prosper-10q_20150630.htm

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

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

As of August 7, 2015, there were 14,191,968 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.

Except as the context requires otherwise, as used herein, “we,” “us,” “our,” and “Registrants” refer to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “Prosper” refers to PMI and its wholly owned subsidiaries, PFL and Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis. In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” Further, investor members currently invest in Borrower Loans through two channels: (i) the “Note Channel”, which allows investor members to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel”, which allows accredited and institutional investors to purchase Borrower Loans in their entirety directly from PFL. Finally, although historically we have referred to investor members as “lender members”, we call them “investor members” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace.

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:

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, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of our Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

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

	June 30, 2015			December 31, 2014
Assets
Cash and Cash Equivalents	$	173,303		$	50,557
Restricted Cash		147,283			81,300
Short Term Investments		1,275			1,274
Accounts Receivable		1,343			3,152
Loans Held for Sale, at Fair Value		1,431			8,463
Borrower Loans, at Fair Value		284,200			273,243
Property and Equipment, Net		18,048			14,424
Prepaid and Other Assets		14,560			7,745
Goodwill		16,825			-
Intangibles Assets, Net		3,182			-
Total Assets	$	661,450		$	440,158
Liabilities, Convertible Preferred Stock and Stockholders' Deficit
Accounts Payable and Accrued Liabilities	$	21,561		$	17,239
Payable to Investors		135,045			64,494
Class Action Settlement Liability		5,903			7,861
Notes at Fair Value		284,628			273,783
Repurchase Liability for Unvested Restricted Stock Awards		808			1,010
Total Liabilities		447,945			364,387
Commitments and Contingencies (see Note 11)
Convertible Preferred Stock – $0.01 par value; 35,477,685 shares authorized; 35,477,685 issued and outstanding as of June 30, 2015; 32,155,022 shares authorized; 30,699,957 issued and outstanding as of December 31, 2014. Aggregate liquidation preference of $325,952 as of June 30, 2015 and $160,952 as of December 31, 2014.		275,938			111,145
Stockholders' Deficit
Common Stock ($0.01 par value; 54,065,215 shares authorized; 14,975,613 issued and 14,008,239 outstanding as of June 30, 2015; and 47,928,883 shares authorized; 14,448,700 issued and 14,261,513 outstanding as of December 31, 2014)		117			102
Additional Paid-In Capital		93,415			86,340
Less: Treasury Stock		(21,549	)		(303	)
Accumulated Deficit		(134,416	)		(121,513	)
Total Stockholders' Deficit		(62,433	)		(35,374	)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit	$	661,450		$	440,158

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014 (As Restated)*			2015			2014 (As Restated)*
Revenue
Operating Revenue
Transaction Fees, Net	$	39,800		$	15,980		$	65,142		$	24,344
Servicing Fees, Net		3,575			697			6,144			1,112
Other Revenue		5,326			717			8,303			1,161
Total Operating Revenue		48,701			17,394			79,589			26,617
Interest Income
Interest Income on Borrower Loans		10,165			10,436			20,634			20,371
Interest Expense on Notes		(9,448	)		(9,564	)		(19,011	)		(18,987	)
Net Interest Income		717			872			1,623			1,384
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net		95			27			21			271
Total Net Revenue		49,513			18,293			81,233			28,272
Expenses
Origination and Servicing		7,126			2,814			13,982			5,105
Sales and Marketing		26,580			9,392			45,150			15,826
General and Administrative		21,832			5,373			35,329			9,345
Total Expenses		55,538			17,579			94,461			30,276
Net Income (Loss) Before Taxes		(6,025	)		714			(13,228	)		(2,004	)
Income Tax Expense		176			-			249			-
Net Income (Loss)	$	(6,201	)	$	714		$	(13,477	)	$	(2,004	)
Less: Net Income Allocated to Participating Securities		-			(533	)		-			-
Net Income (Loss) Attributable to Common Stockholders	$	(6,201	)	$	181		$	(13,477	)	$	(2,004	)
Net Income (Loss) Per Share – Basic	$	(0.56	)	$	0.02		$	(1.24	)	$	(0.24	)
Net Income (Loss) Per Share –Diluted	$	(0.56	)	$	0.01		$	(1.24	)	$	(0.24	)
Weighted-Average Shares - Basic		11,122,497			8,617,887			10,833,635			8,337,853
Weighted-Average Shares - Diluted		11,122,497			16,437,323			10,833,635			8,337,853

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

	Six Months Ended June 30,
	2015			2014 (As Restated)*
Cash flows from Operating Activities:
Net Loss	$	(13,477	)	$	(2,004	)
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		(21	)		(271	)
Depreciation and Amortization		3,455			791
Change in Servicing Rights		(3,962	)		(974	)
Stock-Based Compensation Expense		4,192			490
Loss on Impairment of Property and Equipment		-			215
Other, Net		45			63
Purchase of Loans Held for Sale at Fair Value		(1,402,499	)		(475,934	)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value		1,409,426			471,151
Changes in Operating Assets and Liabilities:
Restricted Cash Except for those Related to Investing Activities		(63,254	)		(20,347	)
Accounts Receivable		1,956			(164	)
Prepaid and Other Assets		(2,235	)		(2,134	)
Accounts Payable and Accrued Liabilities		2,754			3,469
Class Action Settlement Liability		(2,000	)		(2,000	)
Payable to Investors		70,551			17,550
Net Cash Provided by (Used in) Operating Activities		4,931			(10,099	)
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value		(94,512	)		(86,796	)
Principal Payments of Borrower Loans Held at Fair Value		73,457			57,811
Purchases of Property and Equipment		(6,412	)		(1,672	)
Maturities of Short Term Investments		1,274			1,271
Purchases of Short Term Investments		(1,275	)		(1,274	)
Acquisition of Business, Net of Cash Acquired		(19,000	)		-
Changes in Restricted Cash Related to Investing Activities		(2,729	)		(218	)
Net Cash Used in Investing Activities		(49,197	)		(30,878	)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value		94,575			86,678
Payment of Notes Held at Fair Value		(73,509	)		(57,575	)
Proceeds from Issuance of Convertible Preferred Stock, Net		164,793			69,958
Proceeds from Early Exercise of Stock Options and Issuance of Restricted Stock		1,669			277
Proceeds from Exercise of Vested Stock Options and Common Stock Warrants		734			114
Repurchase of Common Stock and Restricted Stock		(21,250	)		(12	)
Net Cash Provided by Financing Activities		167,012			99,440
Net Increase in Cash and Cash Equivalents		122,746			58,463
Cash and Cash Equivalents at Beginning of the Period		50,557			18,339
Cash and Cash Equivalents at End of the Period	$	173,303		$	76,802
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	19,147		$	19,075
Non-Cash Investing Activity-Accrual for Property and Equipment, Net	$	26		$	80
Non-Cash Investing Activity-Amount Payable for the Acquisition of Business	$	840		$	—

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

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 Rule 8-03 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, 2014. The balance sheet at December 31, 2014 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 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 and six months ended June 30, 2015 and 2014.

The preparation of Prosper’s condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in Prosper’s financial statements and accompanying notes. Prosper 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.

The accompanying interim condensed consolidated financial statements include the accounts of PMI and its wholly-owned subsidiaries, PFL and PHL. All intercompany balances have been eliminated in consolidation.

On January 23, 2015, Prosper acquired all of the outstanding limited liability company units of American HealthCare Lending, LLC (“AHL”), a company that operated a cloud-based patient financing platform, and merged AHL with and into PHL, with PHL surviving the merger. Prosper’s condensed consolidated financial statements include PHL's results of operations and financial position from this date forward (see Note 6 – American HealthCare Lending Acquisition).

During the year ended December 31, 2014, Prosper changed the presentation of its revenue in the consolidated statements of operations. A new line called “Servicing fees” was created and the servicing fees related to Borrower Loans sold through Prosper’s Whole Loan Channel that were previously included in interest income were reclassified to this new line. Furthermore, the “Rebates and Promotions” line was removed, with the amounts in that line reclassified to the “Servicing fees” or “Origination fees” lines based on the underlying transactions. Also, the “Change in Fair Value of Borrower Loans, loans held for sale and Notes, Net” was moved into the “Total revenue” subtotal. Lastly, the subtotals were realigned to reflect the new presentation.

Prosper also changed the definitions used to classify expenses. Expenses were previously classified as cost of services, compensation and benefits, marketing and advertising, depreciation and amortization, professional services, facilities and maintenance, class action settlement, loss on impairment of fixed assets and other. The revised classification approach replaces the previous classifications with origination and servicing, sales and marketing, and general and administration. The changes had no impact to the total expenses or net income. Prior period amounts have been reclassified to conform to the current presentation. Lastly, the subtotals were realigned to reflect the new presentation. Management believes these changes make the income statement more useful for the readers of the financial statements and comparable with Prosper’s competitors.

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, 2014. There have been no changes to these accounting policies during the first six months of 2015 except for the policy related to the subsequent measurement of Loan Servicing Assets and Liabilities.

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.

Borrower Loans, loans held for sale and Notes are recorded at fair value. Prosper has adopted the provisions of ASC Topic 825, Financial Instruments (“ASC Topic 825”). ASC Topic 825 permits companies to 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 reader of the financial statements and it allows both the Borrower Loans, loans held for sale 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.

On January 1, 2015, Prosper elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition. ASC 860-50, Servicing Assets and Liabilities, allows the adoption of the fair value method at the beginning of any fiscal year. The adoption of the fair value method for a particular class is irrevocable. Prior to January 1, 2015, Prosper measured the servicing assets and liabilities using the amortized cost method. This change resulted in a $575 thousand decrease to accumulated deficit, a $546 thousand increase in net servicing assets and a $29 thousand decrease in net servicing liabilities.

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. Early adoption is not permitted. Prosper is currently assessing the potential impact on its financial statements from adopting this new guidance.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management of a company to evaluate whether there is substantial doubt about the company’s ability to continue as a going concern. This ASU is effective for the annual reporting period ending after December 15, 2016, and for interim and annual reporting periods thereafter, with early adoption permitted. Prosper is currently assessing the potential impact on its financial statements from adopting this new guidance.

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity to eliminate the use of different methods in practice and thereby reduce existing diversity in the accounting for hybrid financial instruments issued in the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument. The existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Prosper is currently assessing the potential impact on its financial statements from adopting this new guidance.

In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for periods beginning after December 15, 2015 with early adoption permitted. Prosper has decided to early adopt this guidance effective January 1, 2015, and the adoption of this standard had no impact on Prosper’s financial statements.

In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Cloud Computing Costs”, which will be effective for the annual reporting period ending after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer

would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper is currently assessing the potential impact on its financial statements from adopting this new guidance.

Depreciation expense for the three months ended June 30, 2015 and 2014 was $1,363 thousand and $390 thousand respectively. Prosper capitalized internal-use software and website development costs in the amount of $2,079 thousand and $440 thousand for the three months ended June 30, 2015 and 2014, respectively. Depreciation expense for the six months ended June 30, 2015 and 2014 was $3,117 thousand and $791 thousand respectively. Prosper capitalized internal-use software and website development costs in the amount of $3,935 thousand and $808 thousand for the six months ended June 30, 2015 and 2014, respectively. Prosper recorded internal-use software and website development impairment charges of $0 and $215 thousand for the six months ended June 30, 2015 and 2014 respectively, as a result of its decision to discontinue several software and website development projects. These charges are included in general and administration expenses on the condensed consolidated statement of operations.

The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. The obligation to pay principal and interest on any series of Notes is equal to the loan payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the Notes is approximately equal to the fair value of the Borrower Loans funded through the Note Channel, adjusted for the servicing fee and the timing of borrower payments subsequently disbursed to the Note holders. The effective interest rate associated with a series of Notes will be less than the interest rate earned on the corresponding Borrower Loan due to the servicing fee.

The aggregate principal balances outstanding and fair values of Borrower Loans, loans held for sale and Notes as of June 30, 2015 and December 31, 2014, are presented in the following table (in thousands):

At June 30, 2015, Borrower Loans, loans held for sale and Notes had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through June 2020. At December 31, 2014, Borrower Loans, loans held for sale, and Notes had original maturities either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.77% to 33.04% and had various maturity dates through December 2019.

The following table presents quantitative information about the significant unobservable inputs used for Prosper’s Borrower Loans, loans held for sale and Notes fair value measurements at June 30, 2015 and December 31, 2014:

Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at June 30, 2015 Borrower Loans, loans held for sale and Notes funded through the Note Channel are presented in the following table (in thousands):

	Borrower Loans and Loans Held for Sale			Notes
Discount rate assumption:	4.65		%*	4.65		%*
Resulting fair value from:
100 basis point increase	$	282,480		$	281,481
200 basis point increase		279,414			278,420
Resulting fair value from:
100 basis point decrease	$	288,870		$	287,861
200 basis point decrease		292,199			291,185
Default rate assumption:	12.23		%*	12.23		%*
Resulting fair value from:
200 basis point decrease	$	292,609		$	291,611
100 basis point decrease		289,117			288,116
Resulting fair value from:
100 basis point increase	$	282,159		$	281,152
200 basis point increase		278,769			277,760

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a fixed basis points 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.

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, 2014	$	233,105		$	(234,218	)	$	3,206		$	2,093
Purchase of Borrower Loans/Issuance of Notes		86,796			(86,679	)		475,934			476,051
Principal repayments		(57,811	)		57,575			(130	)		(366	)
Borrower Loans sold to third parties		-			-			(471,022	)		(471,022	)
Other changes		(100	)		89			9			(2	)
Change in fair value		(9,019	)		9,290			-			271
Balance at June 30, 2014	$	252,971		$	(253,943	)	$	7,997		$	7,025

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at January 1, 2015	$	273,243		$	(273,783	)	$	8,463		$	7,923
Purchase of Borrower Loans/Issuance of Notes		94,512			(94,575	)		1,402,499			1,402,436
Principal repayments		(73,457	)		73,509			(543	)		(491	)
Borrower Loans sold to third parties		-			-			(1,408,883	)		(1,408,883	)
Other changes		(130	)		136			(9	)		(3	)
Change in fair value		(9,968	)		10,085			(96	)		21
Balance at June 30, 2015	$	284,200		$	(284,628	)	$	1,431		$	1,003

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at April 1, 2014	$	244,927		$	(245,335	)	$	3,482		$	3,074
Purchase of Borrower Loans/Issuance of Notes		42,529			(42,769	)		325,250			325,010
Principal repayments		(29,479	)		29,273			(112	)		(318	)
Borrower Loans sold to third parties		-			-			(320,633	)		(320,633	)
Other changes		(61	)		(84	)		10			(135	)
Change in fair value		(4,945	)		4,972			-			27
Balance at June 30, 2014	$	252,971		$	(253,943	)	$	7,997		$	7,025

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at April 1, 2015	$	280,404		$	(280,801	)	$	1,599		$	1,202
Purchase of Borrower Loans/Issuance of Notes		46,805			(46,779	)		861,574			861,600
Principal repayments		(37,395	)		37,440			(157	)		(112	)
Borrower Loans sold to third parties		-			-			(861,574	)		(861,574	)
Other changes		(136	)		(71	)		(1	)		(208	)
Change in fair value		(5,478	)		5,583			(10	)		95
Balance at June 30, 2015	$	284,200		$	(284,628	)	$	1,431		$	1,003

Approximately $0.9 million and $2.1 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 and six months ending June 30, 2015, respectively.

As of June 30, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $1.5 million and a fair value of $0.6 million. As of December 31, 2014, Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of $1.7 million and a fair value of $0.6 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of June 30, 2015 and December 31, 2014, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0, respectively.

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 and the servicing rights are retained. Prior to January 1, 2015, the initial fair value of such servicing assets or liabilities was amortized in proportion to and over the servicing period. Subsequent to January 1, 2015, the servicing assets and liabilities are measured at fair value throughout the servicing period. The total gain recognized on the sale of such Borrower Loans was $3.7 million and $0.8 million for the three months ended June 30, 2015 and 2014, respectively. The total gain recognized on the sale of such Borrower Loans was $5.6 million and $1.1 million and for the six months ended June 30, 2015 and 2014, respectively.

As of June 30, 2015, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $2,393 million, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and various maturity dates through June 2020. At December 31, 2014, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $1,306 million, original terms of either 36

or 60 months and had monthly payments with fixed interest rates ranging from 6.05% to 31.34% and various maturity dates through December 2019.

The fair value of the loan servicing assets and liabilities is determined using a discounted cash flow model that includes assumptions of the market servicing rate, the default rate and discount rate as important inputs.

The following table presents quantitative information about the significant unobservable inputs used for Prosper’s servicing asset/liability fair value measurements at June 30, 2015 and December 31, 2014:

The following table presents additional information about Level 3 servicing assets and liabilities measured at fair value for the six months ended June 30, 2015 (in thousands).

The following table presents additional information about Level 3 servicing assets and liabilities measured at fair value for the three months ended June 30, 2015 (in thousands).

The following table presents the estimated impact on Prosper’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of June 30, 2015 (in thousands, except percentages).

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.

On January 23, 2015, Prosper acquired all of the outstanding limited liability company interests of AHL, and merged AHL with and into PHL, with PHL surviving the merger (the “Merger”). Under the terms of the purchase agreement, the sellers of AHL received an aggregate of $20.2 million in cash on the closing date and will receive $0.8 million in cash one year after the closing date subject to general representations and warranties.

PHL operates a cloud-based patient financing company for healthcare providers in the cosmetic, dentistry, bariatric surgery, fertility, plastic surgery and other markets. PHL has relationships with a nationwide network of healthcare providers. These healthcare providers refer individuals who would like to finance medical procedures to the Prosper platform. Prosper has included the financial results of PHL in the condensed consolidated financial statements from the date of acquisition. The amounts of net revenue and loss of PHL included in Prosper’s condensed consolidated statement of operations from the merger date of January 23, 2015 to June 30, 2015 were $1.5 million and $1.6 million, respectively. Prosper recorded acquisition-related expenses of $0 and $0.2 million for the three and six months ended June 30, 2015 respectively, which is included in general and administrative expense.

The preliminary purchase price allocation as of the merger date is as follows (in thousands):

The allocation of the purchase price is preliminary and subject to further adjustment as information relative to closing date balances and related tax balances are finalized.

The goodwill balance is primarily attributed to expected operational synergies and the combined workforce. Goodwill is expected to be deductible for U.S. income tax purposes.

The customer relationship intangible assets are being amortized on an accelerated basis over a 10 year period. The technology and brand name intangible assets are being amortized on a straight line basis over three and one years, respectively. Amortization expense associated with intangible assets for the three and six months ended June 30, 2015 was $242 thousand and $338 thousand respectively.

Prosper valued the customer relationships, technology and brand name assets using the income approach. Significant assumptions include forecasts of revenues, costs of revenues, operating expenses and customer attrition rates for customers.

The weighted average shares used in calculating basic and diluted net income (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.

	Three Months Ended June 30, 2015						Six Months Ended June 30,
	2015			2014			2015			2014
Numerator:
Net Income (loss) (in thousands)	$	(6,201	)	$	714		$	(13,477	)	$	(2,004	)
Less: Net income allocated to participating securities		-			(533	)		-			-
Net Income (loss) available to common stockholders for basic and diluted income (loss) per share (in thousands)	$	(6,201	)	$	181		$	(13,477	)	$	(2,004	)
Denominator:
Weighted average shares used in computing basic net income (loss) per share		11,122,497			8,617,887			10,833,635			8,337,853
Weighted average shares used in computing diluted net income (loss) per share		11,122,497			16,437,323			10,833,635			8,337,853
Basic net income (loss) per share	$	(0.56	)	$	0.02		$	(1.24	)	$	(0.24	)
Diluted net income (loss) per share	$	(0.56	)	$	0.01		$	(1.24	)	$	(0.24	)

The following common stock equivalents were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have been anti-dilutive:

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
	(shares)		(shares)		(shares)		(shares)
Excluded securities:
Convertible preferred stock issued and outstanding		35,477,685		32,155,022		35,477,685		32,155,022
Stock options issued and outstanding		6,982,320		-		6,478,422		3,633,509
Unvested stock options exercised		3,084,604		-		3,084,604		4,959,917
Warrants issued and outstanding		123,467		-		123,467		148,438
Total common stock equivalents excluded from diluted net loss per common share computation		45,668,076		32,155,022		45,164,178		40,896,886

Under Prosper’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.

In April 2015, Prosper issued and sold 4,777,728 shares of new Series D (“New Series D”) convertible preferred stock in a private placement at a purchase price of $34.54 per share for proceeds of approximately $164.8 million, net of issuance costs. The New Series D convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering. The purpose of the New Series D private placement was to raise funds for general corporate needs and for the share repurchase discussed below.

Dividends on shares of the New Series D 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 New Series A, New Series B, New Series C and New Series D convertible preferred stock have been paid or set aside for payment to the New Series A, New Series B, New Series C and New Series D 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. To date, no dividends have been declared on any of Prosper’s preferred stock or common stock, and there are no dividends in arrears at June 30, 2015.

Prosper’s convertible preferred stock has been classified as temporary equity on the accompanying 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 Prosper, holders of convertible preferred stock may have the right to receive such convertible preferred stock’s liquidation preference under the terms of Prosper’s certificate of incorporation.

The New Series D convertible preferred stock is entitled to receive, on a pari passu basis, prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 preferred stock or common stock, an amount per share for each share of New D 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 New Series A, New Series B, New Series C and New Series D 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 New Series A, New Series B, New Series C convertible preferred stock and Series A-1 convertible preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of New Series A convertible preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the New 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 New Series A convertible preferred stock which the holders of New Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the new Series A convertible preferred stock. At present, the liquidation preferences are equal to $1.44 per share for the New Series A convertible preferred stock, $10.00 per share for the Series A-1 convertible preferred stock, $3.02 per share for the New Series B convertible preferred stock, $14.36 per share for the New Series C convertible preferred stock and $34.54 for the New Series D convertible preferred stock.

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 Prosper’s bylaws.

The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of June 30, 2015 are disclosed in the table below (amounts in thousands except share and per share amounts):

Prosper, through its amended and restated certificate of incorporation, is the sole issuer of common stock and related options and warrants. In April 2015, Prosper amended and restated its certificate of incorporation to effect an increase in the number of authorized shares of stock. The total number of shares of stock which Prosper has the authority to issue is 89,542,900, consisting of 54,065,215 shares of common stock, $0.01 par value per share, and 35,477,685 shares of preferred stock, $0.01 par value per share. As of June 30, 2015, 14,975,613 shares of common stock were issued and 14,008,239 shares of common stock were outstanding. As of December 31, 2014, 14,448,700 shares of common stock were issued and 14,261,513 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held.

On June 12, 2015, Prosper repurchased 777,025 shares of common stock from certain employees at a price equal to $34.54 per share for an aggregate purchase price of $26.8 million. As the purchase price exceeded the fair value of common stock at the time of the repurchase, Prosper recognized compensation costs of $5.7 million which is recorded in Origination and Servicing for $0.13 million, Sales and Marketing for $0.04 million and General and Administrative for $5.50 million on the statement of operations. As part of this transaction Prosper repurchased 721,419 shares for a total of $24.9 million from Prosper’s executive officers.

During the six months ended June 30, 2015 Prosper issued 438,795 shares of common stock, upon the exercise of options for cash proceeds of $0.66 million, of which 12,709 shares were unvested. With the approval of Prosper’s board of directors, Prosper allows certain employees and directors to exercise stock options granted under the 2005 Plan prior to vesting. The unvested shares are subject to Prosper’s repurchase right at the original exercise price. Early exercises of options are not deemed to be substantive exercises for accounting purposes and therefore, amounts received for early exercises are initially recorded in repurchase liability for unvested restricted stock awards. Such amounts are reclassified to common stock and additional paid-in capital as the underlying shares vest. At June 30, 2015 and December 31, 2014, there were 3,084,604 and 4,114,269 shares respectively of restricted stock outstanding that remain unvested and subject to Prosper’s right of repurchase.

For the six months ended June 30, 2015, Prosper repurchased 30,341 shares of restricted stock for $4 thousand upon termination of employment of various employees.

For the six months ended June 30, 2015, Prosper issued 35,678 shares of common stock upon the exercise of warrants for aggregate proceeds of $116 thousand.

In 2005, Prosper’s stockholders approved the adoption of the 2005 Stock Plan. In December 2010, Prosper’s stockholders approved the adoption of the Amended and Restated 2005 Stock Plan (the “2005 Plan”). The 2005 Plan expired during the three months ending June 30, 2015 and Prosper’s stockholders approved the adoption of the 2015 Equity Incentive Plan (the “2015 Plan”). As of June 30, 2015 under the 2005 Plan, options to purchase up to 15,195,255 shares of common stock are reserved and may be granted to employees, directors, and consultants by Prosper’s board of directors and stockholders to promote the success of its business. As of June 30, 2015 under the 2015 Plan, options to purchase up to 2,080,323 shares of common stock are reserved and may be granted to employees, directors, and consultants by Prosper’s board of directors and stockholders to promote the success of its business. Options generally vest 25% one year from the vesting commencement date and 1/48^th per month thereafter. In no event are options exercisable more than ten years after the date of grant.

At June 30, 2015, there were 1,633,723 stock options available for grant under the 2015 Plan and zero stock options available for grant under the 2005 Plan.

The activity of options that were early exercised under the 2005 Plan for the six months ended June 30, 2015 is below:

Additional information regarding the unvested early exercised stock options outstanding as of June 30, 2015 is as follows:

Stock option activity under the 2005 Plan and 2015 Plan is summarized for the six months ended June 30, 2015 below:

For the six months ended June 30, 2015, Prosper granted stock options to purchase 2,919,414 shares of common stock with a weighted average grant date fair value of $14.72 per share and an estimated aggregate fair value of approximately $43.0 million.

Additional information regarding common stock options outstanding as of June 30, 2015 is as follows:

		Options Outstanding						Options Vested and Exercisable
				Weighted –		Weighted –				Weighted -
Range of				Avg.		Avg.				Avg.
Exercise		Number		Remaining		Exercise		Number		Exercise
Prices		Outstanding		Life		Price		Vested		Price
$0.10			139,046		8.12	$	0.10		69,939	$	0.10
0.57			2,612,902		8.11		0.57		2,133,049		0.57
1.20			60,889		6.20		1.20		57,470		1.20
1.70			44,491		6.78		1.70		36,427		1.70
2.00			81,724		5.10		2.00		81,724		2.00
5.00			7,000		1.25		5.00		7,000		5.00
5.60			18,250		4.21		5.60		18,250		5.60
5.65			1,077,995		9.21		5.65		70,750		5.65
18.11			2,416,439		9.63		18.11		-		18.11
	27.24		446,600		9.87		27.24		-		27.24
$0.10 - $27.24			6,905,336		8.85	$	7.49		2,474,609	$	0.83

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 its common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of its common stock value, 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 its 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 its preferred stock sold to outside investors; (iii) the

rights, preferences and privileges of its preferred stock relative to its common stock; (iv) the lack of marketability of its common stock; (v) developments in its business; (vi) secondary transactions of its 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.

Prosper also estimates forfeitures of unvested stock options. 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.

As Prosper’s stock is not publicly traded, the expected volatility of its stock price 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 and contractual terms 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. Expected forfeitures are based on Prosper’s historical experience.

The fair value of Prosper’s stock option awards for the three months and six months ended June 30, 2015 and 2014 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:

During the six months ended June 30, 2015, Prosper issued 90,000 shares of restricted stock to employees at a purchase price of $18.11 per share. One third of these shares vest on the annual anniversary date of the grant over the three year term of the agreement.

The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations during the three and six months ended June 30, 2015 and 2014 (in thousands):

During the three months ended June 30, 2015 and 2014, Prosper capitalized $175 thousand and $5 thousand respectively, of stock-based compensation as internal use software and website development costs. During the six months ended June 30, 2015 and 2014, Prosper capitalized $297 thousand and $10 thousand respectively, of stock-based compensation as internal use software and website development costs. As of June 30, 2015, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to Prosper’s employees’ unvested stock-based awards was approximately $34.8 million, which will be recognized over the remaining weighted-average vesting period of approximately 3.3 years.

For the three and six months ended June 30, 2015, Prosper recognized $176 thousand and $249 respectively of income tax expense. The income tax expense relates to state income tax expense and the amortization of goodwill from the Acquisition for tax purposes which gives rise to an indefinite-lived deferred tax liability. No other income tax expense or benefit was recorded for the three and six months ended June 30, 2015 and 2014 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, a full valuation allowance has been recorded to recognize only deferred tax assets that are more likely than not to be realized.

Prosper files U.S. Federal and multiple state tax returns. Prosper is currently not subject to any income tax examinations in any jurisdiction. Due to the Prosper’s losses, generally income tax returns related to all years remain open to examination.

The net amount of unrecognized tax benefits as of June 30, 2015 is $4.9 million related to the uncertainty of whether Prosper will be allowed to utilize certain California NOL carryforwards and R&D credits to offset future taxable income due to Section 382 limitations. Prosper does not expect any material changes in the next 12 months to its unrecognized tax benefits.

Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2014, Prosper identified an error that affected the disclosure of Unrecognized Tax Benefits as of December 31, 2014. The error was the result of presenting a portion of the unrecognized tax benefit gross of the application of the applicable tax rate, which resulted in an overstatement of the amount. The amount of unrecognized tax benefits as of January 1, 2015 has been revised to reflect the correction of the error. All unrecognized tax benefits are netted against deferred tax assets with a full valuation allowance. If these amounts are recognized there will be no effect on Prosper's effective tax rate due to the full valuation allowance.

The following table summarizes Prosper’s activity related to its unrecognized tax benefits (in thousands):

The unrecognized tax benefits would not affect income tax expense if recognized, after consideration of the valuation allowance. Prosper recognizes interest and/or penalties related to uncertain tax positions. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected in the period that such determination is made. The interest and penalties are recognized as other expense in the income statement. Prosper currently has no interest and penalties related to uncertain tax positions.

During 2014, Prosper entered into leases for its new corporate headquarters at 221 Main Street in San Francisco, California and for its co-location facility. These are non-cancelable operating leases that expire in February 2023 and August 2015, respectively. In 2014, Prosper entered into a lease for office space in Phoenix, Arizona under an operating lease that expires in July 2021. In 2015, Prosper entered into a lease for office space in Lehi, Utah under an operating lease that expires in February 2027.

Future minimum rental payments under these leases as of June 30, 2015 are as follows (in thousands):

Rental expense under operating lease arrangements was $0.9 million and $0.2 million for the three months ended June 30, 2015 and 2014, respectively. Rental expense under operating lease arrangements was $1.7 million and $0.3 million for the six months ended June 30, 2015 and 2014, respectively.

Prosper amended and restated its agreement with WebBank, under which all Borrower Loans originated through Prosper’s marketplace are made by WebBank under its bank charter. The arrangement allows for Borrower Loans to be offered to borrowers nationwide on uniform terms. Prosper is required to pay the greater of a monthly minimum fee or a fee calculated based on a certain percentage of monthly Borrower Loan origination volume. The minimum annual fee for the year ended December 31, 2015 is $1.4 million.

Prosper has entered into an agreement with WebBank to purchase $31.2 million of Borrower Loans that WebBank is originating within the first two business days of the three months ended September 30, 2015.

Under the terms of the loan purchase agreements between Prosper and investor members that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor member. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at June 30, 2015 is $2,393 million. Prosper has accrued $281 thousand and $171 thousand as of June 30, 2015 and December 31, 2014, respectively in regard to this obligation.

From inception through October 16, 2008, Prosper sold approximately $178.0 million of Borrower Loans to investor members through its old platform structure, whereby Prosper assigned promissory notes directly to investor members. Prosper did not register the offer and sale of the promissory notes corresponding to these Borrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws. Prosper believes that the question of whether or not the operation of the platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, Prosper would have failed to comply with the registration and qualification requirements of federal and state laws.

Prosper’s decision to restructure the platform and cease sales of promissory notes offered through the platform effective October 16, 2008 limited this contingent liability to the period covering its activities prior to October 16, 2008.

On April 21, 2009, Prosper and the North American Securities Administrators Association (“NASAA”) reached agreement on the terms of a model consent order between Prosper and the states in which it, under its initial platform structure, offered promissory notes for sale directly to investor members prior to November 2008. The consent order involves payment by Prosper of up to an aggregate of $1 million in penalties, which have been allocated among the states based on Prosper’s promissory note sale transaction volume in each state prior to November 2008. A state that enters into a consent order receives its portion of the $1 million in exchange for its agreement to terminate, or refrain from initiating, any investigation of our promissory note sale activities prior to November 2008. Penalties are paid promptly after a state enters into a consent order. NASAA has recommended that each state enter into a consent order; however, no state is obliged to do so, and there is no deadline by which a state must make its decision. Prosper is not required to pay any portion of the penalty to those states that do not elect to enter into a consent order. If a state does not enter into a consent order, it is free to pursue its own remedies against Prosper, subject to any applicable statute of limitations. As of June 30, 2015, Prosper has entered into consent orders with 35 states and has paid an aggregate of $0.48 million in penalties to those states.

As of June 30, 2015 and December 31, 2014, Prosper has accrued approximately $0.23 million and $0.25 million, respectively, in connection with the contingent liability associated with the states that have not entered into consent orders, in accordance with ASC Topic 450, Contingencies. The methodology applied to estimate the accrual was to divide the $1 million maximum fee pro-rata by state, using Prosper’s promissory note sales from inception through November 2008. A weighting was then applied by state to each state that has not entered into a consent order, assigning a likelihood that the penalty will be claimed. In estimating the probability of a claim being made by a state, Prosper considered factors such as the standard terms of the consent orders; whether the state ever gave any indication of concern regarding the sale of promissory notes through the platform; the probability of a state electing not to enter into a consent order in order to pursue its own litigation against Prosper; whether the penalty is sufficient to compensate a state for the cost of processing the settlement consent order; and finally the impact that current economic conditions have had on state governments. Prosper will continue to evaluate this accrual and related assumptions as new information becomes known.

In 2008, plaintiffs filed a class action lawsuit against Prosper and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation agreed to enter into a settlement to resolve all claims related thereto (the “Settlement”). In connection with the Settlement, Prosper agreed to pay

an aggregate amount of $10 million into a settlement fund, split into four annual installments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order and judgment entered by the Superior Court on April 16, 2014. Pursuant to the final order and judgment, the claims in the class action were dismissed, and the defendants were released by the plaintiffs from all claims that were or could have been asserted concerning the issues alleged in the class action lawsuit. The reserve for the class action settlement liability is $5.9 million in the condensed consolidated balance sheet as of June 30, 2015.

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. The aggregate amount of the Notes purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the three and six months ended June 30, 2015 and 2014, as well as the Notes outstanding as of June 30, 2015 and December 31, 2014 are summarized below (in thousands):

Prosper has earned approximately $5 thousand and $2 thousand in servicing fee revenue related to these Notes for the three months ended June 30, 2015 and 2014, respectively. Prosper has earned approximately $9 thousand and $8 thousand in servicing fee revenue related to these Notes for the six months ended June 30, 2015 and 2014, respectively.

Prosper has a 401(k) plan that covers all employees meeting certain eligibility requirements. The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may defer eligible compensation up to the annual maximum as determined by the Internal Revenue Service. Prosper’s contributions to the 401(k) plan are discretionary. During the three months ended June 30, 2015 and 2014, Prosper has contributed $0.4 million and $0.2 million to the 401 (k) plan. During the six months ended June 30, 2015 and 2014, Prosper has contributed $0.8 million and $0.2 million to the 401 (k) plan.

Prosper’s chief operating decision maker, which is its executive group, reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The chief operating decision maker does

not review any financial information that is at a lower level than the overall Prosper results. As such, Prosper has a single reporting segment and operating unit structure.

Subsequent to the issuance of the condensed consolidated financial statements for the three and six months ended June 30, 2014, Prosper identified errors that affected the interim condensed financial statements as of and for the three and six months ended June 30, 2014. Financial statements presented herein have been restated to correct for these errors that are described below and summarized in the tables that follow.

Prosper discovered that certain fees that Prosper pays to WebBank were incorrectly classified as expenses. Since WebBank is a customer of Prosper and Prosper earns transaction fees from WebBank any cash consideration paid to WebBank should be recorded as a reduction of the Transaction Fees earned by Prosper. This resulted in an overstatement of Transaction Fee revenues and Origination and Servicing expenses of $700 thousand and $1,089 thousand for the three and six months ended June 30, 2014, respectively.

Prosper also discovered that certain rebates offered on the sale of Borrower Loans and Notes were incorrectly classified as Transaction Fee revenue and should have been classified as Other Revenue or Change in Fair value of Borrower Loans, Loans Held for Sale and Notes. This resulted in an understatement of Transaction Fee revenues of $428 thousand, an overstatement of Other Revenues of $392 thousand and an overstatement of Change in Fair Values of Borrower Loans, Loans Held for Sale and Notes of $36 thousand for the three months ended June 30, 2014. This resulted in an understatement of Transaction Fee revenues of $660 thousand, an overstatement of Other Revenues of $580 thousand and an overstatement of Change in Fair Values of Borrower Loans, Loans Held for Sale and Notes of $80 thousand for the six months ended June 30, 2014.

Additionally, Prosper discovered certain errors in its valuation of servicing assets and liabilities which resulted in an overstatement of net loan servicing rights and an understatement of the gain recognized on the sale of Borrower Loans which was included in Other Revenues of $946 thousand and $926 thousand for the three and six months ended June 30, 2015, respectively. Also, we discovered errors in our amortization of the servicing assets and liabilities which understated Servicing Income by $600 thousand and $951 thousand for the three and six months ending June 30, 2014, respectively.

Prosper also discovered errors related to internal use software and web site development costs including an impairment that was not recorded when the project was abandoned in the prior year and assets were being amortized over a time period that exceeded their useful life which understated amortization included in Origination and Servicing expense for $9 thousand and $51 thousand for the three and six months ended June 30, 2014, respectively.

In addition to the restatements described above, Prosper has made other corrections, some of which were previously identified, but were not corrected because management had determined they were not material, individually or in the aggregate, to our consolidated financial statements. These corrections related to the fair value of loans held for investment, reclassification of certain loans from loans held for investment to Borrower Loans, amortization of prepaid assets, estimation of various accruals and a correction for vesting of options that were early exercised.

Prosper also discovered the following classification errors within its Condensed Consolidated Statement of Cash Flows:

Lastly, Prosper corrected its calculation of basic and diluted earnings (loss) per share for the changes to net income (loss) and errors in the calculation of the weighted average basic and diluted shares which was overstated by 456,484 shares for the six months ended June 30, 2014. For the three months ended June 30, 2014 as a result of the corrections described above the net loss moved to net income; in addition, because the Convertible Preferred Stock participates in any earnings income allocated to participating securities, the amount was understated by $533 thousand. Further the weighted average shares for basic and diluted earnings per share were overstated by 537,312 shares and understated by 7,282,124 shares, respectively.

The following tables present the impact of these corrections and corrections of other immaterial errors on three and six months ended June 30, 2014 ($ in thousands):

Condensed Consolidated Statement of Operations – Three months ended June 30, 2014

	As previously reported			Reclassifications*			As reclassified			Adjustments			As corrected
Revenue
Operating Revenue
Transaction Fees, Net	$	16,448		$	(429	)	$	16,019		$	(39	)	$	15,980
Rebates and Promotions		(639	)		639			-			-			-
Servicing Fees, Net		-			83			83			614			697
Other Revenue		269			-			269			448			717
Total Operating Revenue		16,078			293			16,371			1,023			17,394
Interest Income on Borrower Loans		10,702			(293	)		10,409			27			10,436
Interest Expense on Notes		(9,494	)					(9,494	)		(70	)		(9,564	)
Net Interest Income		1,208			(293	)		915			(43	)		872
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net		91			-			91			(64	)		27
Total Net Revenue		17,377			-			17,377			916			18,293
Cost of Revenue
Cost of Services		(767	)		767			-			-			-
Provision for repurchase and indemnification obligation		(54	)		54			-			-			-
		(821	)		821			-			-			-
Expenses
Compensation and benefits		5,277			(5,277	)		-			-			-
Marketing and advertising		9,040			(9,040	)		-			-			-
Depreciation and amortization		380			(380	)		-			-			-
Professional services		364			(364	)		-			-			-
Facilities and maintenance		621			(621	)		-			-
Loss on impairment		-			-			-			-			-
Other		877			(877	)		-			-			-
Origination and Servicing		-			2,773			2,773			41			2,814
Sales and Marketing		-			9,392			9,392			-			9,392
General and Administrative		-			5,215			5,215			158			5,373
Total Expenses		16,559			821			17,380			199			17,579
Other income		-			-			-			-			-
Total Net Income	$	(3	)	$	-		$	(3	)	$	717		$	714

Condensed Consolidated Statement of Operations – Six months ended June 30, 2014

	As previously reported			Reclassifications*			As reclassified			Adjustments			As corrected
Revenue
Operating Revenue
Transaction Fees, Net	$	25,149		$	(660	)		24,489		$	(145	)	$	24,344
Rebates and Promotions		(999	)		999			-			-			-
Servicing Fees, Net		-			182			182			930			1,112
Other Revenue		965			-			965			196			1,161
Total Operating Revenue		25,115			521			25,636			981			26,617
Interest Income on Borrower Loans		20,812			(522	)		20,290			81			20,371
Interest Expense on Notes		(18,763	)					(18,763	)		(224	)		(18,987	)
Net Interest Income		2,049			(522	)		1,527			(143	)		1,384
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net		389			-			389			(118	)		271
Total Net Revenue		27,553			(1	)		27,552			720			28,272
Cost of Revenue
Cost of Services		(1,293	)		1,293			-			-			-
Provision for repurchase and indemnification obligation		(116	)		116			-			-			-
		(1,409	)		1,409			-			-			-
Expenses
Compensation and benefits		9,219			(9,219	)		-			-			-
Marketing and advertising		15,026			(15,026	)		-			-			-
Depreciation and amortization		743			(743	)		-			-			-
Professional services		541			(541	)		-			-			-
Facilities and maintenance		1,066			(1,066	)		-			-
Loss on impairment		215			(215	)		-			-			-
Other		1,503			(1,503	)		-			-			-
Origination and Servicing		-			4,904			4,904			201			5,105
Sales and Marketing		-			15,816			15,816			10			15,826
General and Administrative		-			9,001			9,001			344			9,345
Total Expenses		28,313			1,408			29,721			555			30,276
Other income		-			-			-			-			-
Total Net Income	$	(2,169	)	$	-		$	(2,169	)	$	165		$	(2,004	)

Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2014

	As previously
	reported			Adjustments			As corrected
Cash flows from operating activities:
Net Loss	$	(2,169	)	$	165		$	(2,004	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities:
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes		-			(271	)		(271	)
Change in Fair Value of Notes		(1,350	)		1,350			-
Change in Fair Value of Borrower Loans Receivable		958			(958	)		-
Change in Fair Value of Loans Held for Sale		3			(3	)		-
Other, Net		-			63			63
Depreciation and Amortization		743			48			791
Stock-Based Compensation		500			(10	)		490
Loss on Impairment of Property and Equipment		215			-			215
Change in Servicing Rights		-			(974	)		(974	)
Purchase of loans held for sale at fair value		-			(475,934	)		(475,934	)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value		-			471,151			471,151
Changes in Operating Assets and Liabilities:					-
Restricted Cash		(2,473	)		(17,874	)		(20,347	)
Accounts Receivable		(11	)		(153	)		(164	)
Prepaid and Other Assets		(2,162	)		28			(2,134	)
Accounts Payable and Accrued Liabilities		3,776			(307	)		3,469
Repurchase liability for unvested stock awards		-			-			-
Payable to Investors		-			17,550			17,550
Class Action Settlement Liability		(2,000	)		-			(2,000	)
Net Cash Used in Operating Activities		(3,970	)		(6,129	)		(10,099	)
Cash Flows From Investing Activities:
Purchase of Borrower Loans Receivable Held at Fair Value		(330,464	)		243,668			(86,796	)
Principal Payment of Borrower Loans Receivable Held at Fair Value		65,648			(7,837	)		57,811
Proceeds from Sale of Borrower Loans Receivable Held at Fair Value		243,235			(243,235	)		-
Repayment of Loans Held for Investment at Fair Value		312			(312	)		-
Origination of Loans Held for Investment at Fair Value		(111,927	)		111,927			-
Proceeds from sale of Borrower Loans at Fair Value		105,986			(105,986	)		-
Purchases of Property and Equipment		(1,762	)		90			(1,672	)
Maturities of Short Term Investments		-			1,271			1,271
Purchases of Short Investments		-			(1,274	)		(1,274	)
Changes in Restricted Cash Related to Investing Activities		-			(218	)		(218	)
Net Cash Used in Investing Activities		(28,972	)		(1,906	)		(30,878	)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value		86,713			(35	)		86,678
Payment of Notes Held at Fair Value		(65,646	)		8,071			(57,575	)
Proceeds from Issuance of Convertible Preferred Stock, net		69,958			-			69,958
Proceeds from Early Exercise of Stock Options		276			1			277
Proceeds from Exercise of Vested Stock Options and Common Stock Warrants		31			83			114
Proceeds from the Exercise of Warrants		85			(85	)		-
Repurchase of Restricted Stock		(12	)		-			(12	)
Net Cash Provided by Financing Activities	$	91,405		$	8,035		$	99,440
Net Decrease in Cash and Cash Equivalents		58,463			-			58,463
Cash and Cash Equivalents at Beginning of the Period		18,339			-			18,339
Cash and Cash Equivalents at End of the Period	$	76,802		$	-		$	76,802

	June 30, 2015		December 31, 2014
Assets
Cash and Cash Equivalents	$	11,568	$	23,777
Restricted Cash		138,218		73,103
Short Term Investments		1,275		1,274
Loans Held for Sale at Fair Value		1,431		8,463
Borrower Loans at Fair Value		284,200		273,243
Property and Equipment, Net		5,796		1,125
Related Party Receivable		-		1,135
Other Assets		7,652		3,120
Total Assets	$	450,140	$	385,240
Liabilities and Member’s Equity
Accounts Payable and Accrued Liabilities	$	1,741	$	1,357
Payable to Related Party		252		-
Payable to Investors		133,495		63,809
Notes at Fair Value		284,628		273,783
Total Liabilities		420,116		338,949
Member's Equity
Member's Equity		2,370		29,619
Retained Earnings		27,654		16,672
Total Member's Equity		30,024	$	46,291
Total Liabilities and Member's Equity	$	450,140	$	385,240

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014 as Restated*			2015			2014 as Restated*
Revenue
Operating Revenue
Administration Fee Revenue - Related Party	$	14,213		$	6,898		$	23,886		$	10,951
Servicing Income, Net		3,272			703			5,536			1,126
Other Revenue		3,696			679			5,596			977
Total Operating Revenue		21,181			8,280			35,018			13,054
Interest Income on Borrower Loans		10,209			10,544			20,723			20,512
Interest Expense on Notes		(9,448	)		(9,564	)		(19,011	)		(18,986	)
Net Interest Income		761			980			1,712			1,526
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net		94			27			21			352
Total Net Revenue		22,036			9,287			36,751			14,932
Expenses
Administration Fee - Related Party		14,085			5,536			23,380			9,031
Servicing		899			358			2,271			755
General and Administration		282			81			546			186
Total Expenses		15,266			5,975			26,197			9,972
Total Net Income	$	6,770		$	3,312		$	10,554		$	4,960

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

	Six Months Ended June 30,
	2015			2014 As Restated*
Cash Flows from Operating Activities:
Net Income	$	10,554		$	4,960
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		(21	)		(352	)
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes		2			2
Change in Servicing Rights		(4,357	)		(998	)
Depreciation and Amortization		1,896			539
Purchase of Loans Held for Sale at Fair Value		(1,402,499	)		(475,934	)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value		1,409,426			471,151
Changes in Operating Assets and Liabilities:
Restricted Cash Except for those Related to Investing Activities		(62,390	)		(19,943	)
Other Assets		(14	)		4
Accounts Payable and Accrued Liabilities		402			527
Payable to Investors		69,686			16,995
Net Related Party Receivable/Payable		1,387			(249	)
Net Cash Provided by Operating Activities		24,072			(3,298	)
Cash flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value		(94,512	)		(86,715	)
Principal Payments of Borrower Loans Held at Fair Value		73,457			57,811
Maturities of Short Term Investments		1,274			1,271
Purchase of Short Term Investments		(1,275	)		(1,274	)
Purchases of Property and Equipment		(6,567	)		(553	)
Changes in Restricted Cash Related to Investing Activities		(2,725	)		(121	)
Net Cash Used in Investing Activities		(30,348	)		(29,581	)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value		94,576			86,679
Payment of Notes Held at Fair Value		(73,509	)		(57,575	)
Net Cash Included in Transfer of Assets to Parent		(27,000	)		-
Net Cash (Used By) Provided by Financing Activities		(5,933	)		29,104
Net (Decrease) Increase in Cash and Cash Equivalents		(12,209	)		(3,775	)
Cash and Cash Equivalents at Beginning of the Period		23,777			5,789
Cash and Cash Equivalents at End of the Period	$	11,568		$	2,014
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	19,147		$	19,075
Non-Cash Financing Activity - Distribution to Parent	$	249		$	342

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

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 and six months ended June 30, 2015 and 2014.

The preparation of Prosper Funding's condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Prosper Funding based 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.

During the year ended December 31, 2014, Prosper Funding changed the presentation of its revenue in the statement of operations. A new line called “Servicing Fees, Net” was created and the servicing fees related to Borrower Loans sold through its Whole Loan Channel that were previously included in interest income were reclassified to this new line. Also, the “Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net” was moved into the total revenue subtotal.

Prosper Funding also changed the definitions used to classify expenses. Expenses were previously classified as cost of services, administration fee, depreciation and amortization, professional services and other operating expenses. The revised classification approach replaces the previous classifications with servicing, administration fee –related party, and general and administration. The changes had no impact to the total expenses or net income. Prior period amounts have been reclassified to conform to the current presentation. Prosper Funding believes these changes make the income statement more useful for the readers of the financial statements and comparable with Prosper Funding’s competitors.

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, 2014. There have been no changes to these accounting policies during the first six months of 2015 except for the policy related to the subsequent measurement of Loan Servicing Assets and Liabilities.

Borrower Loans, loans held for sale and Notes are recorded at fair value. Prosper Funding has adopted the provisions of ASC Topic 825, Financial Instruments (“ASC Topic 825”). ASC Topic 825 permits companies to 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 reader of the financial statements and it allows both the Borrower Loans, loans held for sale 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.

On January 1, 2015, Prosper Funding elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities, subsequent to initial recognition. ASC 860, Servicing Assets and Liabilities allows the adoption of the fair value method at the beginning of any fiscal year. The adoption of the fair value method for a particular class is irrevocable. Prior to January 1, 2015, Prosper Funding measured the servicing assets and liabilities using the amortized cost method. This change resulted in a $428 thousand increase to retained earnings, a $399 thousand increase in net servicing assets and a $29 thousand decrease in net servicing liabilities.

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper Funding in the first quarter of fiscal 2018. Early adoption is not permitted. Prosper Funding is currently assessing the potential impact on its financial statements from adopting this new guidance.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management of a company to evaluate whether there is substantial doubt about Prosper Funding’s ability to continue as a going concern. This ASU is effective for the annual reporting period ending after December 15, 2016, and for interim and annual reporting periods thereafter, with early adoption permitted. Prosper Funding is currently assessing the potential impact on its financial statements from adopting this new guidance.

In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for periods beginning after December 15, 2015 with early adoption permitted. Prosper Funding has decided to early adopt this guidance effective January 1, 2015, and the adoption of this standard had no impact on Prosper Funding’s financial statements.

Depreciation expense for the three months ended June 30, 2015 and 2014 was $676 thousand and $262 thousand, respectively. Depreciation expense for the six months ended June 30, 2015 and 2014 was $1,896 thousand and $539 thousand, respectively

The fair value of the Borrower Loans, loans held for sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, loans held for sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. The obligation to pay principal and interest on any series of Notes is equal to the loan payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the Notes is

approximately equal to the fair value of the Borrower Loans funded through the Note Channel, adjusted for the servicing fee and the timing of borrower payments subsequently disbursed to the Note holders. The effective interest rate associated with a series of Notes will be less than the interest rate earned on the corresponding Borrower Loan due to the servicing fee.

At June 30, 2015, Borrower Loans, loans held for sale and Notes had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through June 2020. At December 31, 2014, Borrower Loans, Notes and loans held for sale had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.77% to 33.04% and had various maturity dates through December 2019.

The following table presents quantitative information about the significant unobservable inputs used for Prosper Funding’s Borrower Loans, loans held for sale and Notes fair value measurements at June 30, 2015 and December 31, 2014:

Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at June 30, 2015 for Borrower Loans, loans held for sale and Notes funded are presented in the following table (in thousands):

	Borrower Loans and Loans Held for Sale			Notes
Discount rate assumption:	4.65		%*	4.65		%*
Resulting fair value from:
100 basis point increase	$	282,480		$	281,481
200 basis point increase		279,414			278,420
Resulting fair value from:
100 basis point decrease	$	288,870		$	287,861
200 basis point decrease		292,199			291,185
Default rate assumption:	12.23		%*	12.23		%*
Resulting fair value from:
200 basis point decrease	$	292,609		$	291,611
100 basis point decrease		289,117			288,116
Resulting fair value from:
100 basis point increase	$	282,159		$	281,152
200 basis point increase		278,769			277,760

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)
							Loans
							Held for
	Borrower Loans			Notes			Sale			Total
Balance at January 1, 2014	$	233,105		$	(234,218	)	$	3,206		$	2,093
Originations		86,715			(86,679	)		475,934			475,970
Principal repayments		(57,811	)		57,575			(130	)		(366	)
Borrower Loans sold to third parties		-			-			(471,022	)		(471,022	)
Other changes		(100	)		89			9			(2	)
Change in fair value		(8,938	)		9,290			-			352
Balance at June 30, 2014	$	252,971		$	(253,943	)	$	7,997		$	7,025

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
							Loans
							Held for
	Borrower Loans			Notes			Sale			Total
Balance at January 1, 2015	$	273,243		$	(273,783	)	$	8,463		$	7,923
Originations		94,512			(94,575	)		1,402,499			1,402,436
Principal repayments		(73,457	)		73,509			(543	)		(491	)
Borrower Loans sold to third parties		-			-			(1,408,883	)		(1,408,883	)
Other changes		(130	)		136			(9	)		(3	)
Change in fair value		(9,968	)		10,085			(96	)		21
Balance at June 30, 2015	$	284,200		$	(284,628	)	$	1,431		$	1,003

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
							Loans
							Held for
	Borrower Loans			Notes			Sale			Total
Balance at April 1, 2014	$	244,927		$	(245,335	)	$	3,482		$	3,074
Originations		42,529			(42,769	)		325,250			325,010
Principal repayments		(29,479	)		29,273			(112	)		(318	)
Borrower Loans sold to third parties		-			-			(320,633	)		(320,633	)
Other changes		(61	)		(84	)		10			(135	)
Change in fair value		(4,945	)		4,972			-			27
Balance at June 30, 2014	$	252,971		$	(253,943	)	$	7,997		$	7,025

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
							Loans
							Held for
	Borrower Loans			Notes			Sale			Total
Balance at April 1, 2015	$	280,404		$	(280,801	)	$	1,599		$	1,202
Originations		46,805			(46,779	)		861,574			861,600
Principal repayments		(37,395	)		37,441			(157	)		(111	)
Borrower Loans sold to third parties		-			-			(861,574	)		(861,574	)
Other changes		(136	)		(71	)		(1	)		(208	)
Change in fair value		(5,478	)		5,582			(10	)		94
Balance at June 30, 2015	$	284,200		$	(284,628	)	$	1,431		$	1,003

As June 30, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $1.5 million and a fair value of $0.6 million. As December 31, 2014, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $1.5 million and a fair value of $0.14 million. Prosper Funding places Borrower Loans on non-accrual status when they are

over 120 days past due. As of June 30, 2015 and December 31, 2014, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0, respectively.

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 and the servicing rights are retained. Prior to January 1, 2015, the initial fair value of such servicing assets or liabilities was amortized in proportion to and over the servicing period. Subsequent to January 1, 2015, the servicing assets and liabilities are measured at fair value throughout the servicing period. The total gain recognized on the sale of such Borrower Loans was $0.8 million and $1.1 million for the three and six months ended June 30, 2014, respectively. Effective January 1, 2015, Prosper Funding elected to adopt the fair value method to measure the servicing assets and liabilities for all classes subsequent to initial recognition. The total gain recognized on the sale of the Borrower Loans sold to unrelated third-party buyers was $3.7 million and $5.6 million for the three and six months ended June 30, 2015, respectively.

At June 30, 2015, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights had a total outstanding principal balance of $2,078 million, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and various maturity dates through June 2020. At December 31, 2014, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights had a total outstanding principal balance of $1,045 million, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 6.05% to 31.34% and various maturity dates through December 2019.

The following table presents quantitative information about the significant unobservable inputs used for Prosper Funding's servicing asset/liability fair value measurements at June 30, 2015 and December 31, 2014:

The following table presents additional information about Level 3 servicing assets and liabilities recorded at fair value for the three months ended March 31, 2015 (in thousands).

The following table presents the estimated impact on Prosper Funding’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of June 30, 2015 (in thousands, except percentages).

Prosper Funding incurred no income tax provision for the three and six months ended June 30, 2015 and 2014. 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, not currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.

Prosper Funding and PMI entered into an amended and restated agreement with WebBank, pursuant to which Prosper Funding is required to pay WebBank the greater of a monthly minimum fee or a fee calculated based on a certain percentage of Borrower Loans purchased by Prosper Funding. The minimum annual fee for the year ended December 31, 2015 is $1.4 million.

Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase $31.2 million of Borrower Loans that WebBank will originate within the first two business days of July 2015.

Under the terms of the loan purchase agreements between Prosper Funding and investor members that participate in the Whole Loan Channel, Prosper Funding may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor member. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper Funding recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at June 30, 2015 is $2.1 billion. Prosper Funding had accrued $252 thousand and $171 thousand as of June 30, 2015 and December 31, 2014 in regard to this obligation, respectively.

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, directors who are not executive officers participate in its marketplace by placing bids and purchasing Notes. The aggregate amount of the Notes purchased and the income earned by parties deemed to be related parties of Prosper as of June 30, 2015 and December 31, 2014 are summarized below (in thousands):

Prosper Funding has earned approximately $5 thousand and $2 thousand in servicing fee revenue related to these Notes for the three months ended June 30, 2015 and 2014, respectively. Prosper Funding has earned approximately $9 thousand and $8 thousand in servicing fee revenue related to these Notes for the six months ended June 30, 2015 and 2014, respectively.

Subsequent to the issuance of the condensed consolidated financial statements for the three and six months ended June 30, 2014, Prosper Funding identified errors that affected the interim condensed financial statements as of and for the three and six months ended June 30, 2014. The financial statements presented herein have been restated to correct for these errors that are described below.

Prosper Funding discovered certain errors in its valuation of servicing assets and liabilities which resulted in an overstatement of the servicing assets, an understatement of the servicing liabilities and an understatement of the gain recognized on the sale of Borrower Loans which was included in Other Revenues of $946 thousand and $926 thousand for the three and six months ended June 30, 2014, respectively. Also, we discovered errors in our amortization of the servicing assets and liabilities which understated Servicing Income by $620 thousand and $977 thousand for the three and six months ending June 30, 2014, respectively.

Prosper Funding also discovered that the Administration Fee Related Party Expense was understated by $521 thousand and Servicing expenses were overstated by $687 thousand for the three months ended June 30, 2014 due to a misclassification of an expense between the two statement of operations line items and an error in the calculation of the Administration Fee Related Party Expense. Prosper Funding also discovered that the Administration Fee Related Party Expense was understated by $849 thousand and Servicing expenses were overstated by $1,068 thousand for the six months ended June 30, 2014 due to a misclassification of an expense between the two statement of operations classifications and an error in the calculation of the Administration Fee Related Party Expense. The offset to the above errors was to Related Party Receivable which was understated as a result. Furthermore, we also discovered that the Administration Fee Related Party Expense was understated by $782 thousand and $1,489 thousand for the three and six months ended June 30, 2014 due to the amortization of servicing assets and liabilities being incorrectly amortized to this line item.

Prosper Funding also discovered errors related to internal use software including an overstatement of assets transferred from PMI and assets that were being amortized over their original estimated useful life after Prosper Funding decided to replace the assets before the originally estimated useful life which understated amortization by $9 thousand and $ 51 thousand for the three and six months ended June 30, 2014, respectively, which is included in Servicing expenses.

In addition to the restatements described above, Prosper Funding has made other corrections, some of which were previously identified, but were not corrected because management had determined they were not material, individually or in the aggregate, to our consolidated financial statements. These corrections related to the fair value of loans held for investment, and reclassification of certain Borrower Loans from loans held for investment to Borrower Loans.

Lastly, Prosper Funding discovered the following classification errors within its Condensed Consolidated Statement of Cash Flows:

The following tables present the impact of these corrections and corrections of other immaterial errors on the interim periods in the three months ended June 30, 2014 (in thousands):

Condensed Consolidated Statement of Operations – Three months ended June 30, 2014

	As previously reported			Reclassifications*			As reclassified			Adjustments			As corrected
Revenue
Operating Revenue
Administration Fee Revenue – Related Party	$	6,898		$	—		$	6,898		$	—		$	6,898
Servicing Income, Net		—			109			109			594			703
Other Revenue		(155	)		—			(155	)		834			679
Total Operating Revenue		6,743			109			6,852			1,428			8,280
Interest Income on Borrower Loans		10,518			(109	)		10,409			135			10,544
Interest Expense on Notes		(9,494	)		—			(9,494	)		(70	)		(9,564	)
Net Interest Income		1,024			(109	)		915			65			980
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net		91			—			91			(64	)		27
Total Net Revenue		7,858			—			7,858			1,429			9,287
Cost of Revenue
Cost of Services		(654	)		654			—			—			—
Provision for repurchase and indemnification obligation		(56	)		56			—			—			—
		(710	)		710			—			—			—
Expenses
Servicing		—			963			963			(605	)		358
Administration Fee – Related Party		4,234			—			4,234			1,302			5,536
Depreciation and Amortization		253			(253	)		—			—			—
Professional Services		—			—			—			—			—
Other Operating Expenses		77			(77	)		—			—			—
General and Administration		—			77			77			4			81
Total Expenses		4,564			710			5,274			701			5,975
Total Net Income	$	2,584		$	—		$	2,584		$	728		$	3,312

Condensed Consolidated Statement of Operations – Six months ended June 30, 2014

	As previously reported			Reclassifications*			As reclassified			Adjustments			As corrected
Revenue
Operating Revenue
Administration Fee Revenue – Related Party	$	10,951		$	—		$	10,951		$	—		$	10,951
Servicing Income, Net		—			279			279			847			1,126
Other Revenue		201			-			201			776			977
Total Operating Revenue		11,152			279			11,431			1,623			13,054
Interest Income on Borrower Loans		20,568			(278	)		20,290			222			20,512
Interest Expense on Notes		(18,763	)		-			(18,763	)		(223	)		(18,986	)
Net Interest Income		1,805			(278	)		1,527			(1	)		1,526
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net		389			(1	)		388			(36	)		352
Total Net Revenue		13,346			-			13,346			1,586			14,932
Cost of Revenue
Cost of Services		(1,051	)		1,051			—			—			—
Provision for repurchase and indemnification obligation		(118	)		118			—			—			—
		(1,169	)		1,169			—			—			—
Expenses
Servicing		—			1,656			1,656			(901	)		755
Administration Fee – Related Party		6,840			—			6,840			2,191			9,031
Depreciation and Amortization		487			(487	)		—			—			—
Professional Services		12			(12	)		—			—			—
Other Operating Expenses		166			(166	)		—			—			—
General and Administration		—			178			178			8			186
Total Expenses		7,505			1,169			8,674			1,298			9,972
Total Net Income	$	4,672		$	—		$	4,672		$	288		$	4,960

Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2014

	As previously
	reported			Adjustments			As corrected
Cash flows from operating activities:
Net Income	$	4,672		$	288		$	4,960
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities:
Change in Fair Value of Notes		(1,350	)		1,350			-
Change in Fair Value of Borrower Loans Receivable		958			(958	)		-
Change in Fair Value of Loans Held for Sale		3			(3	)		-
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes		-			(352	)		(352	)
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes		-			2			2
Depreciation and Amortization		487			52			539
Change in Servicing Rights		-			(998	)		(998	)
Purchase of Loans Held for Sale at Fair Value		-			(475,934	)		(475,934	)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value		-			471,151			471,151
Changes in Operating Assets and Liabilities:					-
Restricted Cash		(1,971	)		(17,972	)		(19,943	)
Other Assets		(5	)		9			4
Accounts Payable and Accrued Liabilities		158			369			527
Payable to Investors		-			16,995			16,995
Net Related Party Payable		(31	)		(218	)		(249	)
Net Cash Used in Operating Activities		2,921			(6,219	)		(3,298	)
Cash Flows From Investing Activities:
Purchase of Borrower Loans Receivable Held at Fair Value		(330,464	)		243,749			(86,715	)
Principal Payment of Borrower Loans Receivable Held at Fair Value		65,648			(7,837	)		57,811
Proceeds from Sale of Borrower Loans Receivable Held at Fair Value		243,235			(243,235	)		-
Repayment of Loans Held for Investment at Fair Value		312			(312	)		-
Origination of Loans Held for Investment at Fair Value		(111,927	)		111,927			-
Proceeds from Sale of Borrower Loans at Fair Value		105,986			(105,986	)		-
Maturities of Short Term Investments		-			1,271			1,271
Purchases of Property and Equipment		-			(1,274	)		(1,274	)
Purchases of Property and Equipment		(553	)		-			(553	)
Changes in Restricted Cash Related to Investing Activities		-			(121	)		(121	)
Net Cash Used in Investing Activities		(27,763	)		(1,818	)		(29,581	)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value		86,713			(34	)		86,679
Payment of Notes Held at Fair Value		(65,646	)		8,071			(57,575	)
Net Cash Provided by Financing Activities		21,067			8,037			29,104
Net Decrease in Cash and Cash Equivalents		(3,775	)		-			(3,775	)
Cash and Cash Equivalents at Beginning of the Period		5,789			-			5,789
Cash and Cash Equivalents at End of the Period	$	2,014		$	-		$	2,014

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 Prosper’s Annual Report on Form 10-K 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. Management’s Discussion and Analysis has been revised to include the effects of the restatement. 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” section and elsewhere in Prosper’s Annual Report on Form 10-K.

Prosper is a pioneer of online marketplace lending that connects borrowers and investors. Prosper’s goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return. Prosper’s marketplace facilitated $1.6 billion in Borrower Loan originations during 2014, of which $1.4 billion were funded through Prosper’s Whole Loan Channel, representing 88% of the total Borrower Loans originated through Prosper’s marketplace during this period. In the three months ended June 30, 2015, Prosper’s marketplace facilitated $912 million in Borrower Loan originations, of which $866 million were funded through Prosper’s Whole Loan Channel, representing 95% of the total Borrower Loans originated through Prosper’s marketplace during this period. In the six months ended June 30, 2015, Prosper’s marketplace facilitated $1.5 billion in Borrower Loan originations, of which $1.4 billion were funded through Prosper’s Whole Loan Channel, representing 94% of the total Borrower Loans originated through Prosper’s marketplace during this period. From inception through June 30, 2015, Prosper’s marketplace facilitated $3.9 billion in Borrower Loan originations, of which $2.2 billion were funded through Prosper’s Whole Loan Channel, representing 72% of the total Borrower Loans originated through Prosper’s marketplace during this period.

Prosper believes its online marketplace model has key advantages relative to traditional banks, 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. Prosper does not operate physical branches or incur expenses related to that infrastructure like traditional banks or consumer finance institutions do; instead, it uses data and technology to drive automation and efficiency in its operation. As a result, Prosper believes its business model has lower operating costs than traditional banks and consumer finance institutions, allowing it to deliver what Prosper believes is higher value and a better experience for both borrowers and investors.

To consumer borrowers, Prosper believes that it offers generally better pricing, on average, than the pricing those borrowers would pay on outstanding credit card balances or unsecured installment loans from a traditional bank. Prosper also believes that it offer faster decisions and loan originations, and greater transparency, resulting in a better customer experience than that provided by traditional banks.

To individual and institutional investors, Prosper offers a new asset class that it believes has attractive risk adjusted returns, transparency, access to consumer loans, and lower duration risk.

Prosper’s marketplace offers fixed rate, fully amortizing, unsecured consumer loans from $2,000 to $35,000. Loan terms of three and five years are available, depending upon the Prosper Rating assigned to the borrower at issue and loan amount being sought. All Borrower Loans are originated and funded by WebBank, an FDIC-insured, state chartered industrial bank organized under the laws of Utah. As part of operating its marketplace, Prosper verifies the identity of borrowers and assesses borrowers’ credit risk profile using a combination of public and proprietary data. Prosper’s proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.

The following table summarizes Prosper’s net loss for the three months ended June 30, 2015 and 2014 (in thousands):

Total revenue for the three months ended June 30, 2015 increased $31.2 million, a 171% increase from the three months ended June 30, 2014, primarily due to increased Borrower Loan originations which increased 147%. Total expenses for the three months ended June 30, 2015 increased $38.1 million, a 217% increase from the three months ended June 30, 2014, primarily due to higher compensation costs as Prosper added more staff to support its business growth, additional facilities related expenses incurred in connection with the move into a new headquarters and expansion into Phoenix, and higher marketing and origination expenses to support higher origination volume. Additionally, Prosper incurred $5.6 million in additional compensation costs as a result of purchasing common stock from certain employees at a price above the fair market value of such common stock. Net loss for the three months ended June 30, 2015 increased $6.9 million, a switch from net income in the three months ended June 30, 2014, primarily due to increased expenses previously described.

The following table summarizes Prosper’s net loss for the six months ended June 30, 2015 and 2014 (in thousands):

Total revenue for the six months ended June 30, 2015 increased $53.0 million, a 187% increase from the six months ended June 30, 2014, primarily due to increased Borrower Loan originations, which increased 98%. Total expenses for the six months ended June 30, 2015 increased $64.4 million, a 213% increase from the six months ended June 30, 2014, primarily due to higher compensation costs as Prosper added more staff to support its business growth, additional facilities related expenses incurred in connection with the move into a new headquarters and expansion into Phoenix, and higher marketing and origination expenses to support higher origination volume. Additionally, Prosper incurred $5.6 million in additional compensation costs as a result of purchasing common stock from certain employees at a price above the fair market value of such common stock. Net loss for the six months ended June 30, 2015 increased $11.5 million, a 573% increase from the six months ended June 30, 2014, primarily due to increased expenses previously described.

On January 23, 2015, Prosper acquired all of the outstanding limited liability company interests of American HealthCare Lending, LLC, a company that operated a cloud-based patient financing platform, and merged AHL with and into PHL, with PHL surviving the merger. Prosper’s condensed consolidated financial statements include PHL's results of operations and financial position from this date forward.

From inception through June 30, 2015, a total of 334,165 Borrower Loans, totaling $3.9 billion, were originated through Prosper’s marketplace.

During the second quarter ended June 30, 2015, 67,038 Borrower Loans totaling $912 million were originated through Prosper’s marketplace, compared to 28,826 Borrower Loans totaling $370 million during the second quarter ended June 30, 2014. This represented a “unit” or loan, increase of 133% and a dollar increase of 147%.

The graph below presents aggregate dollar originations in (millions) through Prosper’s marketplace dating back to July 2009:

The following table summarizes Prosper’s revenue for the three months ended June 30, 2015 and 2014 (in thousands):

	Three Months Ended
	June 30,
	2015			2014			$ Change			% Change
Operating Revenue
Transaction Fees, Net	$	39,800		$	15,980			23,820			149	%
Servicing Fees, Net		3,575			697			2,878			413	%
Other Revenue		5,326			717			4,609			643	%
Total Operating Revenue		48,701			17,394			31,307			180	%
Interest Income
Interest Income on Borrower Loans		10,165			10,436			(271	)		(3	)%
Interest Expense on Notes		(9,448	)		(9,564	)		116			(1	)%
Net Interest Income		717			872			(155	)		(18	)%
Change in Fair Value of Borrower Loans, Loans Held for Investment and Notes, net		95			27			68			252	%
Total Revenue		49,513			18,293			31,220			171	%

The following table summarizes Prosper’s revenue for the six months ended June 30, 2015 and 2014 (in thousands):

	Six Months Ended
	June 30,
	2015			2014			$ Change			% Change
Operating Revenue
Transaction Fees, Net	$	65,142		$	24,344			40,798			168	%
Servicing Fees, Net		6,144			1,112			5,032			453	%
Other Revenue		8,303			1,161			7,142			615	%
Total Operating Revenue		79,589			26,617			52,972			199	%
Interest Income
Interest Income on Borrower Loans		20,634			20,371			263			1	%
Interest Expense on Notes		(19,011	)		(18,987	)		(24	)		0	%
Net Interest Income		1,623			1,384			239			17	%
Change in Fair Value of Borrower Loans, Loans Held for Investment and Notes, net		21			271			(250	)		(92	)%
Total Revenue		81,233			28,272			52,961			187	%

Prosper earns transaction fees paid by WebBank for Prosper’s services in connection with Borrower Loan origination. The transaction fee is equal to the origination fee WebBank charges the borrower under a Borrower Loan less the amount retained by WebBank.

Transaction fees increased primarily due to higher origination volume through Prosper’s marketplace during the three months ended June 30, 2015. The average transaction fee (gross of fees from WebBank) was 4.56% for the three months ended June 30, 2015 and was 4.51% for the three months ended June 30, 2014.

Transaction fees increased primarily due to higher origination volume through Prosper’s marketplace during the six months ended June 30, 2015. The average transaction fee (gross of fees from WebBank) was 4.52% for the six months ended June 30, 2015 and was 4.50% for the six months ended June 30, 2014.

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 Prosper for the costs it incurs in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. The servicing fee is generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The increase in servicing fees was due to the increase in Borrower Loans being serviced as a result of the increase in Borrower Loan originations.

Other revenue consists primarily of credit referral fees, where partner companies pay Prosper an agreed upon amount for referrals of customers from the website, and net gains on Borrower Loans sold through the Whole Loan Channel. The increase in other revenue was due to the gains on Borrower Loans sold through the Whole Loan Channel due to an increase in volume of such sales and the addition of new credit referral partners, as well as increased traffic to existing partners.

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

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

The fair value of Borrower Loans, loans held for sale and Notes are 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, recovery rates and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. Loans held for sale are primarily comprised of Borrower Loans held for short durations and are valued using the same approach as the Borrower Loans held at fair value.

The following table summarizes the fair value adjustments for the three months ended June 30, 2015 and 2014, respectively (in thousands):

The following table summarizes Prosper’s expenses for the three months ended June 30, 2015 and 2014 (in thousands):

The following table summarizes Prosper’s expenses for the six months ended June 30, 2015 and 2014 (in thousands):

As of June 30, 2015, Prosper had 450 full-time employees compared to 136 full-time employees as of June 30, 2014. The following table reflects full-time employees as of June 30, 2015 and June 30, 2014 by department:

Origination and servicing costs consists 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 increase was primarily due to an increase in personnel related expenses as Prosper expanded its verification and customer support teams to support the increased loan application and processing volume and an increase in consumer reporting agency and loan processing costs which was also driven by higher loan volumes.

Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations, gift/promotional expenses, and direct mail marketing including the compensation costs such as wages, benefits and stock based compensation for the employees to support these activities. For the three months ending June 30, 2015, this increase was largely due to increased costs related to generating the continuing growth in originations through Prosper’s marketplace including an $7.5 million or 246% increase in affiliate marketing costs as Prosper increased the number and volume of partners, an $4.2 million or 80% increase in direct mailing costs as we increased the volume of our direct mail campaigns, a $1.3 million or 560% increase in online marketing costs as Prosper significantly expanded its efforts in this area and a $2.9 million or 900% increase in compensation costs due to the hiring of seventy five additional employees in this department. For the six months ending June 30, 2015, this increase was largely due to increased costs related to generating the continuing growth in originations through Prosper’s marketplace including an $13.3 million or 292% increase in affiliate marketing costs as Prosper increased the number and volume of partners, a $7.8 million or 84% increase in direct mailing costs as we increased the volume of our direct mail campaigns, a $1.7 million or 427% increase in online marketing costs as Prosper significantly expanded its efforts in this area and a $4.1 million or 604% increase in compensation costs due to the hiring of seventy five additional employees in this department.

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 was primarily due to an increase in personnel related expenses as Prosper expanded its engineering and product development teams to support continued investment in its marketplace. The total increase is not as large as the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are expensed in origination and servicing.

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 increase was primarily due to an increase in personnel related expenses as Prosper increased its headcount to support growth and increased facilities expenses as Prosper obtained additional space to support the increase in headcount.

The following table summarizes Prosper’s cash flow activities for the six months ended June 30, 2015 and 2014 (in thousands):

Net cash increased for the six months ended June 30, 2015 primarily due to the $165 million raised through the issuance of New Series D convertible preferred shares, which was offset by the $19 million paid net of cash acquired to purchase American HealthCare Lending LLC and $27 million paid to repurchase common stock from certain employees. Prosper plans to use the $165 million raised for general corporate needs and for the common stock repurchase described above. Net cash used in investing primarily represents the acquisition of AHL and acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties which is included in cash flow from operations 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.

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.

In February 2012, PMI formed PFL. PMI is the sole equity member of PFL and PFL’s accounts are included in PMI’s condensed consolidated financial statements included in this Quarterly Report. PFL has been organized and is operated in a manner that is intended to minimize the likelihood that it will (i) become subject to bankruptcy proceedings or (ii) be substantively consolidated with PMI, and thus have its assets subject to claims by PMI’s creditors, in the event PMI becomes subject to a bankruptcy proceeding. PMI restructured its marketplace so that Borrower Loans sold through the Note Channel are held by PFL and PFL issues and sells the related Notes. 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 interest entities are consolidated as Prosper is not the primary beneficiary.

Certain of the Prosper's accounting policies that involve a higher degree of judgment and complexity are discussed in Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Estimates in Prosper’s Annual Report. There have been no significant changes to these critical accounting estimates during the first six months of 2015 other than noted below.

On January 1, 2015, Prosper elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition. Prior to January 1, 2015 servicing assets and liabilities were measured at amortized cost subsequent to initial recognition. The adoption of the fair value method for a particular class is irrevocable. The difference between the amortized cost and fair value at January 1, 2015 was recorded as a decrease to accumulated deficit.

Prosper reviews the performance of Borrower Loans on a monthly basis to determine how loss rate estimates compare to actual performance. As part of this monthly review, the processes for calculating and assigning loss rates and Prosper Ratings are reassessed to ensure continued accuracy. The graphs below show the estimated versus actual cumulative dollar loss rates by Prosper Rating for Borrower Loans, collectively, booked from July 13, 2009 through December 31, 2014. Performance is as of June 30, 2015. The loss performance is tracked by vintage, meaning each line represents all Borrower Loans originated in a given period. The graphs only include Borrower Loans that have been outstanding at least 6 months. In addition, data for a point along the x axis is only included if the entire vintage is at least that mature. So, although Borrower Loans originated in October 2014 have 8 months of performance, only 6 months of performance are reflected in the graphs below because the December 2014 Borrower Loans, which are also a part of the 2014 Q4 vintage, have only completed 6 months of performance.

Vintages generally contain enough loan volume for their performance curves to be meaningful. For presentation purposes, some of the older vintages have been grouped into annual and half-year vintages.

Below is a graph that shows cumulative net charge-offs as a percentage of originations across all Prosper Ratings by vintage for Borrower Loans, collectively, originated from July 13, 2009 to December 31, 2014. The addition of “H1” means that the information reported reflects the first six months of the year presented, while “H2” reflects the second 6 months of the year presented. Similarly, “Q1” or “Q2” means that the information reported reflects the first or second quarter of the year presented.

Overall, vintages originated in 2013 and 2014 are demonstrating meaningfully lower cumulative losses than those originated in 2012 and earlier. Prosper considers changes in the risk management process implemented at the end of 2012 and in early 2013 to be a meaningful driver of this trend.

The graphs below show cumulative net charge-offs for Borrower Loans, collectively, as a percentage of originations for each Prosper Rating presented by vintage from July 13, 2009 to June 30, 2015.

Note: Estimated lines represent the high end of the estimated loss rate range for each Prosper Rating, except for HR, where the high end of the range is 100% and the estimated curve was set at 19.50% cumulative principal loss.

In many rating grades, risk is trending above estimates for the 2009-2012 booked vintages. To date, the majority of the 2013 and 2014 vintages have cumulative losses below their respective estimated lines. Prosper considers this change in performance to be a direct result of changes made to its risk management practices at the end of 2012 and the beginning of 2013.

Please note that the historical performance of Borrower Loans may not be indicative of the future performance of Borrower Loans.

The performance of Borrower Loans is a function of the credit quality of borrowers and the risk and return preferences of investor members. Investor members can choose to pursue a variety of bidding strategies, including strategies that may or may not maximize the return on their investment. When making commitment decisions, investor members consider borrower members’ Prosper Ratings, credit scores, debt-to-income ratios and other credit data and information displayed with listings.

The graph below displays the overall level of delinquency (days past due or “DPD”) for Borrower Loans, collectively, on a calendar basis. Loss estimates for the portfolio on a vintage basis may be found in the section “Comparing Estimated Loss Rates to Actual Losses”.

The following table presents aggregated information as of June 30, 2015, grouped by Prosper Rating, for all Borrower Loans, collectively, originated on Prosper’s marketplace from July 13, 2009 through June 30, 2015. With respect to delinquent Borrower Loans, the table shows the entire amount of the principal remaining due (not just that particular payment) as of June 30, 2015

	Total Loan Originations				Current Borrower Loans								1-30 Days Past Due
Prosper Rating	No.		Origination Amount		No.			Origination Amount			Outstanding Principal		No.			Origination Amount			Outstanding Principal
AA		27,866	$	358,177		23,183		$	307,977		$	247,838		66		$	951		$	665
A		64,039		860,580		52,580			735,950			606,938		343			5,039			3,616
B		69,522		997,498		57,202			855,535			739,031		530			7,917			6,169
C		70,515		930,567		55,606			769,904			673,234		797			10,807			8,591
D		39,932		416,653		26,263			306,231			269,975		567			6,868			5,607
E		23,483		128,762		14,151			83,278			70,656		319			1,931			1,545
HR		9,795		34,641		3,369			12,334			9,358		102			379			220
		305,152	$	3,726,878		232,354		$	3,071,209		$	2,617,030		2,724		$	33,892		$	26,413
Avg loan size:			$	12.2
Percent of total						76.1	%		82.4	%				0.9	%		0.9	%

	Paid In Full						31+ Days Past Due								Defaulted ¹
Prosper Rating	No.			Origination Amount			No.			Origination Amount			Outstanding Principal		No.			Origination Amount			Net Charged Off Principal
AA		4,362		$	46,031			44		$	656		$	489		211		$	2,563		$	1,906
A		9,714			102,596			311			4,111			3,167		1,091			12,884			9,722
B		9,456			104,927			575			8,351			6,683		1,759			20,768			16,661
C		10,302			105,145			932			12,458			10,311		2,878			32,254			26,924
D		9,291			70,474			644			7,626			6,415		3,167			25,454			20,345
E		5,993			28,403			479			2,787			2,329		2,541			12,363			9,748
HR		4,177			14,351			142			524			309		2,005			7,053			5,203
		53,295		$	471,927			3,127		$	36,513		$	29,703		13,652		$	113,339		$	90,509
Percent of total		17.5	%		12.7	%		1.0	%		1.0	%				4.5	%		3.0	%

The data in the preceding tables regarding Borrower Loans may not be representative of the loss experience that will develop for future Borrower Loans. In addition, the data in the preceding tables may not be representative of the impact of prepayments experienced on Borrower Loans over time.

The following table presents aggregate information, as of June 30, 2015, regarding the results of Prosper’s collection efforts for Borrower Loans, collectively, originated after July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating (in thousands except for number amounts).

Prosper Rating	Loans In Collections		Origination Amount		Aggregate Amount Sent to Collections		Gross Amount Collected on Accounts sent to Collections		Number of Loans Charged- off		Gross Aggregate Principal Balance of Loans Charged- Off		Gross Amount Recovered on Loans Charged- Off		Net Aggregate Charge- Off*
AA		317	$	3,940	$	229	$	108		218	$	1,992	$	74	$	1,918
A		1,660		20,204		1,175		636		1,100		10,067		334		9,733
B		2,714		33,668		1,997		949		1,767		17,067		401		16,665
C		4,358		50,822		3,134		1,617		2,896		27,604		648		26,956
D		4,364		37,855		2,628		1,635		3,189		21,119		729		20,390
E		3,461		17,325		1,387		852		2,548		10,176		420		9,755
HR		2,435		8,623		749		537		2,020		5,538		331		5,208
		19,309	$	172,437	$	11,299	$	6,334		13,738	$	93,563	$	2,937	$	90,625

* This amount excludes collection agency payments that were subsequently returned due to insufficient funds.

Prosper may alter the terms or make principal reductions on some Borrower Loans, which may include cases where a reduction in the initial interest rate is required by law. The Servicemembers’ Civil Relief Act requires interest rates to be reduced to 6% while a borrower in the armed forces is on active duty. In order to comply with the Servicemembers’ Civil Relief Act, Prosper has elected to make “pre-refunds” of the interest differential to the affected borrower for the period of deployment. The borrower then continues to make their regular payments. In these cases, Prosper has refunded the interest to the borrower from Prosper’s own funds and, as a result, the payments received by the applicable investor members were unchanged.

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 Prosper Funding’s Annual Report on Form 10-K 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. Management’s Discussion and Analysis has been revised to include the effects of the restatement. 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” section and elsewhere in Prosper Funding’s Annual Report on Form 10-K.

Prosper Funding was formed in the state of Delaware in February 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 will 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 in November 2013 as a limited liability company with the sole equity member being PFL. PAH was formed to purchase certain Borrower Loans from PFL and, sell them to certain participants in the Whole Loan Channel.

The following table summarizes Prosper Funding’s net income for the three months ended June 30, 2015 and 2014 (in thousands):

Total revenue for the three months ended June 30, 2015 increased $12.7 million, a 137% increase from the three months ended June 30, 2014, primarily due to Borrower Loan originations which increased the loan administrative fee. Total expenses for the three months ended June 30, 2015 increased $9.3 million, a 155% increase from the three months ended June 30, 2014, primarily due to higher administrative expenses and depreciation charges. Net income for the three months ended June 30, 2015 increased $3.5 million, a 104% increase from the three months ended June 30, 2014, primarily due to increased Borrower Loan originations.

The following table summarizes Prosper Funding’s net income for the six months ended June 30, 2015 and 2014 (in thousands):

Total revenue for the six months ended June 30, 2015 increased $21.8 million, a 146% increase from the six months ended June 30, 2014, primarily due to Borrower Loan originations which increased the loan administrative fee. Total expenses for the three months ended June 30, 2015 increased $16.2 million, a 163% increase from the six months ended June 30, 2014, primarily due to higher administrative expenses and depreciation charges. Net income for the six months ended June 30, 2015 increased $5.6 million, a 113% increase from the six months ended June 30, 2014, primarily due to increased Borrower Loan originations.

The following table summarizes Prosper Funding’s revenue for the three months ended June 30, 2015 and 2014 (in thousands):

	Three Months Ended June 30,
	2015			2014			$ Change			% Change
Revenue
Operating Revenue
Administration Fee Revenue - Related Party	$	14,213		$	6,898			7,315			106	%
Servicing Fees, Net		3,272			703			2,569			365	%
Other Revenue		3,696			679			3,017			444	%
Total Operating Revenue		21,181			8,280			12,901			156	%
Interest Income on Borrower Loans		10,209			10,544			(335	)		-3	%
Interest Expense on Notes		(9,448	)		(9,564	)		116			-1	%
Net Interest Income		761			980			(219	)		-22	%
Change in Fair Value on Borrower Loans, Loans Held for Investment and Notes, net		94			27			67			248	%
Total Revenue	$	22,036		$	9,287			12,749			137	%

The following table summarizes Prosper Funding’s revenue for the three months ended June 30, 2015 and 2014 (in thousands):

	Six Months Ended June 30,
	2015			2014			$ Change			% Change
Revenue
Operating Revenue
Administration Fee Revenue - Related Party	$	23,886		$	10,951			12,935			118	%
Servicing Fees, Net		5,536			1,126			4,410			392	%
Other Revenue		5,596			977			4,619			473	%
Total Operating Revenue		35,018			13,054			21,964			168	%
Interest Income on Borrower Loans		20,723			20,512			211			1	%
Interest Expense on Notes		(19,011	)		(18,986	)		(25	)		0	%
Net Interest Income		1,712			1,526			186			12	%
Change in Fair Value on Borrower Loans, Loans Held for Investment and Notes, net		21			352			(331	)		-94	%
Total Revenue	$	36,751		$	14,932			21,819			146	%

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 increases in the administration fee revenue were the result of higher loan volume during 2015. Prosper Funding believes that the fees are at a rate that would be considered arm’s length.

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 incurred in servicing these Borrower Loans, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. The servicing fee is currently set at 1% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. The increase in servicing fees was due to the increase in Borrower Loans being serviced as a result of the increase in Borrower Loan originations.

Other revenue consists primarily of gains on Borrower Loans sold through the Whole Loan Channel. The increase was due to the net gains on Borrower Loans sold through the Whole Loan Channel which increased with the increased volume of such sales.

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 collectable. Prosper Funding records interest expense on the corresponding Notes based on the contractual interest rates to the extent Prosper Funding believes they will be collectable. The interest rate charged on a Borrower Loan is generally 1% higher than the interest rate on the corresponding Notes to compensate Prosper Funding for servicing the Borrower Loan. This is recorded in interest income.

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

The fair value of Borrower Loans, loans held for sale and Notes are 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, recovery rates and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. Loans held for sale are primarily comprised of Borrower Loans held for short durations and 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 and six months ended June 30, 2015 and 2014, respectively (in thousands):

The following table summarizes Prosper Funding’s expenses for the three months ended June 30, 2015 and 2014 (in thousands):

The following table summarizes Prosper Funding’s expenses for the six months ended June 30, 2015 and 2014 (in thousands):

Pursuant to an Administration Agreement between Prosper Funding and PMI, PMI manages the marketplace on behalf of Prosper Funding. Accordingly, each month, Prosper Funding is required to pay PMI (a) an amount equal to one-twelfth (1/12) of the

specified annual Corporate Administration Fees equal to 50% of finance and legal personnel costs, (b) a fee for each Borrower Loan originated through the marketplace, (c) 90% of all servicing fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of Prosper Funding. In addition, under a second Administration Agreement between PMI and PAH, a wholly owned subsidiary of Prosper Funding, PAH is required to pay PMI an annual fee of $0.2 million, payable on a monthly basis, for PMI being the administrator of PAH’s operations. The increase in the administration fee expense was primarily due to the growth of the marketplace, resulting in increased fees owed to PMI by Prosper Funding. Prosper Funding believes that the fees are at a rate that would be considered arm’s length.

Servicing costs consists primarily of vendor costs and depreciation of internal use software costs associated with servicing Borrower Loans. The increase was primarily due to an increase in loan processing costs which was driven by higher loan volumes.

General and administrative costs consist primarily of bank service charges and professional fees. The increase was primarily due to an increase in bank charges that were incurred with the increased transaction volume.

The following table summarizes Prosper Funding’s cash flow activities for the six months ended June 30, 2015 and 2014 (in thousands):

Net cash decreased for the six months ended June 30, 2015, primarily due to cash distributions to PMI, Prosper Funding’s parent company that netted $27 million that were offset by cash provided by operations of $24.1 million. Operating cash flows were positive generally due to the positive net income for the period of $11 million and cash proceeds on the sale of Borrower Loans. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties which is included in cash flow from operations 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.

Prosper Funding incurred no income tax expense for the six months ended June 30, 2015 and 2014. 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 and inability to achieve profitable operations, 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.

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 June 30, 2015, Prosper Funding has not engaged in any off-balance sheet financing activities.

In connection with the preparation of this June 30, 2015 Form 10-Q, each Registrants’ management, under the supervision and with the participation of such registrant’s Principal Executive Officer (PEO) and Principal Financial Officer (PFO), evaluated the effectiveness of the design and operation of such Registrant’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of June 30, 2015. As described below, each Registrant’s management has identified material weaknesses in our internal controls over financial reporting, which is an integral component of our disclosure controls and procedures. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of such Registrant’s annual or interim financial statements will not be prevented, or detected and corrected on a timely basis. As a result of the material weaknesses, each Registrant’s PEO and PFO have concluded that, as of June 30, 2015, such Registrant’s disclosure controls and procedures were not effective.

Management of each Registrant concluded that such Registrant’s internal control over financial reporting was not effective as of June 30, 2015, because of material weaknesses in its internal controls identified as described below:

Notwithstanding the identified material weaknesses, management of each of the Registrants believes that the consolidated financial statements contained in this report present fairly in conformity with accounting principles generally accepted in the U.S. the Registrants’ financial condition, results of operations, and cash flows for the periods covered thereby in all material respects. To address the material weaknesses in the Registrants’ internal control over financial reporting, the Registrants also performed additional manual reconciliation procedures and analysis and other post-closing procedures in order to prepare the consolidated financial statements included in this Quarterly Report on Form 10-Q.

As a result of the material weakness described above, Prosper has hired additional IT and finance personnel with technical accounting expertise and plans to continue such hiring. The Registrants are formalizing their accounting policies and internal controls documentation and strengthening supervisory reviews by management. Management of each Registrant has taken steps to address the causes of identified errors and to improve its internal control over financial reporting, including the implementation of new accounting and reconciliation processes and control procedures and the identification of gaps in their skills base and expertise of the staff required to meet the financial reporting requirements. Management of each Registrant is committed to improving the each Registrant’s internal control over financial reporting processes and will meet frequently with Prosper’s Audit Committee to monitor and report on the ongoing effectiveness of such remediation activities and controls.

With the oversight of the Registrants’ senior management and Prosper’s audit committee, the Registrants have begun taking the steps set forth above and plan to take additional measures to remediate the underlying causes of the material weaknesses.

Other than with respect to the ongoing remediation of the material weakness pursuant to the plan described above, there has been no change to the Registrants’ internal control over financial reporting during such Registrant’s most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the Registrants’ internal control over financial reporting.

The Dodd-Frank Wall Street Reform and Consumer Protection Act exempts any company that is not a “large accelerated filer” or an “accelerated filer” (as defined by SEC rules) from the requirement that such company obtain an external audit of the effectiveness of its internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. As a result, each Registrant is exempt from the requirement that it include in its Annual Report on Form 10-K an attestation report on internal control over financial reporting by an independent registered public accounting firm; however, management’s annual report on internal control over financial reporting, pursuant to Section 404(a) of the Sarbanes-Oxley Act, is still required with respect to the Registrants.

PFL is not currently subject to any material legal proceedings. PFL is not aware of any litigation matters which have had, or are expected to have, a material adverse effect on it.

PMI is not currently subject to any material legal proceedings. Except for the matters referenced in Note 11 (“Commitments and Contingencies”) of PMI’s Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report, which information is incorporated into this Item by reference, Prosper is not aware of any litigation matters that have had, or are expected to have, a material adverse effect on it.

This Item should be read in conjunction with the Legal Proceedings disclosures in the Registrants’ Annual Report on Form 10-K for the year ended December 31, 2014 (Part I, Item 3).

On April 7, 2015, PMI entered into a Series D Preferred Stock Purchase Agreement with several new investors, pursuant to which PMI issued and sold to such purchasers 4,777,728 shares of PMI’s new Series D convertible preferred stock for an aggregate purchase price of $165 million.

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 AND THEREFORE IS FILING THIS FORM WITH A REDUCED FILING FORMAT.

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

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.

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 (incorporated by reference to Exhibit 3.2 of Post-Effective Amendment No. 5 to the Registration Statement on Form S-1, filed April 20, 2015 by PFL and PMI)

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 and PMI)

3.4		Bylaws of PMI, dated March 22, 2005 (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1, filed October 30, 2007 by PMI)

4.1		Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5)

4.2		Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4)

4.3		Supplemental Indenture, dated January 22, 2013, between PMI, PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)

4.4		Indenture, dated June 15, 2009, between PMI and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed June 26, 2009)

4.5		Amended and Restated Indenture, dated January 22, 2013, between PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K filed on January 28, 2013)

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.

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 June 30, 2015.

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 June 30, 2015.

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 June 30, 2015.

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 June 30, 2015.

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 June 30, 2015.

101.INS		XBRL Instance Documents

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

Commission File Number	Exact Name of Registrant as Specified in its Charter	I.R.S. Employer Identification Number
333-147019 333-179941-01	PROSPER MARKETPLACE, INC. a Delaware corporation 221 Main Street, 3^rd Floor San Francisco, CA 94105 Telephone: (415)593-5400	73-1733867

333-179941	PROSPER FUNDING LLC a Delaware limited liability company 221 Main Street, 3^rd Floor San Francisco, CA 94105 Telephone: (415)593-5479	45-4526070

		Page No.
	Forward-Looking Statements	3
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	5
	Prosper Marketplace Inc.	5
	Condensed Consolidated Balance Sheets (Unaudited)	5
	Condensed Consolidated Statements of Operations (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Prosper Funding LLC	27
	Condensed Consolidated Balance Sheets (Unaudited)	27
	Condensed Consolidated Statements of Operations (Unaudited)	28
	Condensed Consolidated Statements of Cash Flows (Unaudited)	29
	Notes to Condensed Consolidated Financial Statements (Unaudited)	30
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	58
PART II.	OTHER INFORMATION	59
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	59
Item 3.	Defaults upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	59
Signatures		60
Exhibit Index		61

	June 30,			December 31,
		2015		2014
Property and equipment:
Computer equipment	$	6,585		$	3,824
Internal-use software and website development costs		11,047			4,486
Office equipment and furniture		2,062			1,904
Leasehold improvements		5,570			5,274
Assets not yet placed in service		1,247			4,361
Property and equipment		26,511			19,849
Less accumulated depreciation and amortization		(8,463	)		(5,425	)
Total property and equipment, net	$	18,048		$	14,424

	Range
Unobservable Input	June 30, 2015	December 31, 2014
Discount rate	15% - 25%	15% - 25%
Default rate	2.0% - 20.9%	2.6% - 26.3%
Market servicing rate	0.625%	0.625% - 0.70%

	Servicing Assets			Servicing Liabilities
Amortized cost at January 1, 2015	$	4,163		$	624
Adjustment to adopt fair value measurement	546				(29	)
Fair value at January 1, 2015		4,709			595
Additions		5,837			193
Less: Changes in fair value		(1,864	)		(182	)
Fair value at June 30, 2015	$	8,682		$	606


Prosper Marketplace, Inc.	Yesx No ¨
Prosper Funding LLC	Yesx No ¨


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

	Borrower Loans				Notes						Loans Held for Sale
	June 30, 2015		December 31, 2014		June 30, 2015			December 31, 2014			June 30, 2015		December 31, 2014
Aggregate principal balance outstanding	$	280,862	$	268,598	$	(284,628	)	$	(272,267	)	$	1,416	$	8,295
Fair value adjustments		3,338		4,645		-			(1,516	)		15		168
Fair value	$	284,200	$	273,243	$	(284,628	)	$	(273,783	)	$	1,431	$	8,463

	Servicing Assets			Servicing Liabilities
Fair Value at April 1, 2015	$	6,034		$	668
Additions		3,759			39
Less: Changes in fair value		(1,111	)		(101	)
Fair value at June 30, 2015	$	8,682		$	606

	Servicing Assets			Servicing Liabilities
Weighted average market servicing rate assumptions		0.625	%		0.625	%
Resulting fair value from:
Market servicing rate increase to 0.65%	$	8,041		$	(667	)
Market servicing rate decrease to 0.60%	$	9,324		$	(546	)
Weighted average default assumptions		13	%		13	%
Resulting fair value from:
100 basis point increase	$	8,529		$	(606	)
100 basis point decrease	$	8,837		$	(607	)

	Fair Value
Assets:
Cash	$	1,219
Accounts Receivable		147
Property, equipment and software		6
Other assets		63
Identified intangible assets		3,520
Goodwill		16,825
Liabilities:

Accrued expenses and other liabilities		708
Total purchase consideration	$	21,072

	June 30, 2015
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Remaining Useful Life (In Years)
Customer relationships	$	2,650	$	(201	)	$	2,449		10.0
Technology		810		(112	)		698		3.0
Brand name		60		(25	)		35		1.0
Total intangible assets subject to amortization	$	3,520	$	(338	)	$	3,182

Convertible Preferred Stock	Par Value		Authorized shares		Outstanding and Issued shares		Liquidation Preference
New Series A	$	0.01		13,711,644		13,711,644	$	19,774
Series A-1		0.01		4,952,183		4,952,183		49,522
New Series B		0.01		7,155,176		7,155,176		21,581
New Series C		0.01		4,880,954		4,880,954		70,075
New Series D		0.01		4,777,728		4,777,728		165,000
				35,477,685		35,477,685		325,952

	Early exercised options, unvested			Weighted average exercise price
Balance as of January 1, 2015		4,112,269		$	0.25
Exercise of non-vested stock options		12,709			3.07
Repurchase of restricted stock		(30,341	)		0.13
Restricted stock vested		(1,010,033	)		0.23
Balance as of June 30, 2015		3,084,604		$	0.26

	Options Issued and Outstanding			Weighted- Average Exercise Price
Balance as of January 1, 2015		4,994,998		$	1.85
Options granted		2,919,414			19.52
Options exercised – vested		(426,086	)		1.45
Options exercised – nonvested		(12,709	)		3.07
Options forfeited		(570,281	)		2.79
Balance as of June 30, 2015		6,905,336			9.26

Options vested and/or exercisable at June 30, 2015		5,798,746			8.30

Beginning balance as of January 1, 2015	$	4,927
Decrease related to prior year positions		-
Increase related to current year positions		-
Ending balance as of June 30, 2015	$	4,927

Remaining six months of 2015		1,913
2016		4,439
2017		5,326
2018		5,687
2019		5,845
2020		6,007
Thereafter		20,923
Total future operating lease obligations	$	50,140

	Aggregate Amount of Notes Purchased				Interest Earned on Notes
	Six Months Ended June 30,				Six Months Ended June 30,
Related Party	2015		2014		2015		2014
Executive officers and management	$	846	$	403	$	98	$	49
Directors		20	$	3	$	4	$	3
Total	$	866	$	406	$	102	$	52

	Notes Balance as of
Related Party	June 30, 2015		December 31, 2014
Executive officers and management	$	1,992	$	1,614
Directors		96		76
	$	2,088	$	1,690

	Note Balance as of
Related Party	June 30, 2015		December 31, 2014
Executive officers and management	$	1,992	$	1,614
Directors		-		-
	$	1,992	$	1,614

Default due to Delinquency:			11,323			$	74,112
Default due to Bankruptcy²:			2,329			$	16,396

	PROSPER MARKETPLACE, INC.
	PROSPER FUNDING LLC

Date: August 10, 2015	/s/ Aaron Vermut
	Aaron Vermut
	Chief Executive Officer of Prosper Marketplace, Inc.
	Chief Executive Officer of Prosper Funding LLC
	(Principal Executive Officer)

Date: August 10, 2015	/s/ John Hiestand
	John Hiestand
	Vice President, Finance of Prosper Marketplace, Inc.
	Treasurer of Prosper Funding LLC (Principal Financial Officer and Principal Accounting Officer)