase to the transaction fee rate for certain Prosper ratings that was effective in the second quarter of 2018 that impacted a portion of the loans originated on the platform during the three months ended March 31, 2019.

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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 decrease in servicing fees during the three months ended March 31, 2019 was due to a decrease in the overall whole loan balance as compared to the three months ended March 31, 2018.

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 March 31, 2019 was due to a decrease in loans being originated through the platform as described above.

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 $5.5 million for the three months ended March 31, 2019 is primarily due to fewer warrants vesting and a lower per warrant value of the warrants that vested during the three months ended March 31, 2019.

Other Revenue

Other Revenue consists 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 change for three months ended March 31, 2019 was not significant.

Interest Income on Borrower Loans and Interest Expense on Notes, Certificates Issued by Securitization Trust and Warehouse Lines

Prosper recognizes interest income on Borrower Loans 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 months ended March 31, 2019 was due to the net interest earned on the Borrower Loans purchased by Prosper with funding from the Warehouse Line and the securitization completed during the three months ended March 31, 2019.

Change in Fair Value of Financial Instruments, Net

Prosper records the fair value of Borrower Loans, Loans Held for Sale, Notes and Certificates Issued by Securitization Trust at fair value. Fair value 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. 

For the three months ended March 31, 2019, the change in fair value of Financial Instruments, Net moved to a loss as a result of an increase in the balances of Loans Held for Sale and Borrower Loans and the related chargeoffs that are incurred by holding such loans.

Expenses

The following tables summarize Prosper’s expenses for the three months ended March 31, 2019 and 2018 (in thousands):

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	Three Months Ended March 31,
	2019		2018		$ Change		% Change
Expenses
Origination and Servicing	$	8,161	$	8,821	(660)		(7)	%
Sales and Marketing	16,341		18,828		(2,487)		(13)	%
General and Administrative - Research and Development	4,456		4,268		188		4	%
General and Administrative - Other	14,312		14,447		(135)		(1)	%
Change in Fair Value of Convertible Preferred Stock Warrants	10,058		(4,604)		14,662		(318)	%
Restructuring Charges	82		323		(241)		(75)	%
Other Expenses (Income), Net	(648)		(242)		(406)		168	%
Total Expenses	$	52,762	$	41,841	$	10,921	26	%

As of March 31, 2019, Prosper had 416 full-time employees compared to 385 full-time employees as of March 31, 2018. The following table reflects full-time employees as of March 31, 2019 and 2018 by department:

	March 31, 2019	March 31, 2018
Origination and Servicing	163	166
Sales and Marketing	17	12
General and Administrative - Research and Development	97	87
General and Administrative - Other	139	120
Total Headcount	416	385

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 March 31, 2019 was due to a $0.4 million decrease in amortization for internal use software and a $0.5 million decrease in outsourced services.

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 March 31, 2019, the decrease was driven by a $5.6 million or 52% decrease in direct mailing costs as Prosper decreased the volume of its direct mail campaigns. The decrease was offset by a $2.4 million, or 49%, increase in partnership costs as Prosper significantly increased partnership activities.  

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 March 31, 2019 was due to a $0.2 million increase in outside contractors. Prosper capitalized internal-use software and website development costs in the amount of $2.1 million and $1.1 million for the three months ended March 31, 2019 and 2018, 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 March 31, 2019 was not significant.

Changes in the Fair Value of Convertible Preferred Stock Warrants

Changes in the Fair Value of Convertible Preferred Stock Warrants moved to a loss in the three months ended March 31, 2019 due to a increase in the fair value of the underlying convertible preferred stock.

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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 three months ended March 31, 2019 and 2018, the expenses relate to adjustments to the existing liabilities.

Other Expenses (Income)

Other Expenses (Income) includes interest income. The increase for the three months ended March 31, 2019 was not significant.

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 May 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 March 31,
	2019		2018
Total Net Revenue	$	30,077	$	30,450
Less: Fair Value of Warrants Vested on Sale of Borrower Loans	(9,747)		(15,279)
Core Revenue	$	39,824	$	45,729

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):

	Three Months Ended March 31,
	2019		2018
Net Loss	$	(22,714)	$	(11,401)
Fair Value of Warrants Vested on Sale of Borrower Loans	9,747		15,279
Depreciation expense:
Servicing and Origination	1,146		1,578
General & Administration - Other	654		1,136
Amortization of Intangibles	70		112
Stock-Based Compensation	1,614		2,331
Restructuring Charges	82		323
Change in the Fair Value of Warrants	10,058		(4,604)
Interest Income on Available for Sale Securities, Cash and Cash Equivalents	(329)		(244)
Income Tax Expense	29		10
Adjusted EBITDA	$	357	$	4,520

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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 March 31,
	2019		2018
Origination and servicing	196		216
Sales and marketing	83		107
General and administrative	1,335		2,008
Total stock based compensation	$	1,614	$	2,331

Liquidity and Capital Resources

We currently anticipate that our available funds, Warehouse Lines, 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 three months ended March 31, 2019 and 2018 (in thousands):

	Three Months Ended March 31,
	2019		2018
Net Loss	$	(22,714)	$	(11,401)
Net cash provided by (used in) by operating activities	(31,622)		(60,833)
Net cash (used in) provided by investing activities	16,110		3,885
Net cash provided by financing activities	21,439		69,859
Net increase in cash, cash equivalents and restricted cash	5,927		12,911
Cash, cash equivalents and restricted cash at the beginning of the period	207,059		198,463
Cash, cash equivalents and restricted cash at the end of the period	$	212,986	$	211,374

Cash, cash equivalents and restricted cash ("net cash") increased for the three months ended March 31, 2019 primarily due to the $31.8 million provided by the Warehouse Line and $3.9 million of net income, net of non-cash items and net maturity of $18.0 million in available for sale securities. This is offset by the $9.9 million in less cash held on the platform by investors that is classified as restricted cash, the $25.3 million of net purchases of borrower loans by Prosper and the $2.8 million of purchases of property and equipment. Net cash provided by financing activities primarily represents proceeds from the Warehouse Lines, the issuance and payments of Notes and payments related to the securitization.

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

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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 Operations—Critical Accounting Estimates" in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes to these critical accounting estimates during the first three months of 2019.

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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, 2018.

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. 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 months ended March 31, 2019 and 2018 (in thousands, except percentages):

	Three Months Ended March 31,
	2019		2018		$ Change		% Change
Total Net Revenue	$	17,445	$	19,715	$	(2,270)	(12)	%
Total Expenses	16,154		19,884		(3,730)		(19)	%
Net Income (Loss)	$	1,291	$	(169)	$	1,460	(864)	%

Total net revenue for the three months ended March 31, 2019 decreased $2.3 million, a 12% decrease from the three months ended March 31, 2018, 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 March 31, 2019 decreased $3.7 million, a 19% decrease from the three months ended March 31, 2018, primarily due to lower corporate administration fees related to the origination driven portion during the current quarter.

Revenue

The following tables summarize Prosper Funding’s revenue for the three months ended March 31, 2019 and 2018 (in thousands, except percentages):

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	Three Months Ended March 31,
	2019		2018		$ Change	% Change
Revenues
Operating Revenues
Administration Fee Revenue - Related Party	$	16,975	$	23,783	(6,808)	(29)	%
Servicing Fees, Net	6,645		6,812		(167)	(2)	%
Gain (Loss) on Sale of Borrower Loans	(6,827)		(11,574)		4,747	(41)	%
Other Revenue	57		63		(6)	(10)	%
Total Operating Revenues	16,850		19,084		(2,234)	(12)	%
Interest Income on Borrower Loans	10,331		10,951		(620)	(6)	%
Interest Expense on Notes	(9,649)		(10,211)		562	(6)	%
Net Interest Income	682		740		(58)	(8)	%
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net	(87)		(109)		22	(20)	%
Total Net Revenue	$	17,445	$	19,715	(2,270)	(12)	%

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. The Administration Agreement requires PMI to pay PFL a monthly license fee that is partially based on the number of loan listings posted on the marketplace in that month, as well as a rebates fee based on rebates given to investors as an incentive to purchase Borrower Loans from PFL. The decrease in revenue for the three months ended March 31, 2019 was the result of a decrease in license fees owing to fewer loan listings being generated on the marketplace during that period, as well as a decrease in the rebate fee due to a decrease in the rebates given under the Consortium 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 decreases in servicing fees were due to a lower outstanding Borrower Loan balance in the servicing pool.

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 March 31, 2019 decreased $4.7 million due to a $6.1 million decrease in rebates primarily due 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.

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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 three month periods ended March 31, 2019 and 2018, respectively (in thousands):

	Three Months Ended March 31,
	2019		2018
Borrower Loans	$	(5,589)	$	(7,538)
Loans Held for Sale	—		—
Notes	5,502		7,429
Total	$	(87)	$	(109)

Expenses

The following tables summarize Prosper Funding’s expenses for the three month period ended March 31, 2019 and 2018 (in thousands, except percentages):

	Three Months Ended March 31,
	2019		2018		$ Change	% Change
Expenses
Administration Fee Expense – Related Party	$	14,991	$	17,887	(2,896)	(16)	%
Servicing	1,067		1,814		(747)	(41)	%
General and Administrative	96		183		(87)	(48)	%
Total Expenses	$	16,154	$	19,884	(3,730)	(19)	%

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, PFL 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 PFL, and all nonsufficient funds fees collected by or on behalf of Prosper Funding.  The decrease in fees for the three months ended March 31, 2019 was due to the decreased origination volume of 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 March 31, 2019 was primarily due to a decrease in amortization of internal use software.  

General and Administrative

General and Administrative costs consist primarily of bank service charges and professional fees. The decrease for the three months ended March 31, 2019 was not significant.

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.

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The following table summarizes Prosper Funding’s cash flow activities for the three months ended March 31, 2019 and 2018 (in thousands):

	Three Months Ended March 31,
	2019		2018
Net Income	$	1,291	$	(169)
Net cash provided by (used in) operating activities	(7,833)		$	20,959
Net cash used in investing activities	(3,649)		(752)
Net cash (used in) provided by financing activities	822		(877)
Net increase (decrease) in cash, cash equivalents and restricted cash	(10,660)		19,330
Cash, cash equivalents and restricted cash at the beginning of the period	147,181		148,315
Cash, cash equivalents and restricted cash at the end of the period	$	136,521	$	167,645

The net decrease in cash, cash equivalents and restricted cash for the three months ended March 31, 2019, is primarily due to the net $9.7 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 March 31, 2019 and 2018. 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 March 31, 2019, 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 Risk

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 Lines 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 $106.6 million as of March 31, 2019.

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.

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The Company is also exposed to variable interest rate risk under the debt from the PWIT Warehouse Line, which had an outstanding balance of $93.6 million as of March 31, 2019. 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 $64.2 million as of March 31, 2019, and $57.9 million as of December 31, 2018. 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 moderately reduce interest income on these cash and cash equivalents. Increases in short-term interest rates will moderately increase the interest income earned on the cash and cash equivalents.  

Interest Rate Sensitivity

Prosper holds available for sale investments. The fair value of Prosper’s available for sale investment portfolio was $4.3 million and $22.2 million as of March 31, 2019 and December 31, 2018, 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 $14 thousand in the fair value of Prosper’s available for sale investments as of March 31, 2019, and of approximately $40 thousand in the fair value of Prosper’s available for sale investments as of December 31, 2018. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $14 thousand in the fair value of Prosper’s available for sale investments as of March 31, 2019, and of approximately $40 thousand in the fair value of Prosper’s available for sale investments as of December 31, 2018. 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 $106.6 million and $183.8 million as of March 31, 2019 and December 31, 2018, respectively. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $1.0 million in the fair value of Prosper’s investment in Borrower Loans held for sale as of March 31, 2019, and of approximately $1.8 million in the fair value of Prosper’s investment in Borrower Loans held for sale as of December 31, 2018. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $1.0 million in the fair value of Prosper’s investment in Borrower Loans held for sale as of March 31, 2019, and of approximately $1.8 million in the fair value of Prosper’s investment in Borrower Loans held for sale as of December 31, 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 Risk

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 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 $13.2 million as of March 31, 2019, and $11.2 million as of December 31, 2018. These amounts were held in various unrestricted deposits with highly rated financial institutions and short

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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 moderately reduce interest income on these cash and cash equivalents, while increases in short-term interest rates will moderately increase the interest income earned on these cash and cash equivalent 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 March 31, 2019. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of March 31, 2019.

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 March 31, 2019, 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

In April 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to Note investors. The Company was advised by the SEC that it was investigating whether violations of federal securities laws had occurred in connection with the error. On April 19, 2019, the SEC accepted an offer of settlement from PFL to resolve the matter. Under the settlement, the SEC alleged a violation of Section 17(a)(2) of the Securities Act and ordered PFL to cease and desist from any future violations of that provision. PFL neither admitted nor denied any wrongdoing, and agreed to pay a civil monetary penalty of $3.0 million. The SEC credited PFL’s prompt remedial acts in response to the error and the Company’s cooperation with the SEC staff during the investigation.

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, 2018.

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, 2018.

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

We have experienced errors on our platform that have resulted in incorrect reporting of performance returns to Note investors. If we are unable to prevent the reoccurrence of similar errors, investors could be adversely impacted.

In April 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to Note investors, which resulted from errors in the code forming part of our calculation framework. On average, the error resulted in Note investors being shown annualized net return information that was approximately 260 basis points higher than the actual performance of Notes in their accounts. The error did not affect any other part of Note investors’ accounts, nor did it affect any other aspects of the platform, including the receipt and distribution of loan payments, deposits, monthly statements or tax documentation, or the Note and loan level information provided to investors. Following an SEC investigation, the Company and the SEC came to a settlement to resolve the matter on April 19, 2019. Under the settlement, the SEC alleged a negligence-based violation of Section 17(a)(2) of the Securities Act and ordered PFL to cease and desist from any future violations of that provision. PFL neither admitted nor denied any wrongdoing, and agreed to pay a civil monetary penalty of $3.0 million.

The error reveals a risk associated with the complex programs, algorithms and inputs that support our platform. We depend on these programs, algorithms and inputs to store, retrieve, process and manage data, as well as to provide marketplace features such as our credit assessments and underwriting, the Prosper Rating, historical returns, and individual Note, Note portfolio and platform-wide performance data. Errors or other design defects within these programs, algorithms and inputs may result in a negative experience for borrowers and investors, delay introductions of new features or enhancements, or impact the information displayed on our website. They could also result in negative publicity and unfavorable media coverage, harm to our reputation, litigation, regulatory inquiries or proceedings, loss of or damage to our relationships with borrowers or investors, or loss of revenue or liability for damages, any of which could adversely affect our business and financial results.

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 (incorporated by reference to Exhibit 3.2 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on November 14, 2018)
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)
4.6	First Supplemental Indenture, dated May 10, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL's Quarterly Report on Form 10-Q, filed on August 14, 2013)
10.1	Third Amendment to Asset Sale Agreement, dated February 1, 2019, between Prosper Funding LLC and WebBank.
10.2	Third Amendment to Marketing Agreement, dated February 1, 2019, between Prosper Marketplace, Inc. and WebBank. (2)
10.3	First Amendment to Stand By Purchase Agreement, dated February 1, 2019, between Prosper Marketplace, Inc. and WebBank. (2)
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 March 31, 2019 (1)

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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 March 31, 2019 (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 March 31, 2019 (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 March 31, 2019 (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 March 31, 2019 (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 March 31, 2019 (1)
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.
(2)	Confidential treatment has been granted to certain portions of this Exhibit, which portions have been omitted and filed separately with the Commission.

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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
May 10, 2019	/s/ David Kimball
	David Kimball
	Chief Executive Officer of Prosper Marketplace, Inc.
	Chief Executive Officer and President of Prosper Funding LLC
	(Principal Executive Officer)
May 10, 2019	/s/ Usama Ashraf
	Usama Ashraf
	Chief Financial Officer of Prosper Marketplace, Inc.
	Chief Financial Officer and Treasurer of Prosper Funding LLC
	(Principal Financial Officer)

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