10-Q 1 prosper-10q_20160331.htm 10-Q prosper-10q_20160331.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 March 31, 2016

 

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

 

x

 

o

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 May 4, 2016, there were 69,716,310 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.

 

 

 

 

1

 


 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

Page No.

 

 

Forward-Looking Statements

 

2

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 Other Comprehensive Income (Loss) (Unaudited)

 

7

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

8

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

 

 

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

 

38

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

47

Item 4.

 

Controls and Procedures

 

48

PART II.

 

OTHER INFORMATION

 

49

Item 1.

 

Legal Proceedings

 

49

Item 1A.

 

Risk Factors

 

49

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

49

Item 3.

 

Defaults upon Senior Securities

 

49

Item 4.

 

Mine Safety Disclosures

 

49

Item 5.

 

Other Information

 

49

Item 6.

 

Exhibits

 

49

Signatures

 

50

Exhibit Index

 

51

 

 

Except as the context requires otherwise, as used herein, “Registrants” refers to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “we,” “us,” “our,” “Prosper,” and the “Company” refer to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. (“BillGuard”), a Delaware corporation, and Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned 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, investors currently invest in Borrower Loans through two channels: (i) the “Note Channel”, which allows investors to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel”, which allows accredited and institutional investors to purchase Borrower Loans in their entirety directly from PFL. Finally, although historically we have referred to investors as “lender members,” we call them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace. All share and per share numbers presented in this Form 10-Q have been adjusted to reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

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

2

 


 

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 investors;

 

·

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

 

·

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

 

·

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

 

·

potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;

 

·

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

 

·

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

 

·

the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;

 

·

the 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.

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.

 

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4

 


 

Item 1. Condensed Consolidated Financial Statements

Prosper Marketplace, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

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

 

 

 

March 31, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

40,961

 

 

$

66,295

 

Restricted Cash

 

 

148,091

 

 

 

151,223

 

Available for Sale Investments, at Fair Value

 

 

67,958

 

 

 

73,187

 

Accounts Receivable

 

 

2,652

 

 

 

2,434

 

Loans Held for Sale, at Fair Value

 

 

30

 

 

 

32

 

Borrower Loans, at Fair Value

 

 

303,243

 

 

 

297,273

 

Property and Equipment, Net

 

 

28,143

 

 

 

24,965

 

Prepaid and Other Assets

 

 

7,109

 

 

 

6,433

 

Servicing Assets

 

 

15,548

 

 

 

14,363

 

Goodwill

 

 

36,368

 

 

 

36,368

 

Intangibles Assets, Net

 

 

12,083

 

 

 

13,051

 

Total Assets

 

$

662,186

 

 

$

685,624

 

Liabilities, Convertible Preferred Stock and Stockholders' Deficit

 

 

 

 

 

 

 

 

Accounts Payable and Accrued Liabilities

 

$

13,987

 

 

$

22,409

 

Payable to Investors

 

 

132,625

 

 

 

136,507

 

Notes at Fair Value

 

 

302,357

 

 

 

297,405

 

Other Liabilities

 

 

16,274

 

 

 

20,735

 

Total Liabilities

 

 

465,243

 

 

 

477,056

 

Commitments and Contingencies (see Note 15)

 

 

 

 

 

 

 

 

Convertible Preferred Stock – $0.01 par value; 177,388,425 shares authorized, issued and outstanding as of March 31, 2016 and December 31, 2015. Aggregate liquidation preference of $325,952 as of March 31, 2016 and December 31, 2015.

 

 

275,938

 

 

 

275,938

 

Stockholders' Deficit

 

 

 

 

 

 

 

 

Common Stock ($0.01 par value; 286,826,075 shares authorized; 70,629,640 issued and

69,693,705 outstanding as of March 31, 2016; and 270,326,075 shares authorized; 70,367,425 shares issued and 69,431,490 outstanding as of December 31, 2015)

 

 

150

 

 

 

127

 

Additional Paid-In Capital

 

 

108,593

 

 

 

102,971

 

Less: Treasury Stock (5,177,235 common shares at cost, March 31, 2016 and December 31, 2015)

 

 

(23,417

)

 

 

(23,417

)

Accumulated Deficit

 

 

(164,368

)

 

 

(146,907

)

Accumulated Other Comprehensive Income/(Loss)

 

 

47

 

 

 

(144

)

Total Stockholders' Deficit

 

 

(78,995

)

 

 

(67,370

)

Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit

 

$

662,186

 

 

$

685,624

 

 

All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

 

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

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

 

Transaction Fees, Net

 

$

41,824

 

 

$

25,342

 

Servicing Fees, Net

 

 

7,144

 

 

 

2,569

 

Gain on Sale of Borrower Loans

 

 

3,791

 

 

 

1,922

 

Other Revenue

 

 

2,773

 

 

 

1,076

 

Total Operating Revenues

 

 

55,532

 

 

 

30,909

 

Interest Income

 

 

 

 

 

 

 

 

Interest Income on Borrower Loans

 

 

10,783

 

 

 

10,476

 

Interest Expense on Notes

 

 

(9,722

)

 

 

(9,563

)

Net Interest Income

 

 

1,061

 

 

 

913

 

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

 

 

(78

)

 

 

(101

)

Total Net Revenue

 

 

56,515

 

 

 

31,721

 

Expenses

 

 

 

 

 

 

 

 

Origination and Servicing

 

 

10,449

 

 

 

6,852

 

Sales and Marketing

 

 

32,720

 

 

 

18,570

 

General and Administrative

 

 

30,645

 

 

 

13,502

 

Total Expenses

 

 

73,814

 

 

 

38,924

 

Net Loss Before Taxes

 

 

(17,299

)

 

 

(7,203

)

Income Tax Expense

 

 

165

 

 

 

73

 

Net Loss Applicable to Common Stockholders

 

$

(17,464

)

 

$

(7,276

)

Net Loss Per Share – Basic and Diluted

 

$

(0.29

)

 

$

(0.14

)

Weighted-Average Shares - Basic and Diluted

 

 

60,357,488

 

 

 

52,766,255

 

  

All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

 

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

 


6

 


 

 

Prosper Marketplace, Inc.

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

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Net Loss

 

$

(17,464

)

 

$

(7,276

)

Other Comprehensive Income (Loss), Before Tax

 

 

 

 

 

 

 

 

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

 

 

191

 

 

 

-

 

Other Comprehensive Income (Loss), Before Tax

 

 

191

 

 

 

-

 

   Income tax effect

 

 

-

 

 

 

-

 

Other Comprehensive Income (Loss), Net of Tax

 

 

191

 

 

 

-

 

Comprehensive Income (Loss)

 

 

(17,273

)

 

 

(7,276

)

 

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

 


7

 


 

 

Prosper Marketplace, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Cash flows from Operating Activities:

 

 

 

 

 

 

 

 

Net Loss

 

$

(17,464

)

 

$

(7,276

)

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

 

 

78

 

 

 

101

 

Depreciation and Amortization

 

 

2,971

 

 

 

1,850

 

Gain on Sales of Borrower Loans

 

 

(3,971

)

 

 

(1,928

)

Change in Fair Value of Servicing Rights

 

 

2,741

 

 

 

675

 

Stock-Based Compensation Expense

 

 

5,107

 

 

 

1,439

 

Other, Net

 

 

(30

)

 

 

(186

)

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Purchase of Loans Held for Sale at Fair Value

 

 

(931,420

)

 

 

(540,924

)

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

 

 

931,422

 

 

 

547,673

 

Restricted Cash Except for those Related to Investing Activities

 

 

2,118

 

 

 

(19,922

)

Accounts Receivable

 

 

(218

)

 

 

2,031

 

Prepaid and Other Assets

 

 

(677

)

 

 

(853

)

Accounts Payable and Accrued Liabilities

 

 

(7,414

)

 

 

926

 

Payable to Investors

 

 

(3,882

)

 

 

23,212

 

Other Liabilities

 

 

(4,305

)

 

 

(722

)

Net cash provided by (Used in) Operating Activities

 

 

(24,944

)

 

 

6,096

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of Borrower Loans Held at Fair Value

 

 

(55,171

)

 

 

(47,714

)

Principal Payments of Borrower Loans Held at Fair Value

 

 

41,599

 

 

 

36,063

 

Purchases of Property and Equipment

 

 

(5,976

)

 

 

(3,537

)

Maturities of Short Term Investments

 

 

1,278

 

 

 

1,274

 

Purchases of Short Term Investments

 

 

(1,277

)

 

 

(1,275

)

Purchases of Available for Sale Investments, at Fair Value

 

 

(11,725

)

 

 

-

 

Maturities of Available for Sale Investments

 

 

17,034

 

 

 

-

 

Acquisition of Businesses, Net of Cash Acquired

 

 

-

 

 

 

(19,000

)

Changes in Restricted Cash Related to Investing Activities

 

 

1,014

 

 

 

1,859

 

Net Cash Used in Investing Activities

 

 

(13,224

)

 

 

(32,330

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from Issuance of Notes Held at Fair Value

 

 

55,273

 

 

 

47,796

 

Payments of Notes Held at Fair Value

 

 

(42,644

)

 

 

(36,069

)

Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock

 

 

251

 

 

 

2,283

 

Repurchase of Common Stock and Restricted Stock

 

 

(46

)

 

 

(1

)

Net Cash Provided by Financing Activities

 

 

12,834

 

 

 

14,009

 

Net Decrease in Cash and Cash Equivalents

 

 

(25,334

)

 

 

(12,225

)

Cash and Cash Equivalents at Beginning of the Period

 

 

66,295

 

 

 

50,557

 

Cash and Cash Equivalents at End of the Period

 

$

40,961

 

 

$

38,332

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash Paid for Interest

 

$

9,879

 

 

$

10,444

 

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

 

$

478

 

 

$

321

 

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.

 

 

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Prosper Marketplace, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Basis of Presentation

Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005.  Except as the context requires otherwise, as used in these Notes to the Condensed Consolidated Financial Statements of Prosper Marketplace, Inc., “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015. The balance sheet at December 31, 2015 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. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.

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

On January 23, 2015, PMI acquired all of the outstanding limited liability company units of American HealthCare Lending, LLC (“American HealthCare Lending”), a company that operated a patient financing platform, and merged American HealthCare Lending with and into Prosper Healthcare Lending LLC (“PHL”), a newly established entity surviving the merger. Prosper’s consolidated financial statements include PHL’s results of operations and financial position from the date of acquisition forward.

On October 9, 2015, PMI acquired all of the outstanding stock of BillGuard, Inc. (“BillGuard”), a company incorporated in Delaware in 2010 that developed applications that help consumers manage their identity, finances and credit. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. Prosper’s consolidated financial statements include BillGuard’s results of operations and financial position from the date of acquisition forward.

Reclassifications

During the period ended March 31, 2016, 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.   

 

 

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, 2015. There have been no changes to these accounting policies during the first three months of 2016.

Fair Value Measurements

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments at Fair Value, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors

9

 


 

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

Through the Note Channel, Prosper purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.

Recent Accounting Pronouncements

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. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material 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 beginning 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 adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s financial statements.

In September 2015, the FASB issued ASU 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 adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s financial statements.  

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures.  This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718).  This guidance makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This guidance will be effective for us in the first quarter of our fiscal year 2017, and early adoption is permitted. Prosper has decided to early adopt this guidance effective January 1, 2016, the adoption of this standard did not have a material impact on Prosper’s financial statements.  

 

 

10

 


 

3. Property and Equipment, Net

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

 

 

 

March 31,

 

 

December 31,

 

 

 

 

2016

 

 

2015

 

Property and equipment:

 

 

 

 

 

 

 

 

Computer equipment

 

$

12,324

 

 

$

10,522

 

Internal-use software and website development costs

 

 

11,853

 

 

 

10,990

 

Office equipment and furniture

 

 

3,056

 

 

 

2,442

 

Leasehold improvements

 

 

6,897

 

 

 

5,719

 

Assets not yet placed in service

 

 

4,129

 

 

 

3,242

 

Property and equipment

 

 

38,259

 

 

 

32,915

 

Less accumulated depreciation and amortization

 

 

(10,116

)

 

 

(7,950

)

Total property and equipment, net

 

$

28,143

 

 

$

24,965

 

 

Depreciation and amortization expense for property and equipment for the three months ended March 31, 2016 and 2015 was $2.0 million and $1.9 million, respectively. Prosper capitalized internal-use software and website development costs in the amount of $2.2 million and $1.2 million for the three months ended March 31, 2016 and 2015, respectively.  

 

 

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

 

The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale and Notes as of March 31, 2016 and December 31, 2015, are presented in the following table (in thousands):

 

 

 

Borrower Loans

 

 

Notes

 

 

Loans Held for Sale

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

March 31, 2016

 

 

December 31, 2015

 

 

March 31, 2016

 

 

December 31, 2015

 

Aggregate principal balance outstanding

 

$

305,062

 

 

$

296,945

 

 

$

(297,183

)

 

$

(294,331

)

 

$

40

 

 

$

42

 

Fair value adjustments

 

 

(1,819

)

 

 

328

 

 

 

(5,174

)

 

 

(3,074

)

 

 

(10

)

 

 

(10

)

Fair value

 

$

303,243

 

 

$

297,273

 

 

$

(302,357

)

 

$

(297,405

)

 

$

30

 

 

$

32

 

 

At March 31, 2016, outstanding Borrower Loans 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 March 2021. At December 31, 2015, outstanding Borrower Loans had original maturities 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 December 2020.

 

Approximately $2.3 million represents the loss that is attributable to changes in the instrument specific credit risks related to Borrower Loans that were recorded in the change in fair value during the three months ending March 31, 2016.

As of March 31, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $1.6 million and a fair value of $0.6 million. As of December 31, 2015, Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of $2.3 million and a fair value of $0.9 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of March 31, 2016 and December 31, 2015, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.1 million, respectively.

 

 

5. Loan Servicing Assets and Liabilities

Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees.  The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers and the servicing rights are retained. 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 $3.8 million and $1.9 million for the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $4.2 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 4.43% to 35.31% and various maturity dates through March 2021.  At December 31, 2015, Borrower Loans that were sold but

11

 


 

for which Prosper retained servicing rights had a total outstanding principal balance of $3.8 billion, 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 December 2020.  

$9.6 million and $3.2 million of contractually specified servicing fees and ancillary fees are included on our Statement of Operations in Servicing Fees, Net for the three months ended March 31, 2016 and 2015 respectively.

Fair value

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

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

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

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

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

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

 

6. Available for Sale Investments, at Fair Value

 

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

 

The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of March 31, 2016 are as follows:

 

12

 


 

 

 

 

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Corporate debt securities

 

$

45,479

 

 

$

47

 

 

$

(15

)

 

$

45,511

 

   Commercial paper

 

 

4,890

 

 

 

-

 

 

 

-

 

 

 

4,890

 

   US Treasury securities

 

 

12,543

 

 

 

18

 

 

 

(10

)

 

 

12,551

 

   Agency bonds

 

 

2,499

 

 

 

9

 

 

 

-

 

 

 

2,508

 

Total fixed maturity securities

 

 

65,411

 

 

 

74

 

 

 

(25

)

 

 

65,460

 

   Short term bond funds

 

 

2,500

 

 

 

-

 

 

 

(2

)

 

 

2,498

 

Total Available for Sale Investments

 

$

67,911

 

 

$

74

 

 

$

(27

)

 

$

67,958

 

 

 

A summary of available for sale investments with unrealized losses as of March 31, 2016, 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

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Corporate debt securities

 

$

12,287

 

 

$

(15

)

 

$

-

 

 

$

-

 

 

$

12,287

 

 

$

(15

)

   U.S. treasury securities

 

 

6,500

 

 

 

(10

)

 

 

-

 

 

 

-

 

 

 

6,500

 

 

 

(10

)

   Agency bonds

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total fixed maturity securities

 

 

18,787

 

 

 

(25

)

 

 

-

 

 

 

-

 

 

 

18,787

 

 

 

(25

)

   Short term bond funds

 

 

2,498

 

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

2,498

 

 

 

(2

)

Total Investments with Unrealized Losses

 

$

21,285

 

 

$

(27

)

 

$

-

 

 

$

-

 

 

$

21,285

 

 

$

(27

)

 

 

There were no impairment charges recognized during the three months ended March 31, 2016.

 

The maturities of available for sale investments at March 31, 2016, are as follows:

 

 

 

 

 

 

 

 

 

Within 1 year

 

 

After 1 year through 5 years

 

 

After 5 years to 10 years

 

 

After 10 years

 

 

Total

 

Corporate debt securities

 

$

23,376

 

 

$

22,135

 

 

$

-

 

 

$

-

 

 

$

45,511

 

Commercial paper

 

 

4,890

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,890

 

US Treasury securities

 

 

3,004

 

 

 

9,547

 

 

 

-

 

 

 

-

 

 

 

12,551

 

Agency bonds

 

 

 

 

 

 

2,508

 

 

 

 

 

 

 

 

 

 

 

2,508

 

Total Fair Value

 

$

31,270

 

 

$

34,190

 

 

$

-

 

 

$

-

 

 

$

65,460

 

Total Amortized Cost

 

$

31,263

 

 

$

34,148

 

 

$

-

 

 

$

-

 

 

$

65,411

 

 

 

Prosper did not sell any available for sale investments during the three months ended March 31, 2016 and as a result did not realize any gains or losses on sale.  

 

7.  Fair Value of Assets and Liabilities

 

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

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

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

13

 


 

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

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

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

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. Servicing Assets and Liabilities are also subject to fair value measurement within the financial statements of Prosper. 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.

 

 

Financial Instruments Recorded at Fair Value

 

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

 

Investments held at fair value consist of available for sale investments.  The available for sale investments consist of corporate debt securities, commercial paper, U.S. treasury securities, agency bonds and short term bond funds.  When available, Prosper uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper 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 (in thousands):

 

14

 


 

 

 

March 31, 2016

 

Level 1 Inputs

 

 

Level 2 Inputs

 

 

Level 3 Inputs

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower Loans

 

$

-

 

 

$

-

 

 

$

303,243

 

 

$

303,243

 

Loans Held for Sale

 

 

-

 

 

 

-

 

 

 

30

 

 

 

30

 

Available for Sale Investments, at Fair Value

 

 

-

 

 

 

67,958

 

 

 

-

 

 

 

67,958

 

Servicing Assets

 

 

-

 

 

 

-

 

 

 

15,548

 

 

 

15,548

 

Total Assets

 

 

-

 

 

 

67,958

 

 

 

318,821

 

 

 

386,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

$

-

 

 

$

-

 

 

$

302,357

 

 

$

302,357

 

Servicing Liabilities

 

 

-

 

 

 

-

 

 

 

398

 

 

 

398

 

Contingent Consideration

 

 

-

 

 

 

-

 

 

 

4,866

 

 

 

4,866

 

Total Liabilities

 

$

-

 

 

$

-

 

 

$

307,621

 

 

$

307,621

 

 

 

December 31, 2015

 

Level 1 Inputs

 

 

Level 2 Inputs

 

 

Level 3 Inputs

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower Loans

 

$

-

 

 

$

-

 

 

$

297,273

 

 

$

297,273

 

Loans Held for Sale

 

 

-

 

 

 

-

 

 

 

32

 

 

 

32

 

Available for Sale Investments, at Fair Value

 

 

-

 

 

 

73,187

 

 

 

-

 

 

 

73,187

 

Servicing Assets

 

 

-

 

 

 

-

 

 

 

14,363

 

 

 

14,363

 

Total Assets

 

 

-

 

 

 

73,187

 

 

 

311,668

 

 

 

384,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

$

-

 

 

$

-

 

 

$

297,405

 

 

$

297,405

 

Servicing Liabilities

 

 

-

 

 

 

-

 

 

 

484

 

 

 

484

 

Contingent Consideration

 

 

-

 

 

 

-

 

 

 

4,801

 

 

 

4,801

 

Total Liabilities

 

$

-

 

 

$

-

 

 

$

302,690

 

 

$

302,690

 

 

 

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 March 31, 2016 and December 31, 2015:

 

Borrower Loans, Loans Held for Sale and Notes:

 

 

 

Range

Unobservable Input

 

March 31, 2016

 

December 31, 2015

Discount rate

 

4.3% - 14.6%

 

4.3% - 14.5%

Default rate

 

1.5% - 15.1%

 

1.4% - 14.4%

15

 


 

 

Servicing Rights

 

 

 

Range

 

Unobservable Input

 

March 31, 2016

 

 

December 31, 2015

 

Discount rate

 

15% - 25%

 

 

15% - 25%

 

Default rate

 

1.1% - 15.3%

 

 

1.2% - 14.7%

 

Prepayment rate

 

15.7% - 51.6%

 

 

14.3% - 25.6%

 

Market servicing rate

 

 

0.625

%

 

 

0.625

%

 

 

At March 31, 2016, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.

 

The following tables present additional information about level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis:  

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

 

 

 

Borrower

Loans

 

 

Notes

 

 

Loans Held

for Sale

 

 

Total

 

 

Balance at January 1, 2016

 

$

297,273

 

 

$

(297,405

)

 

$

32

 

 

$

(100

)

 

Purchase of Borrower Loans/Issuance of Notes

 

 

55,171

 

 

 

(55,273

)