10-Q 1 prosper-10q_20150930.htm 10-Q prosper-10q_20150930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended September 30, 2015

 

Commission

File Number

 

Exact Name of Registrant as Specified in its Charter

 

I.R.S. Employer

Identification Number

333-147019

333-179941-01

333-204880

 

PROSPER MARKETPLACE, INC.

a Delaware corporation

221 Main Street, 3rd Floor

San Francisco, CA 94105

Telephone: (415)593-5400

 

73-1733867

 

 

 

 

 

333-179941

333-204880-01

 

PROSPER FUNDING LLC

a Delaware limited liability company

221 Main Street, 3rd Floor

San Francisco, CA 94105

Telephone: (415)593-5479

 

45-4526070

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

 

Prosper Marketplace, Inc.

Yesx No ¨

Prosper Funding LLC

Yesx No ¨

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

 

Prosper Marketplace, Inc.

Yesx No ¨

Prosper Funding LLC

Yesx No ¨

 

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.

 

 

Large

Accelerated

Filer

 

Accelerated

Filer

 

Non-

Accelerated

Filer

 

Smaller

Reporting

Company

Prosper Marketplace, Inc.

o

 

o

 

o

 

x

Prosper Funding LLC

o

 

o

 

o

 

x

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

 

Prosper Marketplace, Inc.

Yes¨ No x

Prosper Funding LLC

Yes¨ No x

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

As of November 3, 2015, there were 13,881,056 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.

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

 

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)

 

8

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

 

 

Prosper Funding LLC

 

32

 

 

Condensed Consolidated Balance Sheets (Unaudited)

 

32

 

 

Condensed Consolidated Statements of Operations (Unaudited)

 

33

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

34

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

35

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

45

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

63

Item 4.

 

Controls and Procedures

 

63

PART II.

 

OTHER INFORMATION

 

65

Item 1.

 

Legal Proceedings

 

65

Item 1A.

 

Risk Factors

 

65

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

66

Item 3.

 

Defaults upon Senior Securities

 

66

Item 4.

 

Mine Safety Disclosures

 

66

Item 5.

 

Other Information

 

66

Item 6.

 

Exhibits

 

66

Signatures

 

67

Exhibit Index

 

68

 

 

 

 

2


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.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.

The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

 

·

the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;

 

·

PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding Borrower Loans;

 

·

our ability to attract potential borrowers to our marketplace;

 

·

the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investor members;

 

·

our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;

 

·

credit risks posed by the credit worthiness of borrowers and the effectiveness of our credit rating systems;

 

·

our limited operational history and lack of significant historical performance data about borrower performance;

 

·

the impact of current economic conditions on the performance of the Notes and loss rates of the Notes;

 

·

our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;

 

·

potential efforts by state regulators or litigants to characterize either of us, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace;

 

·

the application of federal and state bankruptcy and insolvency laws to borrowers and to each of us;

 

·

the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;

 

·

the lack of a public trading market for the Notes and any inability to resell the Notes on the Note Trader platform;

 

·

the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and

 

·

our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our marketplace or adversely impact our ability to service Borrower Loans.

3


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.

WHERE YOU CAN FIND MORE INFORMATION

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

 

 

4


Item 1. Condensed Consolidated Financial Statements

Prosper Marketplace, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

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

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

Assets

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

120,522

 

 

$

50,557

 

 

Restricted Cash

 

 

152,397

 

 

 

81,300

 

 

Available for Sale Investments, at Fair Value

 

 

47,104

 

 

 

-

 

 

Accounts Receivable

 

 

1,499

 

 

 

3,152

 

 

Loans Held for Sale, at Fair Value

 

 

34

 

 

 

8,463

 

 

Borrower Loans, at Fair Value

 

 

286,462

 

 

 

273,243

 

 

Property and Equipment, Net

 

 

20,067

 

 

 

14,424

 

 

Prepaid and Other Assets

 

 

9,024

 

 

 

4,856

 

 

Servicing Assets

 

 

11,300

 

 

 

4,163

 

 

Goodwill

 

 

16,825

 

 

 

-

 

 

Intangibles Assets, Net

 

 

2,979

 

 

 

-

 

 

Total Assets

 

$

668,213

 

 

$

440,158

 

 

Liabilities, Convertible Preferred Stock and Stockholders' Deficit

 

 

 

 

 

 

 

 

 

Accounts Payable and Accrued Liabilities

 

$

26,188

 

 

$

17,239

 

 

Payable to Investors

 

 

136,757

 

 

 

64,494

 

 

Class Action Settlement Liability

 

 

5,926

 

 

 

7,861

 

 

Notes at Fair Value

 

 

287,254

 

 

 

273,783

 

 

Repurchase Liability for Unvested Restricted Stock Awards

 

 

568

 

 

 

1,010

 

 

Total Liabilities

 

 

456,693

 

 

 

364,387

 

 

Commitments and Contingencies (see Note 13)

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock – $0.01 par value; 35,477,685 shares authorized;

35,477,685 issued and outstanding as of September 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 September 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; 14,058,509 issued and

13,871,322 outstanding as of September 30, 2015; and 47,928,883 shares authorized;

   14,448,700 issued and 14,448,700 outstanding as of December 31, 2014)

 

 

123

 

 

 

102

 

 

Additional Paid-In Capital

 

 

97,131

 

 

 

86,340

 

 

Less: Treasury Stock

 

 

(23,417

)

 

 

(303

)

 

Accumulated Deficit

 

 

(138,259

)

 

 

(121,513

)

 

Accumulated Other Comprehensive Income

 

 

4

 

 

 

-

 

 

Total Stockholders' Deficit

 

 

(64,418

)

 

 

(35,374

)

 

Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit

 

$

668,213

 

 

$

440,158

 

 

 

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

 

 

5


Prosper Marketplace, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2015

 

 

2014

(As Restated)*

 

 

2015

 

 

2014

(As Restated)*

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction Fees, Net

 

$

46,842

 

 

$

21,061

 

 

$

111,984

 

 

$

45,404

 

Servicing Fees, Net

 

 

4,652

 

 

 

1,401

 

 

 

10,796

 

 

 

2,512

 

Gain on Sale of Borrower Loans

 

 

4,263

 

 

 

1,268

 

 

 

9,881

 

 

 

2,246

 

Other Revenue

 

 

2,229

 

 

 

479

 

 

 

4,935

 

 

 

662

 

Total Operating Revenue

 

 

57,986

 

 

 

24,209

 

 

 

137,596

 

 

 

50,824

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income on Borrower Loans

 

 

10,280

 

 

 

10,781

 

 

 

30,892

 

 

 

31,153

 

Interest Expense on Notes

 

 

(9,550

)

 

 

(9,886

)

 

 

(28,561

)

 

 

(28,872

)

Net Interest Income

 

 

730

 

 

 

895

 

 

 

2,331

 

 

 

2,281

 

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

 

 

(87

)

 

 

21

 

 

 

(66

)

 

 

291

 

Total Net Revenue

 

 

58,629

 

 

 

25,125

 

 

 

139,861

 

 

 

53,396

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Origination and Servicing

 

 

8,357

 

 

 

3,376

 

 

 

22,335

 

 

 

8,220

 

Sales and Marketing

 

 

31,844

 

 

 

11,201

 

 

 

76,996

 

 

 

27,028

 

General and Administrative

 

 

22,236

 

 

 

7,204

 

 

 

57,570

 

 

 

16,808

 

Total Expenses

 

 

62,437

 

 

 

21,781

 

 

 

156,901

 

 

 

52,056

 

Net Income (Loss) Before Taxes

 

 

(3,808

)

 

 

3,344

 

 

 

(17,040

)

 

 

1,340

 

Income Tax Expense

 

 

35

 

 

 

-

 

 

 

284

 

 

 

-

 

Net Income (Loss)

 

$

(3,843

)

 

$

3,344

 

 

$

(17,324

)

 

$

1,340

 

Less: Excess Return to Preferred Shareholders on Repurchase

 

 

-

 

 

 

(14,892

)

 

 

-

 

 

 

(14,892

)

Net Loss  Attributable to Common Stockholders

 

$

(3,843

)

 

$

(11,548

)

 

$

(17,324

)

 

$

(13,552

)

Net Loss Per Share – Basic and Diluted

 

$

(0.34

)

 

$

(1.26

)

 

$

(1.58

)

 

$

(1.57

)

Weighted-Average Shares - Basic and Diluted

 

 

11,181,553

 

 

 

9,179,426

 

 

 

10,949,396

 

 

 

8,620,434

 

  

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

*See Note 17

 


6


 

Prosper Marketplace, Inc.

Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2015

 

 

2014

(As Restated)*

 

 

2015

 

 

2014

(As Restated)*

 

Net Income (Loss)

 

$

(3,843

)

 

$

3,344

 

 

$

(17,324

)

 

$

1,340

 

Other Comprehensive Income, Before Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4

 

 

 

-

 

 

 

4

 

 

 

-

 

Other Comprehensive Income, Before Tax

 

 

4

 

 

 

-

 

 

 

4

 

 

 

-

 

Income tax effect

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other Comprehensive Income, Net of Tax

 

 

4

 

 

 

-

 

 

 

4

 

 

 

-

 

Comprehensive Income (Loss)

 

 

(3,839

)

 

 

3,344

 

 

 

(17,320

)

 

 

1,340

 

 

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

*See Note 17

 


7


 

Prosper Marketplace, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

(As Restated)*

 

Cash flows from Operating Activities:

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(17,324

)

 

$

1,340

 

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

 

 

66

 

 

 

(291

)

Depreciation and Amortization

 

 

4,967

 

 

 

1,228

 

Gain on sales of Borrower Loans

 

 

(9,958

)

 

 

(2,480

)

Amortization and Change in Fair Value of Servicing Rights

 

 

3,322

 

 

 

372

 

Stock-Based Compensation Expense

 

 

7,439

 

 

 

763

 

Other, Net

 

 

94

 

 

 

278

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Purchase of Loans Held for Sale at Fair Value

 

 

(2,426,963

)

 

 

(919,770

)

Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value

 

 

2,435,253

 

 

 

909,897

 

Restricted Cash Except for those Related to Investing Activities

 

 

(69,651

)

 

 

(26,976

)

Accounts Receivable

 

 

1,800

 

 

 

(595

)

Prepaid and Other Assets

 

 

(4,168

)

 

 

(2,515

)

Accounts Payable and Accrued Liabilities

 

 

7,483

 

 

 

5,030

 

Class Action Settlement Liability

 

 

(2,000

)

 

 

(2,000

)

Payable to Investors

 

 

72,263

 

 

 

22,596

 

Net Cash Provided by (Used in) Operating Activities

 

 

2,623

 

 

 

(13,123

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of Borrower Loans Held at Fair Value

 

 

(142,103

)

 

 

(130,857

)

Principal Payments of Borrower Loans Held at Fair Value

 

 

111,864

 

 

 

88,974

 

Purchases of Property and Equipment

 

 

(9,518

)

 

 

(4,806

)

Maturities of Short Term Investments

 

 

1,274

 

 

 

-

 

Purchases of Short Term Investments

 

 

(1,275

)

 

 

-

 

Purchases of Available for Sale Investments, at Fair Value

 

 

(47,100

)

 

 

-

 

Acquisition of Business, Net of Cash Acquired

 

 

(19,000

)

 

 

-

 

Changes in Restricted Cash Related to Investing Activities

 

 

(1,446

)

 

 

869

 

Net Cash Used in Investing Activities

 

 

(107,304

)

 

 

(45,820

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from Issuance of Notes Held at Fair Value

 

 

142,246

 

 

 

130,756

 

Payment of Notes Held at Fair Value

 

 

(111,711

)

 

 

(88,909

)

Proceeds from Issuance of Convertible Preferred Stock, Net

 

 

164,793

 

 

 

69,958

 

Proceeds from Early Exercise of Stock Options and Issuance of Restricted Stock

 

 

1,714

 

 

 

454

 

Proceeds from Exercise of Vested Stock Options and Common Stock Warrants

 

 

849

 

 

 

161

 

Repurchase of Preferred Stock

 

 

-

 

 

 

(18,525

)

Repurchase of Common Stock and Restricted Stock

 

 

(23,245

)

 

 

(24

)

Net Cash Provided by Financing Activities

 

 

174,646

 

 

 

93,871

 

Net Increase in Cash and Cash Equivalents

 

 

69,965

 

 

 

34,928

 

Cash and Cash Equivalents at Beginning of the Period

 

 

50,557

 

 

 

18,339

 

Cash and Cash Equivalents at End of the Period

 

$

120,522

 

 

$

53,267

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash Paid for Interest

 

$

28,698

 

 

$

28,961

 

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

 

$

5

 

 

$

423

 

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.

*See Note 17

 

 

8


Prosper Marketplace, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Basis of Presentation

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.

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, a newly, with PHL a newly established entity surviving the merger. Prosper’s condensed consolidated financial statements include PHL's results of operations and financial position from this date forward (see Note 8 – American HealthCare Lending Acquisition).

Reclassifications

During the period ended September 30, 2015, Prosper changed the presentation of its revenue in the consolidated statements of operations. A new line called “Gain on Sales of Borrower Loans” was created with the amounts included in this line previously classified as “Other Revenue”.  Prior period amounts have been reclassified to conform to the current 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 also changed the presentation of the servicing assets on its balance sheet by reclassifying them from “Prepaids and Other Assets” to “Servicing Assets”.  Prior period amounts have been reclassified to conform to the current presentation.   Management believes these changes make the income statement more useful for the readers of the financial statements and comparable with Prosper’s competitors.  

 

 

2. Summary of Significant Accounting Policies

Prosper’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2014. There have been no changes to these accounting policies during the first nine months of 2015 except for the policy related to the subsequent measurement of Loan Servicing Assets and Liabilities, which is discussed below.

9


Fair Value Measurements

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Investments at Fair Value, 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

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 readers 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. 

Loan Servicing Assets and Liabilities

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 Subtopic 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.

Recent Accounting Pronouncements

In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. Early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper may adopt the standard in either Prosper’s fiscal year ending December 31, 2017 or 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Prosper has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.  

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 Fees Paid in Cloud Computing Arrangement”, 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

10


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.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The new guidance simplifies the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. Prosper is currently assessing the potential impact on its financial statements from adopting this new guidance.

 

 

3. Property and Equipment, Net

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

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 

2015

 

 

2014

 

 

Property and equipment:

 

 

 

 

 

 

 

 

 

Computer equipment

 

$

6,789

 

 

$

3,824

 

 

Internal-use software and website development costs

 

 

11,186

 

 

 

4,486

 

 

Office equipment and furniture

 

 

2,327

 

 

 

1,904

 

 

Leasehold improvements

 

 

5,646

 

 

 

5,274

 

 

Assets not yet placed in service

 

 

3,717

 

 

 

4,361

 

 

Property and equipment

 

 

29,665

 

 

 

19,849

 

 

Less accumulated depreciation and amortization

 

 

(9,598

)

 

 

(5,425

)

 

Total property and equipment, net

 

$

20,067

 

 

$

14,424

 

 

 

Depreciation expense for the three months ended September 30, 2015 and 2014 was $1,309 thousand and $438 thousand respectively. Prosper capitalized internal-use software and website development costs in the amount of $1,950 thousand and $316 thousand for the three months ended September 30, 2015 and 2014, respectively. Depreciation expense for the nine months ended September 30, 2015 and 2014 was $4,426 thousand and $1,228 thousand respectively. Prosper capitalized internal-use software and website development costs in the amount of $5,883 thousand and $1,124 thousand for the nine months ended September 30, 2015 and 2014, respectively. Prosper recorded internal-use software and website development impairment charges of $0 and $233 thousand for the nine months ended September 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.  

 

 

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

 

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

 

 

 

Borrower Loans

 

 

Notes

 

 

Loans Held for Sale

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

September 30, 2015

 

 

December 31, 2014

 

 

September 30, 2015

 

 

December 31, 2014

 

Aggregate principal balance outstanding

 

$

285,837

 

 

$

268,598

 

 

$

(284,562

)

 

$

(272,269

)

 

$

44

 

 

$

8,295

 

Fair value adjustments

 

 

625

 

 

 

4,645

 

 

 

(2,692

)

 

 

(1,514

)

 

 

(10

)

 

 

168

 

Fair value

 

$

286,462

 

 

$

273,243

 

 

$

(287,254

)

 

$

(273,783

)

 

$

34

 

 

$

8,463

 

 

At September 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 September 2020. At December 31, 2014, Borrower Loans, loans held for sale, and Notes 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.

 

Approximately $1.3 million and $3.4 million represents the loss that is attributable to changes in the instrument specific credit risks related to Borrower Loans that were recorded in the change in fair value during the three and nine months ending September 30, 2015, respectively.

11


As of September 30, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $1.7 million and a fair value of $0.7 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 September 30, 2015 and December 31, 2014, Borrower Loans in non-accrual status had a fair value of $0.1 million and $0, respectively.

 

 

5. Loan Servicing Assets and Liabilities

Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees.  The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers 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 $4.3 million and $1.3 million for the three months ended September 30, 2015 and 2014, respectively. The total gain recognized on the sale of such Borrower Loans was $9.9 million and $2.2 million for the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3,116 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 September 2020.  At December 31, 2014, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $1,358 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 (see note 6).      

 

6. Available for Sale Investments, at Fair Value

 

Prosper purchased available for sale investments during the third quarter of 2015. Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired (OTTI).

 

The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of September 30, 2015, are as follows:

 

 

 

 

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Corporate debt securities

 

$

33,618

 

 

$

18

 

 

$

(15

)

 

$

33,621

 

Commercial paper

 

 

11,481

 

 

 

-

 

 

 

-

 

 

 

11,481

 

US Treasury securities

 

 

2,001

 

 

 

1

 

 

 

-

 

 

 

2,002

 

Total Available for Sale Investments

 

$

47,100

 

 

$

19

 

 

$

(15

)

 

$

47,104

 

 

A summary of available for sale investments with unrealized losses as of September 30, 2015, aggregated by category and period of continuous unrealized loss, is as follows:

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

Fair Value

 

 

Unrealized losses

 

 

Fair Value

 

 

Unrealized losses

 

 

Fair Value

 

 

Unrealized losses

 

Corporate Debt Securities

 

$

12,602

 

 

$

(15

)

 

$

-

 

 

$

-

 

 

$

12,602

 

 

$

(15

)

Total investments with unrealized losses

 

$

12,602

 

 

$

(15

)

 

$

-

 

 

$

-

 

 

$

12,602

 

 

$

(15

)

 

Management evaluates whether available for sale investment are OTTI on a quarterly basis. Debt securities with unrealized losses are considered OTTI if Prosper intends to sell the investment or if it is more likely than not that it will be required to sell such investment before any anticipated recovery. If management determines that an investment is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and then-current fair value.

 

12


An investment is also OTTI if management does not expect to recover all of the amortized cost of the investment. In this circumstance, the impairment recognized in earnings represents estimated credit losses, and is measured by the difference between the present value of expected cash flows and the amortized cost of the investment. Management utilizes cash flow models to estimate the expected future cash flow from the securities to estimate the credit loss. Expected cash flows are discounted using the investment's effective interest rate.

 

The evaluation of whether Prosper expects to recover the amortized cost of a investment is inherently judgmental. The evaluation includes the assessment of several bond performance indicators, including the current price and magnitude of the unrealized loss and whether Prosper has received all scheduled principal and interest payments. There were no impairment charges recognized during the three and nine months ending September 30, 2015.

 

The maturities of available for sale investments at September 30, 2015, are as follows:

 

 

 

Within 1 year

 

 

After 1 year through 5 years

 

 

After 5 years to 10years

 

 

After 10 years

 

 

Total

 

Corporate debt securities

 

$

20,496

 

 

$

13,125

 

 

$

-

 

 

$

-

 

 

$

33,621

 

Commercial paper

 

 

11,481

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,481

 

US Treasury securities

 

 

-

 

 

 

2,002

 

 

 

-

 

 

 

-

 

 

 

2,002

 

Total Fair Value

 

$

31,977

 

 

$

15,127

 

 

$

-

 

 

$

-

 

 

$

47,104

 

Total Amortized Cost

 

$

31,987

 

 

$

15,113

 

 

$

-

 

 

$

-

 

 

$

47,100

 

 

 

Prosper did not sell any available for sale investments during the three and nine months ended September 30, 2015 and as a result did not realize any gains or losses on sale.  

 

7.  Fair Value of Assets and Liabilities

 

For a description of the fair value hierarchy and Prosper’s fair value methodologies, see "Part IV - Item 15 - Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies" in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2014, except for Investments at Fair value which is discussed below. Prosper did not transfer any assets or liabilities in or out of level 3 during the three months or nine months ended September 30, 2015 or the year ended December 31, 2014.

 

Financial Instruments Recorded at Fair Value

 

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

 

Investments held at fair value consists of available for sale investments.  The available for sale investments consist of corporate and government bonds.  When available, Prosper uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.

 

The following tables present the fair value hierarchy for assets and liabilities measured at fair value except for servicing assets and liabilities at December 31, 2014, which were measured at amortized cost and presented below at fair value for comparison purposes (in thousands):

 

13


 

 

September 30, 2015

 

Level 1 Inputs

 

 

Level 2 Inputs

 

 

Level 3 Inputs

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower Loans

 

$

-

 

 

$

-

 

 

$

286,462

 

 

$

286,462

 

Loans Held for Sale

 

 

-

 

 

 

 

 

 

 

34

 

 

 

34

 

Available for Sale Investments, at Fair Value

 

 

-

 

 

 

47,104

 

 

 

-

 

 

 

47,104

 

Servicing Assets

 

 

-

 

 

 

 

 

 

 

11,300

 

 

 

11,300

 

Total Assets

 

 

-

 

 

 

47,104

 

 

 

297,796

 

 

 

344,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

$

-

 

 

$

-

 

 

$

287,254

 

 

$

287,254

 

Servicing Liabilities

 

 

-

 

 

 

-

 

 

 

550

 

 

 

550

 

Total Liabilities

 

$

-

 

 

$

-

 

 

$

287,804

 

 

$

287,804

 

 

 

December 31, 2014

 

Level 1 Inputs

 

 

Level 2 Inputs

 

 

Level 3 Inputs

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower Loans

 

$

-

 

 

$

-

 

 

$

273,243

 

 

$

273,243

 

Loans Held for Sale

 

 

-

 

 

 

-

 

 

 

8,463

 

 

 

8,463

 

Servicing Assets

 

 

-

 

 

 

 

 

 

 

4,709

 

 

 

4,709

 

Total Assets

 

 

-

 

 

 

-

 

 

 

286,415

 

 

 

286,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

$

-

 

 

$

-

 

 

$

273,783

 

 

$

273,783

 

Servicing Liabilities

 

 

-

 

 

 

-

 

 

 

595

 

 

 

595

 

Total Liabilities

 

$

-

 

 

$

-

 

 

$

274,378

 

 

$

274,378

 

 

 

 

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

 

Significant Unobservable Inputs

 

The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at September 30, 2015 and December 31, 2014:

 

Borrower Loans, Loans Held for Sale and Notes:

 

 

 

Range

Unobservable Input

 

September 30, 2015

 

December 31, 2014

Discount rate

 

2.9%-10.5%

 

3.3%-10.6%

Default rate

 

2.7%-22.8%

 

2.6%-19.7%

 

Servicing Rights

 

 

 

Range

Unobservable Input