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10Q1form10q.htmPROSPERMARKETPLACE,INC10Q9302014
UNITEDSTATES
SECURITIESANDEXCHANGECOMMISSION
Washington,D.C.20549
FORM10Q
QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
ForthequarterlyperiodendedSeptember30,2014
Commission
FileNumber
333147019,
333182599,and
33317994101
333179941
ExactNameofRegistrantasSpecifiedinitsCharter,
StateorOtherJurisdictionofIncorporation,
AddressofPrincipalExecutiveOffices,ZipCode
andTelephoneNumber(IncludingAreaCode)
731733867
PROSPER
MARKETPLACE,INC.
aDelawarecorporation
101SecondStreet,15thFloor
SanFrancisco,CA94105
Telephone:(415)5935400
454526070
PROSPERFUNDING
LLC
aDelawarelimitedliabilitycompany
101SecondStreet,15thFloor
SanFrancisco,CA94105
Telephone:(415)5935479
I.R.S.Employer
IdentificationNumber
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
SecuritiesExchangeActof1934duringthepreceding12monthsand(2)hasbeensubjecttosuchfilingrequirementsforthepast
90days.
ProsperMarketplace,Inc.
ProsperFundingLLC
YesxNo
YesxNo
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,every
InteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationSTduringthepreceding12months
(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).
ProsperMarketplace,Inc.
ProsperFundingLLC
YesxNo
YesxNo
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Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anonacceleratedfiler,orasmaller
reportingcompany.Seethedefinitionsoflargeacceleratedfiler,acceleratedfilerandsmallerreportingcompanyinRule
12b2oftheExchangeAct.
Large
Accelerated
Filer
ProsperMarketplace,Inc.
ProsperFundingLLC
Accelerated
Filer
o
o
Non
Accelerated
Filer
o
o
Smaller
Reporting
Company
x
x
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b2oftheExchangeAct).
ProsperMarketplace,Inc.
ProsperFundingLLC
YesNox
YesNox
2
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ProsperFundingLLCmeetstheconditionssetforthinGeneralInstructionH(1)(a)and(b)ofForm10Qandisthereforefiling
thisForm10QwiththereduceddisclosureformatspecifiedinGeneralInstructionH(2)ofForm10Q.
NumberofSharesofCommon
StockoftheRegistrant
OutstandingatNovember10,
2014
14,430,808
($.01parvalue)
None
Registrant
ProsperMarketplace,Inc.
ProsperFundingLLC
THIS COMBINED FORM 10Q 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
INFORMATIONRELATINGTOTHEOTHERREGISTRANT.
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TABLEOFCONTENTS
ForwardLookingStatements
PARTI.FINANCIALINFORMATION
Item1. CondensedConsolidatedFinancialStatements
ProsperMarketplaceInc.
CondensedConsolidatedBalanceSheetsasofSeptember30,2014andDecember31,2013(Unaudited)
CondensedConsolidatedStatementsofOperationsforthethreemonthsandninemonthsendedSeptember30,2014
and2013(Unaudited)
CondensedConsolidatedStatementofConvertiblePreferredStockandStockholdersEquity(Deficit)forthenine
monthsendedSeptember30,2014(Unaudited)
CondensedConsolidatedStatementsofCashFlowsfortheninemonthsendedSeptember30,2014and2013
(Unaudited)
NotestoCondensedConsolidatedFinancialStatementsasofSeptember30,2014(Unaudited)
ProsperFundingLLC
CondensedConsolidatedBalanceSheetsasofSeptember30,2014andDecember31,2013(Unaudited)
CondensedConsolidatedStatementsofOperationsforthethreeandninemonthsendedSeptember30,2014and2013
(Unaudited)
CondensedConsolidatedStatementsofCashFlowsfortheninemonthsendedSeptember30,2014and2013
(Unaudited)
NotestoCondensedConsolidatedFinancialStatementsasofSeptember30,2014(Unaudited)
Item2. ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations
Item3. QuantitativeandQualitativeDisclosuresAboutMarketRisk
Item4. ControlsandProcedures
PART
II.
OTHERINFORMATION
Item1. LegalProceedings
Item
1A.
RiskFactors
Item2. UnregisteredSaleofEquitySecuritiesandUseofProceeds
Item3. DefaultsuponSeniorSecurities
Item4. MineSafetyDisclosures
Item5. OtherInformation
Item6. Exhibits
Signatures
ExhibitIndex
PageNo.
1
7
7
8
9
10
11
34
35
36
37
50
77
77
78
78
78
78
78
79
87
88
89
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ForwardLookingStatements
This Quarterly Report on Form 10Q includes forwardlooking 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).
Forwardlooking 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,
continueorsimilarexpressions.Forwardlookingstatementsinherentlyinvolvemanyrisksanduncertaintiesthatcouldcause
actual results to differ materially from those projected in these statements. Where, in any forwardlooking statement, Prosper
Funding LLC (Prosper Funding) or Prosper Marketplace, Inc. (PMI and, collectively with Prosper Funding, the
Registrants)expressesanexpectationorbeliefastofutureresultsorevents,suchexpectationorbeliefisbasedonthecurrent
plansandexpectationsofProsperFundingandPMIsrespectivemanagements,expressedingoodfaithandisbelievedtohavea
reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or
accomplished.
In this Quarterly Report, the unsecured, consumer loans originated through the platform are referred to as Borrower
Loans,andtheborrowerpaymentdependentnotesissuedthroughtheplatform,whetherissuedbyPMIorProsperFunding,are
referredtoasNotes.Thefollowingincludesomebutnotallofthefactorsthatcouldcauseactualresultsoreventstodiffer
materiallyfromthoseanticipated:
theperformanceoftheNotes,which,inadditiontobeingspeculativeinvestments,arespecial,limitedobligationsthatare
notguaranteedorinsured
ProsperFundingsabilitytomakepaymentsontheNotes,includingintheeventthatborrowersfailtomakepaymentson
thecorrespondingBorrowerLoans
thereliabilityoftheinformationaboutborrowersthatissuppliedbyborrowers
Prosper Funding and PMIs ability to service the Borrower Loans, and their ability or the ability of a third party debt
collectortopursuecollectionagainstanyborrower,includingintheeventoffraudoridentitytheft
creditrisksposedbythecreditworthinessofborrowersandtheeffectivenessoftheRegistrantscreditratingsystems
actionsbysomeborrowerstodefraudinvestormembersandrisksassociatedwithidentitytheft
ProsperFundingandPMIslimitedoperationalhistoryandlackofsignificanthistoricalperformancedataaboutborrower
performance
theimpactofcurrenteconomicconditionsontheperformanceoftheNotesandlossratesoftheNotes
paymentsbyborrowersontheloansinlightofthefactsthattheloansdonotimposerestrictionsonborrowersanddonot
includecrossdefaultprovisions
ProsperFundingandPMIscompliancewithapplicablelocal,stateandfederallaw,includingtheInvestmentAdvisersAct
of1940,theInvestmentCompanyActof1940andotherlaws
potentialeffortsbystateregulatorsorlitigantstocharacterizeProsperFundingorPMI,ratherthanWebBank,asthelender
oftheloansoriginatedthroughtheplatform
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theapplicationoffederalandstatebankruptcyandinsolvencylawstoborrowersandtoProsperFundingandPMI
theimpactofborrowerdelinquencies,defaultsandprepaymentsonthereturnsontheNotes
thelackofapublictradingmarketfortheNotesandanyinabilitytoreselltheNotesontheNoteTraderplatform
thefederalincometaxtreatmentofaninvestmentintheNotesandthePMIManagementRights
ProsperFundingandPMIsabilitytopreventsecuritybreaches,disruptionsinservice,andcomparableeventsthatcould
compromisethepersonalandconfidentialinformationheldontheirdatasystems,reducetheattractivenessoftheplatform
oradverselyimpacttheirabilitytoserviceloansand
ProsperFundingsabilitytocompetesuccessfullyinthepeertopeerandconsumerlendingindustry.
Theremaybeotherfactorsthatmaycauseactualresultstodiffermateriallyfromtheforwardlookingstatementsinthis
Quarterly Report on Form 10Q. Prosper Funding and PMI can give no assurances that any of the events anticipated by the
forwardlookingstatementswilloccuror,ifanyofthemdoes,whatimpacttheywillhaveonProsperFundingorPMIsresultsof
operations and financial condition. You should carefully read the factors described in the Risk Factors section of the
RegistrantsAnnualReportonForm10K,filedwiththeSecuritiesandExchangeCommission(SEC)onMarch31,2014,as
wellasanysubsequentquarterlyreportsonForm10Q,foradescriptionofcertainrisksthatcould,amongotherthings,cause
ProsperFundingandPMIsactualresultstodifferfromtheseforwardlookingstatements.
All forwardlooking statements speak only as of the date of this Quarterly Report on Form 10Q and are expressly
qualifiedintheirentiretybythecautionarystatementsincludedinthisQuarterlyReportonForm10Q.ProsperFundingandPMI
undertakenoobligationtoupdateorreviseforwardlookingstatementsthatmaybemadetoreflecteventsorcircumstancesthat
ariseafterthedatemadeortoreflecttheoccurrenceofunanticipatedevents,otherthanasrequiredbylaw.
WHEREYOUCANFINDMOREINFORMATION
TheRegistrantsfileannual,quarterlyandcurrentreportsandotherinformationwiththeSEC.Youcaninspect,readand
copythesereportsandotherinformationattheSECsPublicReferenceRoomat100FStreet,N.E.,Washington,D.C.20549.
YoucanobtaininformationregardingtheoperationoftheSECsPublicReferenceRoombycallingtheSECat1800SEC0330.
The SEC also maintains a website at www.sec.gov that makes available reports, proxy statements and other information
regardingissuersthatfileelectronically.
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Item1.
CondensedConsolidatedFinancialStatements
ProsperMarketplace,Inc.
CondensedConsolidatedBalanceSheets
(Unaudited)
(inthousands,exceptforshareandpershareamounts)
September
December
30,
31,
2013*
2014
$
53,267 $
18,339
16,951
15,473
921
218
16,350
3,917
253,068
226,094
6,293
3,396
5,106
968
$
351,956 $ 268,405
Assets
Cashandcashequivalents
Restrictedcash
Accountsreceivable
Loansheldforsaleatfairvalue
Borrowerloansreceivableatfairvalue
Propertyandequipment,net
Prepaidandotherassets
TotalAssets
Liabilities,ConvertiblePreferredStockandStockholders'Equity(Deficit)
Accountspayableandaccruedliabilities
$
Classactionsettlementliability
Notesatfairvalue
Repurchaseliabilityforunvestedrestrictedstockawards
Repurchaseandindemnificationobligation
TotalLiabilities
Commitmentsandcontingencies(seeNote11)
ConvertiblepreferredstockSeriesA'13,A1'13,B'13andC14($0.01parvalue32,155,022
authorized,30,699,957issuedandoutstandingasofSeptember30,2014,and27,274,068
sharesauthorized,issuedandoutstandingasofDecember31,2013).(Aggregateliquidation
preferenceof$160,952and$96,172asofSeptember30,2014andDecember31,2013,
respectively).
Stockholders'Equity(Deficit)
Commonstock($0.01parvalue47,928,883sharesauthorized14,398,864issuedandoutstanding
asofSeptember30,2014and41,487,465sharesauthorized13,588,803issuedandoutstanding
asofDecember31,2013).
Additionalpaidincapital
Less:treasurystock
Accumulateddeficit
TotalStockholders'Equity(Deficit)
TotalLiabilities,ConvertiblePreferredStockandStockholders'Equity(Deficit)
$
13,311 $
7,830
252,911
837
157
275,046
7,076
9,739
226,794
559
32
244,200
111,443
45,118
94
84,428
(291)
(118,764)
(34,533)
351,956 $
75
83,345
(291)
(104,042)
(20,913)
268,405
Thenumberofsharesissuedandoutstandingreflectsa10for1reversestockspliteffectedbytheCompanyonOctober29,
2013.
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
*Pleaseseenote14
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ProsperMarketplace,Inc.
CondensedConsolidatedStatementsofOperations
(Unaudited)
(inthousands,exceptforshareandpershareamounts)
ThreeMonthsEnded
September30,
2014
2013
Revenues
OperatingRevenues
OriginationFees,net
$
22,233 $
4,038
ServicingFees,net
1,749
83
OtherRevenues
1,147
378
TotalOperatingRevenues
25,129
4,499
InterestIncome
Interestincomeonborrowerloans
10,705
8,799
Interestexpenseonnotes
(9,850)
(8,435)
NetInterestincome
855
364
ChangeinFairValueofBorrowerLoans,LoansHeldforSaleand
Notes,net
59
91
TotalNetRevenues
26,043
4,954
Expenses
CostofServices
1,408
450
CompensationandBenefits
6,260
3,259
MarketingandAdvertising
10,717
4,675
DepreciationandAmortization
462
229
ProfessionalServices
582
399
FacilitiesandMaintenance
1,441
530
ClassActionSettlement
LossonImpairmentofFixedAssets
Other
2,449
375
TotalExpenses
23,319
9,917
NetIncome(Loss)
$
2,724 $
(4,963)
Excessreturntopreferredshareholdersonrepurchase
NetLossAvailabletoCommonShareholders
(14,892)
(12,168)
Netlosspersharebasicanddiluted
$
(1.31)
Weightedaveragesharesbasicanddilutednetlosspershare 9,280,334
(4,963)
NineMonthsEnded
September30,
2014
2013
46,849
8,488
3,044
70
2,090
810
51,983
9,368
30,995
24,785
(28,613)
(23,770)
2,382
1,015
448
54,813
3,275
16,327
25,743
1,201
1,169
2,604
215
4,097
54,631
182
579
10,962
1,609
9,101
10,126
643
1,781
1,323
10,000
62
1,132
35,777
(24,815)
(14,892)
(14,710)
(24,815)
(0.72)
(1.68)
(4.05)
6,927,648 8,740,785 6,119,987
Theweightedaveragenumberofsharesandthenetlosspersharereflecta10for1reversestockspliteffectedbytheCompany
onOctober29,2013.
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
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ProsperMarketplace,Inc.
CondensedConsolidatedStatementofConvertiblePreferredStockandStockholders'Equity(Deficit)
(Unaudited)
(inthousands,exceptforshareandpershareamounts)
Convertible
PreferredStock CommonStock
TreasuryStock Additional
PaidIn Accumulated
Shares Amount
Shares
Amount Shares Amount Capital Deficit Total
Balanceasof
January1,
2014
27,274,068 $ 45,118
13,588,803 $
75(182,264)$ (291)$ 83,345$
(104,042)$(20,913)
Issuanceof
Convertible
Preferred
Stock,
SeriesC'14 4,880,954 69,958
Exerciseof
VestedStock
Options
Exerciseof
Nonvested
StockOptions
Repurchaseof
Restricted
Stock
Restricted
StockVested
Exerciseof
Warrants
Stockbased
Compensation
Expense
Repurchaseof
Preferred
Stock
(1,455,065) (3,633)
NetIncome
Balanceasof
September30,
2014
30,699,957 $111,443
56,323
71
72
796,828
(116,018)
(12)
(12)
17
147
164
72,928
88
89
777
777
(14,892) (14,892)
182
182
94(182,264)$
(291)$
84,428$
(118,764)$(34,533)
14,398,864 $
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
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ProsperMarketplace,Inc.
CondensedConsolidatedStatementsofCashFlows
(Unaudited)
(inthousands,exceptforshareandpershareamounts)
CashFlowsfromOperatingActivities:
NetIncome(Loss)
AdjustmentstoReconcileNetIncome(Loss)toNetCashUsedinOperatingActivities:
ChangeinFairValueofBorrowerLoans
ChangeinFairValueofLoansHeldForSale
ChangeinFairValueofNotes
DepreciationandAmortization
ProvisionforRepurchaseandIndemnificationObligation
ChangeinServicingRights
StockbasedCompensationExpense
LossonImpairmentofFixedAssets
ClassActionSettlementLiability
ChangesinOperatingAssetsandLiabilities:
RestrictedCashExceptforthoseRelatedtoInvestingActivities
AccountsReceivable
PrepaidandOtherAssets
LoansHeldforSaleatFairValue
AccountsPayableandAccruedLiabilities
NetCashUsedinOperatingActivities
CashFlowsfromInvestingActivities:
OriginationofBorrowerLoansHeldatFairValue
RepaymentofBorrowerLoansHeldatFairValue
ProceedsfromSaleofBorrowerLoansHeldatFairValue
PurchasesofPropertyandEquipment
MaturitiesofShortTermInvestments
ChangesinRestrictedCashRelatedtoInvestingActivities
NetCashUsedinInvestingActivities
CashFlowsFromFinancingActivities:
ProceedsfromIssuanceofNotesHeldatFairValue
PaymentofNotesHeldatFairValue
ProceedsfromIssuanceofConvertiblePreferredStock,Net
ProceedsfromEarlyExerciseofStockOptions
ProceedsfromExerciseofVestedStockOptions
RepurchaseofRestrictedStock
RepurchaseofPreferredStock
ProceedsfromExerciseofWarrants
NetCashProvidedbyFinancingActivities
NetIncreaseinCashandCashEquivalents
CashandCashEquivalentsatBeginningofthePeriod
CashandCashEquivalentsatEndofthePeriod
FortheNineMonths
EndedSeptember30,
2014
2013*
$
182 $
(24,815)
14,916
15,614
11
3
(15,375)
(16,195)
1,201
643
125
20
(803)
777
184
215
62
(1,909)
10,000
(2,000)
(703)
(122)
(2,543)
(305)
(12,444)
35
4,281
(421)
(12,069)
(17,297)
(823,841) (199,135)
88,944
65,504
693,007
80,786
(3,151)
(2,334)
1,000
(1,478)
(334)
(46,519)
(54,513)
130,828
118,349
(89,336)
(65,167)
69,958
44,775
454
650
72
207
(24)
(4)
(18,525)
89
93,516
98,810
34,928
27,000
18,339
2,300
$
53,267 $
29,300
CashPaidforInterest
NonCashInvestingActivityAccrualforPropertyandEquipmentNet
$
$
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28,976 $
1,162 $
23,725
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Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
*PleaseseeNote14
10
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ProsperMarketplace,Inc.
NotestoCondensedConsolidatedFinancialStatements
(Unaudited)
1.
OrganizationandBusiness
Prosper Marketplace, Inc. (PMI or the Company) was incorporated in the state of Delaware on March 22, 2005.
PMI developed a peertopeer online credit platform (the platform) and prior to February 1, 2013, owned the proprietary
technologythatmadeoperationoftheplatformpossible.PriortoFebruary1,2013,PMIalsooperatedtheplatform,facilitated
the origination of unsecured, consumer loans by WebBank, an FDICinsured, Utahchartered industrial bank, through the
platformandissuedandsoldborrowerpaymentdependentnotescorrespondingtothoseloans.
The platform is designed to allow investor members to invest money in borrower members in an open transparent
marketplace,withtheaimofallowingbothinvestormembersandborrowermemberstoprofitfinanciallyaswellassocially.The
Companybelievespeertopeerlendingrepresentsanewmodelofconsumerlending,whereindividualsandinstitutionscanearn
theinterestspreadofatraditionalconsumerlenderbutmustalsoassumethecreditriskofatraditionalconsumerlender.
A borrower member who wishes to obtain a loan through the platform must post a loan listing, or listing, on the
platform.Listingsareallocatedtooneoftwoinvestormemberfundingchannels:(i)thefirstchannelallowsinvestormembersto
committopurchaseNotes,thepaymentsofwhicharedependentonthepaymentsmadeonthecorrespondingBorrowerLoan(the
NoteChannel)and(ii)thesecondchannelallowsinvestormemberstocommittopurchase100%ofaBorrowerLoandirectly
fromtheCompany(theWholeLoanChannel).
AsofSeptember30,2014,theplatformisopentoinvestorsin31statesandtheDistrictofColumbia.Additionally,asof
September30,2014theplatformisopentoborrowersin47statesandtheDistrictofColumbia.Currentlyourplatformisnot
offeredinternationally.
OnFebruary1,2013,PMItransferredownershipoftheplatform,includingalloftherightsrelatedtotheoperationof
theplatform,aswellasallthenoutstandingBorrowerLoans,toitswhollyownedsubsidiary,ProsperFundingLLC(Prosper
Fundingand,collectivelywithPMI,theCompanyortheRegistrants).Atthatsametime,ProsperFundingassumedallof
PMIs obligations with respect to all thenoutstanding Notes. Since February 1, 2013, all Notes issued and sold through the
platformareissuedandsoldbyProsperFunding.PursuanttoaLoanAccountProgramAgreementbetweenPMIandWebBank,
PMI manages the operation of the platform, as agent of WebBank, in connection with the submission of loan applications by
potentialborrowers,themakingofrelatedloansbyWebBankandthefundingofsuchloansbyWebBank.OnFebruary1,2013,
Prosper Funding entered into an Administration Agreement with PMI in its capacity as licensee, corporate administrator, loan
platform administrator and loan and note servicer, pursuant to which PMI provides certain back office support, loan platform
administrationandloanandnoteservicingtoProsperFunding.
ProsperFundingformedProsperAssetHoldingsLLC(PAH)inNovember2013asalimitedliabilitycompanywith
thesoleequitymemberbeingProsperFunding.PAHwasformedtopurchaseBorrowerLoansfromProsperFundingandsellthe
BorrowerLoanstothirdparties.
11
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Asreflectedintheaccompanyingcondensedconsolidatedfinancialstatements,theCompanygeneratedincomeinthe
currentperiod,howeverbeforethecurrentquartertheCompanyhadincurrednetlossesandnegativecashflowsfromoperations
since inception. There is an accumulated deficit of $118.8 million as of September 30, 2014. At September 30, 2014, the
Companyhad$53.3millionincashandcashequivalents.Sinceitsinception,theCompanyhasfinanceditsoperationsprimarily
through equity financing from various sources. The Company believes that its current cash position, including the additional
$51.4million($69.9millionraisedinMay2014netof$18.5millionspentinJuly2014onpreferredsharerepurchases)raised
throughanewequityfinancing,issufficienttomeetitsliquidityneedsoverthenextyear.
2.
SummaryofSignificantAccountingPolicies
BasisofPresentation
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
requirementsofRule803ofRegulationSX.Accordingly,theydonotincludealloftheinformationandfootnotesrequiredby
USGAAPforcompletefinancialstatements.Theunauditedinterimcondensedconsolidatedfinancialstatementsshouldberead
inconjunctionwiththeauditedfinancialstatementsandnotestheretofortheyearendedDecember31,2013.Thebalancesheetat
December31,2013hasbeenderivedfromtheauditedfinancialstatementsatthatdate.Managementbelievestheseunaudited
interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are
necessaryforafairpresentationoftheresultsfortheinterimperiodspresented.Theresultsofoperationsfortheinterimperiods
arenotnecessarilyindicativeoftheresultsthatmaybeexpectedforthefullyearoranyotherinterimperiod.
The accompanying interim condensed consolidated financial statements include the accounts of PMI and its wholly
ownedsubsidiary,ProsperFunding.Allintercompanybalanceshavebeeneliminatedinconsolidation.
UseofEstimates
The preparation of the interim condensed consolidated financial statements in conformity with accounting principles
generallyacceptedintheUnitedStatesrequiresmanagementtomakecertainestimates,judgmentsandassumptionsthataffect
thereportedamountsofassetsandliabilitiesandtherelateddisclosures,includingcontingentliabilitiesatthedateofthefinancial
statements and the reported amounts of revenues and expenses during the reporting periods. These estimates, judgments and
assumptions include but are not limited to the following: valuation of Borrower Loans and associated Notes, Borrower Loans
heldforsale,valuationofservicingrights,valuationallowanceondeferredtaxassets,repurchaseandindemnificationobligation,
stockbasedcompensationexpense,andcontingentliabilities.Actualresultscoulddifferfromthoseestimates.
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CertainRisksandConcentrations
In the normal course of its business, the Company encounters two significant types of risk: credit and regulatory.
FinancialinstrumentsthatpotentiallysubjecttheCompanytosignificantconcentrationsofcreditriskconsistprimarilyofcash,
cashequivalents,andrestrictedcash.TheCompanyplacescash,cashequivalents,andrestrictedcashwithhighqualityfinancial
institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the
balancesheetexceedsfederallyinsuredamounts.TheCompanyperformsperiodicevaluationsoftherelativecreditstandingof
thesefinancialinstitutionsandhasnotsustainedanycreditlossesfrominstrumentsheldatthesefinancialinstitutions.
To the extent that Borrower Loan payments are not made, servicing income will be reduced. A group of Notes
corresponding to a particular Borrower Loan is wholly dependent on the repayment of such Borrower Loan. As a result, the
CompanydoesnotbeartheriskonsuchBorrowerLoan.
The Company is subject to various regulatory requirements. The failure to appropriately identify and address these
regulatory requirements could result in certain discretionary actions by regulators that could have a material effect on the
Company'sconsolidatedfinancialpositionandresultsofoperations(SeeNote11CommitmentsandContingenciesSecurities
LawCompliance).
Reclassifications
During the nine months ended September 30, 2014, the Company changed the presentation of its revenues in the
statementofoperations.AnewlinecalledServicingFeeswascreatedandtheservicingfeesrelatedtowholeloansthatwere
previouslyincludedininterestincomewerereclassifiedtothisnewline.Furthermore,theRebatesandPromotionslinewas
removed,withtheamountsinthatlinereclassifiedtotheServicingFeesorOriginationFeeslinesbasedontheunderlying
transactions.Also,theChangeinFairValueofBorrowerLoans,LoansHeldforSaleandNotes,Netwasmovedintothetotal
revenuessubtotal.Lastly,thesubtotalswererealignedtoreflectthenewpresentation.Managementbelievesthesechanges
make the income statement more useful for the readers of the financial statements and comparable with the Companys
competitors.
CashandCashEquivalents
Allhighlyliquidinvestmentswithstatedmaturitiesofthreemonthsorlessfromdateofpurchaseareclassifiedascash
equivalents. Cash equivalents are recorded at cost plus accrued interest, which approximates fair value. Cash and cash
equivalents include various unrestricted deposits with highly rated financial institutions in checking, money market and short
termcertificateofdepositaccounts.
RestrictedCash
Restrictedcashconsistsprimarilyofcashdepositsheldascollateralasrequiredforlongtermleases,loanfundingand
servicingactivities.
BorrowerLoansandNotes
Through the Note Channel, the Company issues Notes and purchases Borrower Loans from WebBank, and holds the
BorrowerLoansuntilmaturity.TheobligationtorepayaseriesofNotesfundedthroughtheNoteChannelisconditionedupon
therepaymentoftheassociatedBorrowerLoan.BorrowerLoansandNotesfundedthroughtheNoteChannelarecarriedonthe
Companys condensed consolidated balance sheets as assets and liabilities, respectively. The Company has adopted the
provisionsofASCTopic825,FinancialInstruments.ASCTopic825permitscompaniestochoosetomeasurecertainfinancial
instrumentsandcertainotheritemsatfairvalueonaninstrumentbyinstrumentbasiswithunrealizedgainsandlossesonitems
forwhichthefairvalueoptionhasbeenelectedreportedinearnings.Managementbelievesthatthefairvalueoptionismore
meaningfulforthereaderofthefinancialstatementsanditallowsboththeBorrowerLoansandNotestobevaluedusingthe
samemethodology.Thefairvalueelection,withrespecttoanitem,maynotberevokedonceanelectionismade.Aspecific
allowanceaccountisnotrecordedrelatingtotheBorrowerLoansinwhichtheCompanyhaselectedthefairvalueoption,but
rather the Company estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies
adjustedfortheexpectedpayment,lossandrecoveryrates.
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ServicingAsset/Liability
TheCompanyrecordsservicingassetsandliabilitiesattheirestimatedfairvalueswhentheCompanysellsBorrower
Loanstounrelatedthirdpartybuyers.ThegainorlossonaloansaleisrecordedinOtherRevenuewhilethefairvalueofthe
servicingrights,whichisbasedonthedegreetowhichthecontractualloanservicingfeeisaboveorbelowanestimatedmarket
loanservicingfeeisrecordedinservicingassetsorliabilities.ServicingassetsandliabilitiesarerecordedinPrepaidandOther
AssetsandAccruedExpensesandOtherLiabilities,respectively,onthecondensedconsolidatedbalancesheets.Theinitial
fairvalueofservicingassetsorliabilitiesareamortizedinproportiontoandovertheperiodofestimatedservicingincomeorloss
andarereportedinServicingFeesonthecondensedconsolidatedstatementofoperations.
The Company uses a discounted cash flow model to estimate the fair value of the loan servicing assets or liabilities
whichconsidersthecontractualprojectedservicingfeerevenuethattheCompanyearnsontheloans,estimatedmarketservicing
feestoservicesuchloans,prepaymentrates,defaultratesandthecurrentprincipalbalancesoftheloans.
The Company periodically assesses servicing assets accounted for using the amortization method for impairment.
Impairmentoccurswhenthecurrentfairvalueoftheservicingassetsfallsbelowtheassetscarryingvalue(carryingvalueisthe
amortized cost reduced by any related valuation allowance). If servicing assets are impaired, the impairment is recognized in
currentperiodearningsandthecarryingvalueoftheassetsisadjustedthroughavaluationallowance.Ifthevalueofimpaired
servicingassetssubsequentlyincreases,theCompanyrecognizestheincreaseinvalueincurrentperiodearningsandadjuststhe
carrying value of the servicing assets through a reduction in the valuation allowance to adjust the carrying value only to the
extentofthevaluationallowance.
LoansHeldforSale
LoansheldforsaleareprimarilycomprisedofBorrowerLoansheldforshortdurationsandarerecordedatfairvalue.
Thefairvalueisestimatedusingdiscountedcashflowmethodologiesbaseduponasetofvaluationassumptionssimilartothose
ofotherBorrowerLoans,whicharesetforthinNote2FairValueMeasurement.
FairValueMeasurement
TheCompanyadoptedASCTopic820,FairValueMeasurementsandDisclosures,onJanuary1,2008,whichprovides
aframeworkformeasuringthefairvalueofassetsandliabilities.ASCTopic820alsoprovidesguidanceregardingafairvalue
hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and
providesforenhanceddisclosuresdeterminedbythelevelwithinthehierarchyofinformationusedinthevaluation.ASCTopic
820applieswheneverotherstandardsrequire(orpermit)assetsorliabilitiestobemeasuredatfairvaluebutdoesnotexpandthe
useoffairvalueinanynewcircumstances.
ASC Topic 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to
transferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.
The price used to measure the fair value is not adjusted for transaction costs. Under ASC Topic 820, the fair value
measurementalsoassumesthatthetransactiontosellanassetoccursintheprincipalmarketfortheassetor,intheabsenceofa
principalmarket,themostadvantageousmarketfortheasset.Theprincipalmarketisthemarketinwhichthereportingentity
wouldsellortransfertheassetwiththegreatestvolumeandlevelofactivityfortheasset.Indeterminingtheprincipalmarketfor
anassetorliabilityunderASCTopic820,itisassumedthatthereportingentityhasaccesstothemarketasofthemeasurement
date.Ifnomarketfortheassetexistsorifthereportingentitydoesnothaveaccesstotheprincipalmarket,thereportingentity
shoulduseahypotheticalmarket.
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UnderASCTopic820,assetsandliabilitiescarriedatfairvalueonthebalancesheetsareclassifiedamongthreelevels
basedontheobservabilityoftheinputsusedtodeterminefairvalue:
Level1Thevaluationisbasedonquotedpricesinactivemarketsforidenticalinstruments.
Level2Thevaluationisbasedonobservableinputssuchasquotedpricesforsimilarinstrumentsinactivemarkets,quoted
prices for identical or similar instruments in markets that are not active, and modelbased valuation techniques for which all
significantassumptionsareobservableinthemarket.
Level3Thevaluationisbasedonunobservableinputsthataresupportedbylittleornomarketactivityandthataresignificant
to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow
methodologies, or similar techniques, which incorporate managements own estimates of assumptions that market participants
woulduseinpricingtheinstrumentorvaluationsthatrequiresignificantmanagementjudgmentorestimation.
Fair value of financial instruments are determined based on the fair value hierarchy established in ASC Topic 820,
whichrequiresanentitytomaximizetheuseofquotedpricesandobservableinputsandtominimizetheuseofunobservable
inputswhenmeasuringfairvalue.Variousvaluationtechniquesareutilized,dependingonthenatureofthefinancialinstrument,
includingtheuseofmarketpricesforidenticalorsimilarinstruments,ordiscountedcashflowmodels.Whenpossible,activeand
observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using
assumptionsthatmanagementbelievesamarketparticipantwoulduseinpricingtheassetorliability.
Financial instruments consist principally of Cash and cash equivalents, Restricted cash, Borrower loans receivable,
Loansheldforsale,Accountspayableandaccruedliabilities,andNotes.TheestimatedfairvaluesofCashandcashequivalents,
Restrictedcash,Accountspayableandaccruedliabilitiesapproximatetheircarryingvaluesbecauseoftheirshorttermnature.
ThefollowingtablespresenttheassetsandliabilitiesmeasuredatfairvalueonarecurringbasisatSeptember30,2014
andDecember31,2013(inthousands):
Assets
Borrowerloansreceivable
Restrictedcash
Loansheldforsale
Totalassets
Fair
Level1 Level2 Level3
Value
$
$
$ 253,068 $ 253,068
15,577
1,374
16,951
16,350
16,350
$
15,577 $
1,374 $ 269,418 $ 286,369
Liabilities
Notes
September30,2014
252,911 $
252,911
Fair
Level1 Level2 Level3
Value
$
$
$ 226,094 $ 226,094
14,032
1,441
15,473
3,917
3,917
$
14,032 $
1,441 $ 230,011 $ 245,484
December31,2013
Assets
Borrowerloansreceivable
Restrictedcash
Loansheldforsale
Totalassets
Liabilities
Notes
226,794 $
226,794
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PropertyandEquipment
Property and equipment consists of computer equipment, office furniture and equipment, and software purchased or
developedforinternaluse.Propertyandequipmentarestatedatcost,lessaccumulateddepreciationandamortization,andare
computedusingthestraightlinemethodbaseduponestimatedusefullivesoftheassets,whichrangefromthreetosevenyears,
commencingoncetheassetisplacedinservice.Expendituresarecapitalizedforreplacementsandbettermentsandrecognizedas
expenseformaintenanceandrepairsasincurred.
InternalUseSoftwareandWebsiteDevelopment
Internal use software costs and website development costs are accounted for, in accordance with ASC Topic 35040,
InternalUseSoftware,andASCTopic35050,WebsiteDevelopmentCosts.InaccordancewithASCTopic35040and35050,
the costs to develop software for the website and other internal uses are capitalized when management has authorized and
committedprojectfunding,preliminarydevelopmenteffortsaresuccessfullycompleted,anditisprobablethattheprojectwillbe
completedandthesoftwarewillbeusedasintended.Capitalizedsoftwaredevelopmentcostsprimarilyincludesoftwarelicenses
acquired, fees paid to outside consultants, and salaries and payroll related costs for employees directly involved in the
developmentefforts.
Costsincurredpriortomeetingthesecriteria,togetherwithcostsincurredfortrainingandmaintenance,areexpensed.
Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are
capitalized. Capitalized costs are included in property and equipment and amortized to expense using the straightline method
overtheirexpectedlives.Softwareassetsareevaluatedforimpairmentwhenevereventsorchangesincircumstancesindicatethat
thecarryingamountofsuchassetsmaynotberecoverable.Recoverabilityofsoftwareassetstobeheldandusedismeasuredby
acomparisonofthecarryingamountoftheassettothefuturenetundiscountedcashflowsexpectedtobegeneratedbytheasset.
Ifsuchsoftwareassetsareconsideredtobeimpaired,theimpairmenttoberecognizedistheexcessofthecarryingamountover
thefairvalueofthesoftwareasset.
RepurchaseLiabilityforUnvestedRestrictedStockAwards
UnderthetermsoftheCompanysstockoptionplancertainoptionsissuedtoemployeescanbeexercisedbeforethey
havevestedbytheemployee.WhenthisoccurstheCompanyrecordsaliabilityfortheunvestedportionoftheexercise.Ifthe
employeesemploymentisterminatedbeforeallofthesharesbecomevestedtheCompanymayrepurchasetheunvestedsharesat
theoriginalexerciseprice.TheliabilityisreleasedintoEquityasthesharesbecomevested.Therelatedsharesareconsideredto
berestrictedsharesandareexcludedfromthebasicearningspersharecalculation.
RepurchaseandIndemnificationObligation
UnderthetermsoftheNotes,theLenderRegistrationAgreementsbetweentheCompanyandinvestormemberswho
participateintheNoteChannel,andtheloanpurchaseagreementsbetweentheCompanyandinvestormembersthatparticipate
intheWholeLoanChannel,theCompanymay,incertaincircumstances,becomeobligatedtorepurchaseaNoteorBorrower
LoanfromaninvestormemberorindemnifyaninvestormemberagainstlossonaNote.Generally,thesecircumstancesinclude
theoccurrenceofverifiableidentitytheft,thefailuretoproperlyfollowloanlistingorbiddingprotocols,oraviolationofthe
applicablefederal,state,orlocallendinglaws.Thefairvalueoftheindemnificationandrepurchaseobligationisestimatedbased
onhistoricalexperience.TheCompanyrecognizesaliabilityfortherepurchaseandindemnificationobligationwhentheNotesor
Borrower Loans are issued. Indemnified or repurchased Notes and repurchased Borrower Loans associated with violations of
federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an
indemnificationpaymentismade.
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RevenueRecognition
Revenueprimarilyresultsfromfeesearned.Feesincludeloanoriginationfeespaidbyborrowersandservicingfeespaid
byinvestors.Wealsohaveothersmallersourcesofrevenuereportedasotherrevenue,thisincludesreferralfeesandgainson
wholeloansales.
OriginationFees
TheCompanyearnsanoriginationfeeuponthesuccessfulclosingofallBorrowerLoansissuedthroughtheplatform.
WebBank charges the origination fee and the Company receives payments from WebBank equal to the origination fee as
compensation for its loan origination activities on behalf of WebBank. The borrower receives an amount equal to the loan
amountnetoftheloanoriginationfee.Theloanoriginationfeeisdeterminedbythetermandcreditgradeoftheloan,andranges
from1.00%to5.00%oftheoriginalprincipalamount.SincetheCompanyaccountsforBorrowerLoansandLoansheldforsale
atfairvalue,originationfeesarenotdeferredbutarerecognizedatoriginationoftheBorrowerLoan,anddirectcoststooriginate
BorrowerLoansarerecordedasexpensesasincurred.
ServiceFees
InvestorsinwholeloanstypicallypaytheCompanyaservicingfeewhichiscurrentlygenerallysetat1%perannumof
theoutstandingprincipalbalanceofthecorrespondingloanpriortoapplyingthecurrentpayment.Theservicingfeecompensates
the Company for the costs we incur in servicing the related loan, including managing payments from borrowers, payments to
investorsandmaintaininginvestorsaccountportfolios.Prosperrecordsservicingfeespaidbynoteholdersandborrowerloan
holdersasacomponentofoperatingrevenuewhenreceived.Theamortizationofservicingrightsisalsoincludedinthisline.
InterestIncomeonBorrowerLoansReceivableandInterestExpenseonNotes
TheCompanyrecognizesinterestincomeonBorrowerLoansfundedthroughtheNoteChannelandinterestexpenseon
thecorrespondingNotesusingtheaccrualmethodbasedonthestatedinterestratetotheextenttheCompanybelievesittobe
collectable.
CostofServices
Cost of Services includes costs that are directly related to the origination and servicing of Borrower Loans such as
verificationfeesandfeesfromWebBankforprocessingloanpayments.
MarketingandAdvertisingExpense
UndertheprovisionsofASCTopic720,OtherExpenses,thecostsofadvertisingareexpensedasincurred.Marketing
and advertising costs were $25.7 million and $10.1 million for the nine months ended September 30, 2014 and 2013,
respectively.
StockBasedCompensation
StockbasedcompensationforemployeesisaccountedforusingfairvaluebasedaccountinginaccordancewithASC
Topic718,StockCompensation.ASCTopic718requirescompaniestoestimatethefairvalueofstockbasedawardsonthedate
ofgrantusinganoptionpricingmodel.Thestockbasedcompensationrelatedtoawardsthatareexpectedtovestisamortized
usingthestraightlinemethodoverthevestingtermofthestockbasedaward,whichisgenerallyfouryears.Expectedforfeitures
ofunvestedoptionsareestimatedatthetimeofgrantsuchthatexpenseisrecordedonlyforthosestockbasedawardsthatare
expectedtovest.
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Optionshavebeengrantedtopurchasesharesofcommonstocktononemployeesinexchangeforservicesperformed,
which the Company accounts for in accordance with the provisions of ASC Topic 50550, EquityBased Payments to Non
Employees.BecauseASCTopic505requiresthatnonemployeeequityawardsberecordedattheirfairvalue,theBlackScholes
modelisusedtoestimatethefairvalueofoptionsgrantedtononemployeesateachvestingdateuntilperformanceiscompleteto
determinetheappropriatechargefortheservicesprovided.
NetLossPerShare
NetlosspershareiscomputedinaccordancewithASCTopic260,EarningsPerShare.UnderASCTopic260,basic
netlosspershareiscomputedbydividingnetlosspershareavailabletocommonshareholdersbytheweightedaveragenumber
ofcommonsharesoutstandingfortheperiodandexcludestheeffectsofanypotentiallydilutivesecurities.Dilutedearningsper
share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive
securities into common stock using the treasury stock and/or if converted methods as applicable. At September 30, 2014,
therewereoutstandingconvertiblepreferredstock,warrants,restrictedstockandoptionsconvertibleinto30,699,957,220,882,
4,768,109and4,540,101commonshares,respectively,whichmaydilutefutureearningspershare.AtSeptember30,2013,there
were outstanding convertible preferred stock, warrants, restricted stock and options convertible into 22,156,922, 218,797,
6,461,797and979,483commonshares,respectively,whichmaydilutefutureearningspershare.Theweightedaveragenumber
ofsharesandthelosspersharereflecta10for1reversestockspliteffectedbytheCompanyonOctober29,2013.Byreporting
a net loss available to common stockholders for the three and nine months ended September 30, 2014 and 2013, potentially
dilutivesecuritiesareexcludedfromthecomputationofnetlosspershare,astheireffectwouldbeantidilutive.
IncomeTaxes
TheassetandliabilitymethodisusedtoaccountforincometaxesascodifiedinASCTopic740,IncomeTaxes.Under
thismethod,deferredincometaxassetsandliabilitiesarebasedonthedifferencesbetweenthefinancialstatementsandtaxbases
of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established
whennecessarytoreducedeferredtaxassetstotheamountexpectedtoberealized.
UnderASCTopic740,theCompanyspolicytoincludeinterestandpenaltiesrelatedtogrossunrecognizedtaxbenefits
withinitsprovisionforincometaxesdidnotchange.U.S.Federal,Californiaandotherstateincometaxreturnsarefiled.The
Companyiscurrentlynotundergoinganyincometaxexaminations.Duetothenetoperatingloss,generallyalltaxyearsremain
open.
ComprehensiveIncome
There is no comprehensive income (loss) other than the net income (loss) disclosed in the condensed consolidated
statementsofoperations.
RecentAccountingPronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial
ReportingStandards(IFRS),FASBissuedASU201409,RevenuefromContractswithCustomers.Thenewguidancesets
forth a new fivestep revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is
intended to eliminate numerous industryspecific pieces of revenue recognition guidance that have historically existed in U.S.
GAAP.Theunderlyingprincipleofthenewstandardisthatabusinessorotherorganizationwillrecognizerevenuetodepictthe
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 the Company in the first quarter of
fiscal2017.Earlyadoptionisnotpermitted.TheCompanyiscurrentlyassessingthepotentialimpactonitsfinancialstatements
fromadoptingthisnewguidance.
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
201415,"PresentationofFinancialStatementsGoingConcern(Subtopic20540)DisclosureofUncertaintiesaboutanEntity's
Ability to Continue as a Going Concern," which requires management of a company to evaluate whether there is substantial
doubtaboutthecompany'sabilitytocontinueasagoingconcern.ThisASUiseffectivefortheannualreportingperiodending
afterDecember15,2016,andforinterimandannualreportingperiodsthereafter,withearlyadoptionpermitted.TheCompanyis
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3.
BorrowerLoansandNotesHeldatFairValue
AsobservablemarketpricesarenotavailablefortheBorrowerLoansandNotesfundedthroughtheNoteChannel,or
forsimilarassetsandliabilities,theCompanybelievessuchBorrowerLoansandNotesshouldbeconsideredLevel3financial
instruments under ASC Topic 820. In a hypothetical transaction as of the measurement date, the Company believes that
differencesintheprincipalmarketplaceinwhichsuchBorrowerLoansareoriginatedandtheprincipalmarketplaceinwhichit
mightoffersuchBorrowerLoansforsalemayresultindifferencesbetweentheoriginatedamountoftheBorrowerLoansand
theirfairvalueasofthetransactiondate.ForBorrowerLoansfundedthroughtheNoteChannel,thefairvalueisestimatedusing
discountedcashflowmethodologiesbaseduponvaluationassumptionsincludingprepaymentspeeds,rollrates,recoveryrates
anddiscountratesbasedontheperceivedcreditriskwithineachcreditgrade.
TheobligationtopayprincipalandinterestonanyseriesofNotesisequaltotheloanpayments,ifany,thatarereceived
on the corresponding Borrower Loan, net of its servicing fee. The fair value election for Notes and Borrower Loans funded
throughtheNoteChannelallowsboththeassetsandtherelatedliabilitiestoreceivesimilaraccountingtreatmentforexpected
losseswhichisconsistentwiththesubsequentcashflowstoinvestormembersthataredependentuponborrowerpayments.As
such,thefairvalueoftheNotesisapproximatelyequaltothefairvalueoftheBorrowerLoansfundedthroughtheNoteChannel,
adjustedfortheservicingfeeandthetimingofborrowerpaymentssubsequentlydisbursedtoNoteholders.Anyunrealizedgains
orlossesonsuchBorrowerLoansandNotesforwhichthefairvalueoptionhasbeenelectedisrecordedasaseparatelineitemin
thestatementofoperations.TheeffectiveinterestrateassociatedwithaseriesofNotesislessthantheinterestrateearnedonthe
corresponding Borrower Loan due to the servicing fee. See further discussion in this note for a rollforward and further
discussionofthesignificantassumptionsusedtovalueBorrowerLoansandNotesfundedthroughtheNoteChannel.
ThefairvalueoftheBorrowerLoansandNotesfundedthroughtheNoteChannelisestimatedusingdiscountedcash
flowmethodologiesbaseduponasetofvaluationassumptions.TheprimarycashflowassumptionsusedtovaluesuchBorrower
LoansandNotesincludedefaultratesderivedfromhistoricalperformanceanddiscountratesappliedtoeachcreditgradebased
ontheperceivedcreditriskofeachcreditgrade.TheobligationtopayprincipalandinterestonanyseriesofNotesisequaltothe
loan payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the
NotesisapproximatelyequaltothefairvalueoftheBorrowerLoansfundedthroughtheNoteChannel,adjustedfortheservicing
feeandthetimingofborrowerpaymentssubsequentlydisbursedtotheNoteholders.Theeffectiveinterestrateassociatedwitha
seriesofNoteswillbelessthantheinterestrateearnedonthecorrespondingBorrowerLoanduetotheservicingfee.
AtSeptember30,2014andDecember31,2013,borrowerloans,notesandloansheldforsale(inthousands)were:
Aggregateprincipalbalance
outstanding
Fairvalueadjustments
Fairvalue
BorrowerLoans
September
December
30,2014
31,2013
256,026 $
(2,958)
253,068 $
225,953 $
141
226,094 $
Notes
September
December
30,2014
31,2013
(258,947) $
6,036
(252,911) $
(229,271) $
2,477
(226,794) $
LoansHeldforSale
September
December
30,2014
31,2013
16,360 $
(10)
16,350 $
3,915
2
3,917
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Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those
assumptions at September 30, 2014 for Borrower Loans and Notes funded through the Note Channel are presented in the
followingtable(inthousands):
Borrower
Notes
Loans
9.36%*
9.36%*
$ 247,738 $ 244,736
244,715
241,743
$ 253,975 $ 250,912
257,188
254,085
7.40%*
7.40%*
$ 247,275 $ 244,275
244,418
241,452
$ 253,729 $ 250,663
256,584
253,493
Discountrateassumption:
Resultingfairvaluefrom:
100basispointincrease
200basispointincrease
Resultingfairvaluefrom:
100basispointdecrease
200basispointdecrease
Defaultrateassumption:
Resultingfairvaluefrom:
10%higherdefaultrates
20%higherdefaultrates
Resultingfairvaluefrom:
10%lowerdefaultrates
20%lowerdefaultrates
*Representsweightedaverageassumptionsconsideringallcreditgrades.
ThechangesinLevel3assetsmeasuredatfairvalueonarecurringbasisareasfollows(inthousands):
FairValueMeasurementsUsingSignificantUnobservableInputs(Level3)
LoansHeld
Borrower
for
Loans
Notes
Sale
BalanceatJanuary1,2013
$
166,900 (167,478)
175
Originations
199,135 (118,349)
71
Principalrepayments
(65,504)
65,167
(106)
Borrowerloanssoldtothirdparties
(80,786)
Changeinfairvalueonborrowerloansandnotes
(15,614)
16,195
Changeinfairvalueofloansheldforsale
(3)
BalanceatSeptember30,2013
$
204,131 (204,465)
137
Total
(403)
80,857
(443)
(80,786)
581
(3)
(197)
FairValueMeasurementsUsingSignificantUnobservableInputs(Level3)
LoansHeld
Borrower
for
Loans
Notes
Sale
Total
BalanceatJanuary1,2014
$
226,094 $ (226,794) $
3,917 $
3,217
Originations
823,841 (130,828)
229,679
922,692
Principalrepayments
(88,944)
89,336
(899)
(507)
Borrowerloanssoldtothirdparties
(693,007)
(216,336) (909,343)
Changeinfairvalueonborrowerloansandnotes
(14,916)
15,375
459
Changeinfairvalueofloansheldforsale
(11)
(11)
BalanceatSeptember30,2014
$
253,068 $ (252,911) $
16,350 $
16,507
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FairValueMeasurementsUsingSignificantUnobservableInputs(Level3)
LoansHeld
Borrower
for
Loans
Notes
Sale
Total
BalanceJuly1,2013
$
187,124 $ (187,489) $
153 $
(212)
Originations
94,098
(43,475)
25
50,648
Principalrepayments
(22,778)
22,718
(41)
(101)
Borrowerloanssoldtothirdparties
(50,623)
(50,623)
Changeinfairvalueonborrowerloansandnotes
(3,690)
3,781
91
BalanceatSeptember30,2013
$
204,131 $ (204,465) $
137 $
(197)
FairValueMeasurementsUsingSignificantUnobservableInputs(Level3)
LoansHeld
Borrower
for
Loans
Notes
Sale
Total
BalanceJuly1,2014
$
246,203 $ (246,511) $
9,543 $
9,235
Originations
372,027
(44,115)
117,752
445,664
Principalrepayments
(31,226)
31,620
(586)
(192)
Borrowerloanssoldtothirdparties
(327,909)
(110,350) (438,259)
Changeinfairvalueonborrowerloansandnotes
(6,027)
6,095
68
Changeinfairvalueofloansheldforsale
(9)
(9)
BalanceatSeptember30,2014
$
253,068 $ (252,911) $
16,350 $
16,507
ThechangesinfairvaluewoulddirectlyimpactthechangeinfairvalueonBorrowerLoans,Loansheldforsaleand
Notes in the condensed consolidated statements of operations. The majority of fair value adjustments included in earnings is
attributabletochangesinestimatedinstrumentspecificfuturecreditlosses.
AsSeptember30,2014theBorrowerLoansthatwere90daysormoredelinquent,hadanaggregateprincipalamountof
$1.5millionandafairvalueof$0.14million.
4.
LoanServicingNote:
TheCompanyinitiallyrecordsservicingassetsandliabilitiesattheirestimatedfairvalueswhentheCompanysellswholeloans
tounrelatedthirdpartywholeloanbuyers.Theinitialfairvalueofsuchservicingassetsorliabilitiesisamortizedinproportion
toandovertheperiodofestimatedservicingincomeorloss.
Fairvalue
Discounted cash flow Discounted cash flow valuation techniques generally consist of developing an estimate of future cash
flowsthatareexpectedtooccuroverthelifeofafinancialinstrumentandthendiscountingthosecashflowsatarateofreturn
thatresultsinthefairvalueamount.
SignificantunobservableinputspresentedinthetablebelowarethosethattheCompanyconsiderssignificanttotheestimated
fairvaluesoftheLevel3servicingassetsandliabilities.TheCompanyconsidersunobservableinputstobesignificant,ifbytheir
exclusion,theestimatedfairvalueoftheLevel3assetorliabilitywouldbeimpactedbyasignificantpercentagechange,orbased
onqualitativefactorssuchasthenatureoftheinstrumentandsignificanceoftheunobservableinputsrelativetootherinputsused
withinthevaluation.Thefollowingisadescriptionofthesignificantunobservableinputsprovidedinthetable.
MarketservicingrateTheCompanyestimatesadequateservicingcompensationratesofwhatamarketparticipantwould
earntoservicetheloansthattheCompanysellstothirdparties.Thisrateiscalculatedontheloanbalanceonaperannum
basis. The Company estimated these market servicing rates based on observable market rates for other loan types in the
industry,adjustedfortheuniqueloanattributesthatarepresentinthespecificloansthattheCompanysellsandservicesand
informationfromabackupserviceprovider.
DiscountrateThediscountrateisarateofreturnusedtodiscountfutureexpectedcashflowstoarriveatapresentvalue,
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which represents the fair value of the loan servicing rights. The discount rates for the projected net cash flows of loan
servicing rights are our estimates of the rates of return that investors in servicing rights for unsecured consumer credit
obligationswouldrequireforthevariouscreditgradesoftheunderlyingloans.Discountratesforservicingrightsonexisting
loansareadjustedtoreflectthetimevalueofmoney.Ariskpremiumcomponentisimplicitlyincludedinthediscountrates
to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments cash
flowsresultingfromriskssuchascreditandliquidity.
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DefaultRateThedefaultratepresentedisanannualized,averageestimateconsideringallloancategories,andrepresents
an aggregate of conditional default rate curves for each credit grade or loan category. Each point on a particular loan
categorys curve represents the percentage of principal expected to default per period based on the term and age of the
underlying loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing
revenuesreceivedisbasedontheamountofoutstandingprincipaleachperiod.Inaddition,defaultsalsoreducetheexpected
termsoftheloans,whichareusedtoprojectfutureservicingrevenues.
SignificantUnobservableInputs
The following table presents quantitative information about the significant unobservable inputs used for our servicing
asset/liabilityfairvaluemeasurementsatSeptember30,2014andDecember31,2013:
WeightedAverage
UnobservableInput
September30,2014
December31,2013
Discountrate
9.6%**
9.9%**
Defaultrate
5.5%**
5.6%**
Marketservicingrate
0.65%
0.65%
**Representsweightedaverageoraggregateassumptionsconsideringallcreditgrades.
Servicingasset/liabilityactivity:
ThefollowingtablespresentadditionalinformationaboutLevel3servicingassetsandliabilitiesbeingamortizedforthethree
andninemonthsendedSeptember30,2014(inthousands).TherewerenoservicingassetsorliabilitiesrecordedatSeptember
30,2013.
ThreeMonthsEnded
September30,2014
Servicing
Servicing
Assets Liabilities
AmortizedcostatJune30,2014
$
968 $
857
Additions
1,044
414
Less:Amortization
(157)
(140)
AmortizedcostatSeptember30,2014
$
1,855 $
1,131
NineMonthsEnded
September30,2014
Servicing
Servicing
Assets Liabilities
AmortizedcostatDecember31,2013
$
260 $
339
Additions
1,873
1,064
Less:Amortization
(278)
(272)
AmortizedcostatSeptember30,2014
$
1,855 $
1,131
5.
LoansHeldforSale
LoansheldforsaleonthecondensedconsolidatedbalancesheetsasofSeptember30,2014andDecember31,2013,
was $16.4 million and $3.9 million, respectively. For the nine months ended September 30, 2014 and 2013, a total of $229.7
millionand$0.07millionofBorrowerLoanswasoriginatedthroughtheplatformasLoansheldforsale.Fortheninemonths
endedSeptember30,2014and2013,$216.3millionand$0oftheseBorrowerLoansweresoldtounrelatedthirdpartiesthrough
the Whole Loan Channel. When a Borrower Loan has been funded by the Company in whole, or in part, the portion of the
borrowersmonthlyloanpaymentthatcorrespondstothepercentageoftheBorrowerLoanthatisfundedisretained.Inthese
cases,interestincomeisrecordedontheseBorrowerLoans.
6.
RepurchaseandIndemnificationObligation
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ForthethreemonthsendedSeptember30,2014and2013,theliabilityforrepurchaseandindemnificationobligation
was $0.03 million and $0.01 million, respectively. For the nine months ended September 30, 2014 and 2013, the liability for
repurchaseandindemnificationobligationswas$0.14millionand$0.02million,respectively.Theexpensewasincludedinthe
cost of services line in the Statement of Operations. The balance of the Repurchase and indemnification obligation as of
September30,2014andDecember31,2013,was$0.16millionand$0.03million,respectively.
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7.
NetLossPerShareAvailabletoCommonStockholders
TheCompanyusesthetwoclassmethodtocomputenetlosspersharebecausetheCompanyhasissuedsecurities,other
thancommonstock,thatcontractuallyentitletheholderstoparticipateindividendsandearningsoftheCompany.Thetwoclass
method requires earnings for the period to be allocated between common stock and participating securities based upon their
respectiverightstoreceivedistributedandundistributedearnings.Priortotheirconversiontocommonshares,eachseriesofthe
Companys convertible preferred stock was entitled to participate on an asifconverted basis in distributions, when and if
declaredbytheboardofdirectors(BoardofDirectors),thatweremadetocommonstockholdersandasaresulttheseshares
wereconsideredparticipatingsecurities.DuringthethreemonthsendedSeptember30,2014,certainsharesissuedasaresultof
the early exercise of stock options, which are subject to a repurchase right by the Company, were entitled to receive non
forfeitabledividendsduringthevestingperiodandasaresultwereconsideredparticipatingsecurities.
Underthetwoclassmethod,forperiodswithnetincome,basicnetincomepercommonshareiscomputedbydividing
the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding
duringtheperiod.Netincomeattributabletocommonstockholdersiscomputedbysubtractingfromnetincometheportionof
currentyearearningsthattheparticipatingsecuritieswouldhavebeenentitledtoreceivepursuanttotheirdividendrightshadall
oftheyearsearningsbeendistributed.Nosuchadjustmenttoearningsismadeduringperiodswithanetloss,astheholdersof
theparticipatingsecuritieshavenoobligationtofundlosses.Dilutednetlosspercommonshareiscomputedunderthetwoclass
method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income
attributable to common stockholders, the potential dilutive effects of stock options and warrants. In addition, the Company
analyzesthepotentialdilutiveeffectoftheoutstandingparticipatingsecuritiesundertheifconvertedmethodwhencalculating
dilutedearningspershare,inwhichitisassumedthattheoutstandingparticipatingsecuritiesconvertintocommonstockatthe
beginningoftheperiod.TheCompanyreportsthemoredilutiveoftheapproaches(twoclassorifconverted)asitsdilutednet
income per share during the period. Due to net losses available to common stockholders for the three and nine months ended
September30,2014and2013,basicanddilutedlosspersharewerethesame,astheeffectofpotentiallydilutivesecuritieswould
havebeenantidilutive.
Theadjustmentfromnetincome(loss)tonetlossavailabletocommonshareholdersrepresentstheexcessovercostpaid
tocertainpreferredshareholdersuponrepurchaseoftheirpreferredsharesasdescribedbelowinNote8ConvertiblePreferred
StockandStockholders'Equity(Deficit).Theweightedaveragesharesusedincalculatingbasicanddilutednetlosspershare
excludes shares that are disclosed as outstanding shares in the Condensed Consolidated Balance Sheet and Condensed
ConsolidatedStatementofStockholders'Equitybecausesuchsharesarerestrictedastheywereassociatedwithoptionsthatwere
earlyexercisedandcontinuetoremainunvested.
Basicanddilutednetlosspersharewascalculatedasfollows(inthousands,exceptforshareandpershareamounts):
Threemonthsended
Ninemonthsended
September30,
September30,
2014
2013
2014
2013
Numerator:
Netlossavailabletocommonstockholdersforbasicanddiluted
EPS
$
(12,168) $
(4,963) $
(14,710) $
(24,815)
Denominator:
Weightedaveragesharesusedincomputingbasicanddilutednet
losspershare
9,280,334 6,927,648 8,740,785 6,119,987
Basicanddilutednetlosspershare
$
(1.31) $
(0.72) $
(1.68) $
(4.05)
Thenumberofsharesreflecta10for1reversestockspliteffectedbytheCompanyonOctober29,2013
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Due to losses attributable to the Companys common shareholders for each of the periods below, the following
potentiallydilutivesharesareexcludedfromthedilutednetlosspersharecalculationbecausetheywereantidilutiveunderthe
treasurystockorifconvertedmethod,inaccordancewithASCTopic260:
ExcludedSecurities:
Convertiblepreferredstockissuedandoutstanding
Stockoptionsissuedandoutstanding
Unvestedstockoptionsexercised
Warrantsissuedandoutstanding
Totalcommonstockequivalentsexcludedfromdilutednetlosspercommonsharecomputation
ThreeandNinemonths
endedSeptember30
2014
2013
(shares)
(shares)
30,699,957 22,156,922
4,540,101
979,483
4,768,109 6,461,797
220,882
218,797
40,229,049 29,816,999
Thenumberofsharesissuedandoutstandingreflecta10for1reversestockspliteffectedbytheCompanyonOctober29,2013.
8.
ConvertiblePreferredStockandStockholdersEquity(Deficit)
ConvertiblePreferredStock
Under the Company's certificate of incorporation, preferred stock is issuable in series, and the Companys Board of
Directorsisauthorizedtodeterminetherights,preferences,andtermsofeachseries.
In January 2013, the Company issued and sold 13,868,152 shares of new Series A (Series A) preferred stock in a
privateplacementatapurchasepriceof$1.44persharefor$19.8million,netofissuancecosts.Inconnectionwiththatsale,the
Companyissued5,117,182sharesatparvalue$0.01pershareofSeriesA1(SeriesA1)convertiblepreferredstocktothe
holdersofsharesoftheCompanyspreferredstockthatwasoutstandingimmediatelypriortothesale(OldPreferredShares)in
considerationforsuchstockholdersparticipatinginthesale.InconnectionwiththenewSeriesAsale,OldPreferredShareswere
convertedintosharesofcommonstockataratioof1:1iftheholderoftheOldPreferredSharesparticipatedinthenewSeriesA
saleorata10:1ratioiftheholderoftheOldPreferredSharesdidnotsoparticipate.Inaddition,eachsuchparticipatingholder
receivedashareofnewSeriesA1preferredstockforeverydollarofliquidationpreferenceassociatedwithanOldPreferred
Share held by such holder. Each share of Series A1 preferred stock has a liquidation preference of $10.00 and converts into
common stock at a ratio of 1,000,000:1. These securities were sold in reliance on the exemption from the registration
requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder
regardingsalesbyanissuernotinvolvingapublicoffering.
InSeptember2013,theCompanyissuedandsold8,288,734sharesofnewSeriesB(SeriesB)preferredstockina
privateplacementatapurchasepriceof$3.02pershareforapproximately$24.9million,netofissuancecosts.
InMay2014,theCompanyissuedandsold4,880,954sharesofnewSeriesC(SeriesC)preferredstockinaprivate
placementatapurchasepriceof$14.36pershareforapproximately$69.9million,netofissuancecosts.Thepurposeofthis
shareissuancewastoraisefundsforthebelowtenderofferandgeneraloperatingneeds.
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OnJune18,2014,theCompanyissuedaTenderOfferStatementtopurchaseupto1,392,757shares,intheaggregate,
ofitsSeriesAPreferredStockandSeriesBPreferredStock,atapriceequalto$14.36pershare.Uponclosureofthetenderoffer
onJuly16,2014,156,508sharesofSeriesAPreferredStockand1,133,558shareofSeriesBPreferredStockwerepurchasedfor
atotalpriceof$18.5million.
Authorized,
Issuedand
Outstanding
sharesasof Liquidation
Convertible
Par
September
Preference
PreferredStock
0.01 4,952,183
49,522
NewSeriesB
0.01 7,155,176
21,581
NewSeriesC
0.01 4,880,954
70,075
30,699,957 $ 160,952
Thenumberofsharesissuedandoutstandingreflecta10for1reversestockspliteffectedbytheCompanyonOctober29,2013.
Dividends
DividendsonsharesofthenewSeriesA,newSeriesBandnewSeriesCpreferredstockarepayableonlywhen,as,and
ifdeclaredbytheBoardofDirectors.Nodividendswillbepaidwithrespecttothecommonstockuntilanydeclareddividends
onthenewSeriesApreferredstock,newSeriesBpreferredstockandnewSeriesCpreferredstockhavebeenpaidorsetaside
for payment to the new Series A preferred stockholders, new Series B preferred stockholders and new Series C preferred
stockholders.Afterpaymentofanysuchdividends,anyadditionaldividendsordistributionswillbedistributedamongallholders
ofcommonstockandpreferredstockinproportiontothenumberofsharesofcommonstockthatwouldbeheldbyeachsuch
holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. To date, no
dividendshavebeendeclaredonanyoftheCompanyspreferredstockorcommonstock,andtherearenodividendsinarrearsat
September30,2014.
Conversion
UnderthetermsoftheCompanysamendedandrestatedcertificateofincorporation,theholdersofpreferredstockhave
therighttoconvertsuchpreferredstockintocommonstockatanytime.Inaddition,allpreferredstockautomaticallyconverts
intocommonstock(i)immediatelypriortotheclosingofanIPOthatvaluestheCompanyatleastat$750millionandthatresults
inaggregateproceedstotheCompanyofatleast$100millionor(ii)uponawrittenrequestfromtheholdersofatleast60%of
thevotingpoweroftheoutstandingpreferredstock(onanasconvertedbasis)includingatleast14%ofthevotingpowerofthe
outstandingSeriesA1preferredstock.Inaddition,ifaholderofthenewSeriesApreferredstockhasconvertedanyofthenew
SeriesApreferredstock,thenallofsuchholderssharesofSeriesA1preferredstockalsowillbeconverteduponaliquidation
event.Inlieuofanyfractionalsharesofcommonstocktowhichaholderwouldotherwisebeentitled,theCompanyshallpay
suchholdercashinanamountequaltothefairmarketvalueofsuchfractionalshares,asdeterminedbytheBoardofDirectors.
Atpresent,thenewSeriesApreferredstock,newSeriesBpreferredstockandthenewSeriesCpreferredstockconvertsintothe
Company common stock at a 1:1 ratio while the Series A1 preferred stock converts into the Company common stock at a
1,000,000:1ratio.
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LiquidationRights
TheCompanysconvertiblepreferredstockhasbeenclassifiedastemporaryequityontheaccompanyingbalancesheets
inaccordancewithauthoritativeguidance.Thepreferredstockisnotredeemablehowever,uponintheeventofavoluntaryor
involuntaryliquidation,dissolution,changeincontrolorwindingupoftheCompany,holdersoftheconvertiblepreferredstock
mayhavetherighttoreceiveitsliquidationpreferenceunderthetermsoftheCompanyscertificateofincorporation.
EachholderofnewSeriesApreferredstock,newSeriesBpreferredstockandnewSeriesCpreferredstockisentitledto
receive,onaparipassubasis,priorandinpreferencetoanydistributionofproceedsfromaliquidationeventtotheholdersof
SeriesA1preferredstockorcommonstock,anamountpershareforeachshareofnewSeriesApreferredstock,newSeriesB
preferredstockandnewSeriesCpreferredstockequaltothesumoftheliquidationpreferencespecifiedforsuchshareandall
declaredbutunpaiddividends,ifany,onsuchshare.AfterthepaymentorsettingasideforpaymenttotheholdersofnewSeries
Apreferredstock,newSeriesBpreferredstockandnewSeriesCpreferredstock,theholdersofSeriesA1preferredstockare
entitledtoreceive,priorandinpreferencetoanydistributionofproceedstotheholdersofcommonstockanamountpersharefor
each such share of Series A1 preferred stock equal to the sum of the liquidation preference specified for such share and all
declaredbutunpaiddividends,ifany,onsuchshare.AfterthepaymentorsettingasideforpaymenttotheholdersofnewSeries
A preferred stock, new Series B preferred stock, new Series C preferred stock and Series A1 preferred stock, the entire
remainingproceedslegallyavailablefordistributionwillbedistributedproratatotheholdersofnewSeriesApreferredstock
andcommonstockinproportiontothenumberofsharesofcommonstockheldbythemassumingthenewSeriesApreferred
stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum
aggregateamountpershareofnewSeriesApreferredstockwhichtheholdersofnewSeriesApreferredstockshallbeentitledto
receive is three times the original issue price for the new Series A preferred stock. At present, the liquidation preferences are
equal to $1.44215155 per share for the new Series A preferred stock, $10.00 per share for the Series A1 preferred stock,
$3.01613647pershareforthenewSeriesBpreferredstockand$14.356821052pershareforthenewSeriesCpreferredstock.
Voting
Eachholderofsharesofpreferredstockisentitledtothenumberofvotesequaltothenumberofsharesofcommon
stockintowhichsuchsharesofpreferredstockcouldbeconvertedandhasvotingrightsandpowersequaltothevotingrights
andpowersofthecommonstock.Theholdersofpreferredstockandtheholdersofcommonstockvotetogetherasasingleclass
(except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any
stockholdersmeetinginaccordancewiththebylawsoftheCompany.
AuthorizedandOutstandingShares:
The Company, through its amended and restated certificate of incorporation, is the sole issuer of common stock and
relatedoptionsandwarrants.OnOctober29,2013,theCompanyamendedandrestateditscertificateofincorporationtoeffecta
10for1reversestocksplit.OnMay15,2014,theCompanyamendedandrestateditscertificateofincorporationtoeffectan
increase in authorized shares of stock. The total number of shares of stock which the Company has the authority to issue is
80,083,905, consisting of 47,928,883 shares of common stock, $0.01 par value per share, and 32,155,022 shares of preferred
stock,$0.01parvaluepershare,13,868,152ofwhicharedesignatedasnewSeriesApreferredstock,5,117,182ofwhichare
designatedasSeriesA1preferredstockand8,288,734ofwhicharedesignatednewSeriesBpreferredstockand4,880,954of
whicharedesignatedasSeriesCpreferredstock.AsofSeptember30,2014,14,216,600sharesofcommonstockwereissued
andoutstanding.AsofDecember31,2013,13,406,539sharesofcommonstockwereissuedandoutstanding.Eachholderof
commonstockisentitledtoonevoteforeachshareofcommonstockheld.
CommonStockIssuedforServices
Nonemployees
The Company did not grant any immediately vested common shares to nonemployees for services during the nine
months ended September 30, 2014. During the year ended December 31, 2013, the Company granted an immediately vested
optiontopurchase47,601commonsharestoanonemployeeforservices.
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CommonStockIssueduponExerciseofStockOptions
DuringtheninemonthsendedSeptember30,2014andtheyearendedDecember31,2013,theCompanyissued853,151
and7,327,959sharesofcommonstock,respectively,upontheexerciseofoptionsforcashproceedsof$0.53millionand$0.86
million, respectively, of which 796,828 and 6,499,463 were unvested, respectively. Certain options are eligible for exercise
prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the same vesting
scheduleastheoptions.TheCompanyrecordsaliabilityfortheexerciseofunvestedshares,whichisreclassifiedtocommon
stockandadditionalpaidincapitalasthesharesvest.Shouldtheholdersemploymentbeterminated,theunvestedrestricted
shares are subject to repurchase by the Company at the purchase price paid for such shares. At September 30, 2014 and
December31,2013,therewere4,768,109and5,594,134sharesrespectivelyofrestrictedstockoutstandingthatremainunvested
andsubjecttotheCompanysrightofrepurchase.
FortheninemonthsendedSeptember30,2014,theCompanyrepurchased116,018sharesofrestrictedstockfor$0.02
million,uponterminationofemploymentofvariousemployees.
CommonStockIssueduponExerciseofStockWarrants
FortheninemonthsendedSeptember30,2014theCompanyissued72,928sharesofcommonstock,upontheexercise
ofwarrants.
9.
StockOptionPlanandCompensation
Incentive stock options are granted to employees at an exercise price not less than 100% of the fair value of the
Companyscommonstockonthedateofgrant.Nonstatutorystockoptionsaregrantedtoconsultants,directorsandemployees
whohaveincentivestockoptionsthattheunderlyingstockhasafairvaluegreaterthan$100,000exercisableduringtheyearin
which the nonstatutory stock options are granted. Nonstatutory stock options are granted at an exercise price not less than
100%ofthefairvalueoftheCompanyscommonstockonthedateofgrant.Ifoptionsaregrantedtostockholderswhohold10%
ormoreoftheCompanyscommonstockontheoptiongrantdate,thentheexercisepriceshallnotbelessthan110%ofthefair
valueoftheCompanyscommonstockonthedateofgrant.Asthereisnoactivetradingmarketfortheseoptions,suchestimate
mayultimatelydifferfromvaluationscompletedbyanindependentparty.Theoptionsgenerallyvestoverfouryears,whichis
thesameastheperformanceperiod.Innoeventareoptionsexercisablemorethantenyearsafterthedateofgrant.
In2005,theCompanysstockholdersapprovedtheadoptionofthe2005Plan.OnDecember1,2010,theCompanys
stockholdersapprovedtheadoptionoftheAmendedandRestated2005StockPlan(asamendedandrestated,thePlan).Under
thePlan,optionstopurchaseupto187,946sharesofcommonstockwerereservedandmaybegrantedtoemployees,directors,
andconsultantsbytheBoardofDirectorsandstockholderstopromotethesuccessoftheCompanysbusiness.During2011,the
Board of Directors and stockholders of the Company increased the total number of options under the Plan by an additional
455,087 for a total of 1,353,966 available for grant. During 2012, the Board of Directors, either directly or through the
compensationcommittee,andstockholdersoftheCompanyincreasedthetotalnumberofoptionsunderthePlanbyanadditional
170,000 for a total of 1,523,966, available for grant. During 2013, the Board of Directors, either directly or through the
compensationcommittee,andstockholdersoftheCompanyincreasedthetotalnumberofoptionsunderthePlanbyanadditional
11,110,825 for a total of 12,634,791 available for grant. During the first six months of 2014, the Board of Directors, either
directlyorthroughthecompensationcommittee,andstockholdersoftheCompanyincreasedthetotalnumberofoptionsunder
thePlanbyanadditional1,560,464foratotalof14,195,255.
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Theactivityofoptionsthatwereearlyexercisedundertheplanasfortheperiodbelow:
Early
Weighted
exercised
average
options,
exercise
unvested
price
BalanceasofJanuary1,2014
5,594,134
0.11
Exerciseofnonvestedstockoptions
Repurchaseofrestrictedstock
Restrictedstockvested
BalanceasofSept30,2014
796,828
(111,095)
(1,511,758)
4,768,109
0.57
(0.10)
(0.11)
0.18
OptionactivityunderthePlanissummarizedasfollowsfortheperiodbelow:
BalanceasofJanuary1,2014
Optionsgranted(weightedaveragefairvalueof$0.30)
Optionsexercisedvested
Optionsexercisednonvested
Optionsforfeited
BalanceasofSeptember30,2014
Weighted
Options
Average
Issued
Exercise
and
Price
Outstanding
938,585 $
1.39
4,669,091
1.24
(56,323)
1.28
(796,828)
0.57
(214,424)
3.53
4,540,101 $
0.91
OptionsoutstandingandexercisableatSeptember30,2014
1,891,438 $
1.40
Theshareamountsandsharepricesreflecta10for1reversestockspliteffectedbytheCompanyonOctober29,2013.
OtherInformationRegardingStockOptions
AdditionalinformationregardingtheCompanyscommonstockoptionsoutstandingasofSeptember30,2014isasfollows:
Rangeof
Exercise
Prices
0.10$0.10
0.570.57
1.201.20
1.701.70
2.002.00
5.005.00
5.605.60
5.655.65
0.10$5.65
OptionsOutstanding
Weighted
Avg.
Number
Remaining
Outstanding
Life
170,728
8.87
3,203,051
9.37
133,334
6.96
99,593
7.65
287,933
5.82
7,000
2.00
18,250
4.96
620,212
9.87
4,540,101
9.06
Weighted
Avg.
Exercise
Price
$
0.10
0.57
1.20
1.70
2.00
5.00
5.60
5.65
$
1.41
OptionsExercisable
Weighted
Avg.
Number
Exercise
Vested
Price
60,113 $
0.10
1,339,911
0.57
117,435
1.20
61,049
1.70
287,680
2.00
7,000
5.00
18,250
5.60
5.65
1,891,438 $
1.40
Thenumberofoptionsreflectsa10for1reversestockspliteffectedbytheCompanyonOctober29,2013.
The number of options outstanding, vested and expected to vest as of September 30, 2014 was 3,990,512 and the
weightedaverageremainingcontractuallifewas9.06years.
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Nocompensationexpenseisrecognizedforunvestedsharesthatareforfeiteduponterminationofservice,andthestock
based compensation expense for the nine months ended September 30, 2014 and 2013 reflect the expenses that the Company
expectstorecognizeaftertheconsiderationofestimatedforfeitures.
TheCompanyestimatesitsforfeitureratebasedonananalysisofitsactualforfeituresandwillcontinuetoevaluatethe
adequacyoftheforfeitureratebasedonactualforfeitureexperience,analysisofemployeeturnoverbehavior,andotherfactors.
Theimpactfromaforfeiturerateadjustmentwillberecognizedinfullintheperiodofadjustment,andiftheactualnumberof
futureforfeituresdiffersfromthatestimate,theCompanymayberequiredtorecordadjustmentstostockbasedcompensation
expenseinfutureperiods.
ThefairvalueoftheCompanysstockoptionawardsforthethreeandninemonthsendedSeptember30,2014and2013
wasestimatedatthedateofgrantusingtheBlackScholesmodelwiththefollowingaverageassumptions:
Volatilityofcommonstock
Riskfreeinterestrate
Expectedlife*
Dividendyield
Weightedaveragefairvalueofgrants
ThreeMonthsended
NineMonthsended
September30,
September30,
2014
2013
2014
2013
67.47%
69.57%
69.42%
69.56%
1.92%
1.39%
1.91%
1.90%
5.9years
5.8years
5.9years
5.8years
0%
0%
0%
0%
3.46 $
0.10 $
0.76 $
0.01
*Fornonemployeestockoptionawards,theexpectedlifeisthecontractualtermoftheaward,whichisgenerallytenyears.
The BlackScholes model requires the input of highly subjective assumptions, including the expected stock price
volatility,asaresultthechangesinthesubjectiveinputassumptionscanmateriallyaffectthefairvalueestimate.
TotalstockbasedcompensationexpensereflectedinthestatementsofoperationsfortheninemonthsendedSeptember
30, 2014 and 2013 is $0.76 million and $0.18 million, respectively, and $0.27 million and $0.10 million for the three months
ended September 30, 2014 and 2013. This expense is included in the Compensation and Benefits line in the Statements of
Operations.AsofSeptember30,2014,theunamortizedstockbasedcompensationexpenserelatedtoPMIemployeesunvested
stockbased awards was approximately $2.4 million, which will be recognized over the remaining weightedaverage vesting
periodofapproximately3.3years.
10.
IncomeTaxes
Aspartoftheprocessofpreparingthecondensedconsolidatedfinancialstatements,theCompanyisrequiredtoestimate
its income taxes in each of the jurisdictions in which it operates. This process involves determining the income tax expense
(benefit) together with calculating the deferred income tax expense (benefit) related to temporary differences resulting from
differing treatment of items, such as fair value of loans or deductibility of certain intangible assets, for tax and accounting
purposes.Thesedifferencesresultindeferredtaxassetsandliabilities,whichareincludedwithintheaccompanyingcondensed
consolidatedbalancesheets.TheCompanymustthenassessthelikelihoodthatthedeferredtaxassetswillberecoveredthrough
thegenerationoffuturetaxableincome.
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DuetothebookandtaxnetlossesincurredduringthethreeandninemonthsendedSeptember30,2014and2013,zero
incometaxexpensehasbeenincurredduringthoseperiods.Inaddition,substantialhistoricallosseshavebeenincurredandthe
Companyhasmaintainedafullvaluationallowanceagainstitsnetdeferredtaxassetsbecausetherealizationofthosedeferred
taxassetsisdependentuponfutureearnings,andtheamountandtimingofthoseearnings,ifanyisuncertain.
11.
CommitmentsandContingencies
FutureMinimumLeasePayments
During the period the Company signed new leases for the new corporate headquarters at 221 Main Street in San
FranciscoCaliforniaandforthecolocationfacilityareundernoncancelableoperatingleasesthatexpireinFebruary2023and
August2015,respectively.TheCompanyalsosignedanewleaseforofficespaceinPhoenixArizonaunderanoperatinglease
thatexpiresinJune2022.
FutureminimumrentalpaymentsundertheseleasesasofSeptember30,2014areasfollows(inthousands):
Remainingthreemonthsof2014
2015
2016
2017
2018
2019
Thereafter
Totalfutureoperatingleaseobligations
139
2,459
3,757
3,866
3,978
4,093
12,981
31,273
Rental expense under premisesoperating lease arrangements was $0.7 million and $0.2 million for the three months
ended September 30, 2014 and 2013, respectively. Rental expense under premisesoperating lease arrangements was $1.0
millionand$0.5millionfortheninemonthsendedSeptember30,2014and2013,respectively.
The Company amended and restated an agreement with WebBank, an FDICinsured Utahchartered industrial bank,
underwhichallBorrowerLoansoriginatedthroughtheplatformaremadebyWebBankunderitsbankcharter.Thearrangement
allowsforBorrowerLoanstobeofferedtoborrowersatuniformnationwideterms.TheCompanyisrequiredtopaythegreater
ofamonthlyminimumfeeorafeecalculatedbasedonacertainpercentageofmonthlyBorrowerLoanoriginationvolume.
TheCompanyhasanagreementwithathirdpartybrokerdealerinwhichthethirdpartyagreedtooperateandmaintain
theNoteTraderPlatformforthesecondarytradingofNotes.TheCompanyisrequiredtopaythethirdpartybrokerdealeran
agreeduponmonthlyfeewhichequalsthedifferencebetweentheminimummonthlyfeeandthetransactionfeescollectedbythe
thirdpartyproviderduringthatmonth.
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SecuritiesLawCompliance
From inception through October 16, 2008, the Company sold approximately $178.0 million of Borrower Loans to
investor members through the old platform structure, whereby the Company assigned promissory notes directly to investor
members.TheCompanydidnotregistertheofferandsaleofthepromissorynotescorrespondingtotheseBorrowerLoansunder
theSecuritiesActorundertheregistrationorqualificationprovisionsofanystatesecuritieslaws.TheCompanybelievesthatthe
questionofwhetherornottheoperationoftheplatformduringthisperiodconstitutedanofferorsaleofsecuritiesinvolveda
complicatedfactualandlegalanalysisandwasuncertain.Ifthesalesofpromissorynotesofferedthroughtheplatformduringthis
period were viewed as a securities offering, the Company would have failed to comply with the registration and qualification
requirementsoffederalandstatelaws.
TheCompanysdecisiontorestructuretheplatformandceasesalesofpromissorynotesofferedthroughtheplatform
effectiveOctober16,2008limitedthiscontingentliabilitytotheperiodcoveringitsactivitiespriortoOctober16,2008.
OnApril21,2009,theCompanyandtheNorthAmericanSecuritiesAdministratorsAssociation(NASAA)reached
agreementonthetermsofamodelconsentorderbetweentheCompanyandthestatesinwhichtheCompanyofferedpromissory
notesforsalepriortoNovember2008.TheconsentorderinvolvespaymentbytheCompanyofuptoanaggregateof$1million
in penalties, which have been allocated among the states based on the Companys promissory note sale transaction volume in
eachstatepriortoNovember2008.Astatethatentersintoaconsentorderreceivesitsportionofthe$1millioninexchangefor
itsagreementtoterminate,orrefrainfrominitiating,anyinvestigationoftheCompanyspromissorynotesaleactivitiespriorto
November2008.Penaltiesarepaidpromptlyafterastateentersintoaconsentorder.NASAAhasrecommendedthateachstate
enterintoaconsentorder.However,nostateisobligedtodoso,andthereisnodeadlinebywhichastatemustmakeitsdecision.
TheCompanyisnotrequiredtopayanyportionofthepenaltytothosestatesthatdonotelecttoenterintoaconsentorder.Ifa
state does not enter into a consent order, it is free to pursue its own remedies against the Company, subject to any applicable
statute of limitations. As of September 30, 2014, the Company has entered into consent orders with 34 states and has paid an
aggregateof$0.47millioninpenaltiestothosestates.
AsofSeptember30,2014andDecember31,2013,theCompanyhadaccruedapproximately$0.25millionand$0.25
million, respectively, in connection with the contingent liability associated with the states that have not entered into consent
orders,inaccordancewithASCTopic450,Contingencies.Themethodologyappliedtoestimatetheaccrualwastodividethe$1
millionmaximumfeeproratabystate,usingtheCompanyspromissorynotesalesfrominceptionthroughNovember2008.A
weightingwasthenappliedbystatetoeachstatethathasnotenteredintoaconsentorder,assigningalikelihoodthatthepenalty
will be claimed. In estimating the probability of a claim being made by a state, the Company considered factors such as the
standardtermsoftheconsentorderswhetherthestateevergaveanyindicationofconcernregardingthesaleofpromissorynotes
through the platform the probability of a state electing not to enter into a consent order in order to pursue its own litigation
againsttheCompanywhetherthepenaltyissufficienttocompensateastateforthecostofprocessingthesettlementconsent
order and finally the impact that current economic conditions have had on state governments. The Company will continue to
evaluatethisaccrualandrelatedassumptionsasnewinformationbecomesknown.
In2008,plaintiffsfiledaclassactionlawsuitagainsttheCompanyandcertainofitsexecutiveofficersanddirectorsin
the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note
purchasersontheplatformfromJanuary1,2006throughOctober14,2008.ThelawsuitallegedthattheCompanyofferedand
soldunqualifiedandunregisteredsecuritiesinviolationoftheCaliforniaandfederalsecuritieslaws.OnJuly19,2013solelyto
avoidthecosts,risksanduncertaintiesinherentinlitigation,andwithoutadmittinganyliabilityorwrongdoing,thepartiestothe
classactionlitigationagreedtoenterintoasettlementtoresolveallclaimsrelatedthereto(theSettlement).Inconnectionwith
the Settlement, the Company agreed to pay an aggregate amount of $10 million into a settlement fund, split into four annual
installmentsof$2millionin2014,$2millionin2015,$3millionin2016and$3millionin2017.TheSettlementreceivedfinal
approvalinafinalorderandjudgmententeredbytheSuperiorCourtonApril16,2014.Pursuanttothefinalorderandjudgment,
theclaimsintheclassactionweredismissed,andattheeffectivetimeoftheSettlement(June16,2014),thedefendantswillhave
beenreleasedbytheplaintiffsfromallclaimsthatwereorcouldhavebeenassertedconcerningtheissuesallegedintheclass
actionlawsuit.Thereservefortheclassactionsettlementliabilityis$7.8millioninthecondensedconsolidatedbalancesheetas
ofSeptember30,2014.
On July 1, 2011, the Company and Greenwich entered into a Stipulated Order of Judgment pursuant to which the
CompanyagreedtodismissitsremainingclaimsagainstGreenwich.OnAugust12,2011,Greenwichfiledanoticeofappealof
thecourt'sdecisionregardingGreenwichsdutytodefendupto$2million.ThisappealwasdismissedOnOctober22,2012.
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12.
RelatedParties
SincetheCompanysinception,ithasengagedinvarioustransactionswithitsdirectors,executiveofficersandholders
ofmorethan5%ofitsvotingsecurities,andimmediatefamilymembersandotheraffiliatesofitsdirectors,executiveofficers
and5%stockholders.
CertainoftheCompanysexecutiveofficers,directorswhoarenotexecutiveofficers,andaffiliatesparticipateonthe
CompanyslendingplatformbyplacingbidsandpurchasingNotesandBorrowerLoans.TheaggregateamountofNotesand
BorrowerLoanspurchasedandtheincomeearnedbypartiesdeemedtobeaffiliatesandrelatedpartiesoftheCompanyasof
September30,2014and2013aresummarizedbelow(amountsinthousands):
RelatedParty
Executiveofficersandmanagement
Directors
AggregateAmountof
IncomeEarnedonNotes
Notes
andBorrowerLoans
andBorrowerLoans
ninemonthsended
PurchasedSeptember30,
September30,
2014
2013
2014
2013
$
2,100 $
806 $
83 $
30
5,198
4,578
81
204
$
7,298 $
5,384 $
164 $
234
TheNotesandBorrowerLoansofpartiesdeemedtobeaffiliatesandrelatedpartiesoftheCompany,wereobtainedon
termsandconditionsthatwerenotmorefavorablethanthoseobtainedbyotherNoteandBorrowerLoanpurchasers.Ofthetotal
aggregateamountofNotesandBorrowerLoanspurchasedsinceinceptionapproximately$0.41millionor6%ofprincipaland
$0.36millionor7%ofprincipalhasbeenchargedoffthroughSeptember30,2014and2013,respectively.TheCompanyhas
earned approximately $0.01 million in servicing fee revenue related to these Notes and Borrower Loans for the three months
endedSeptember30,2014and2013.
13. PostretirementBenefitPlans
TheCompanyhasa401(k)planthatcoversallemployeesmeetingcertaineligibilityrequirements.The401(k)planis
designedtoprovidetaxdeferredretirementbenefitsinaccordancewiththeprovisionsofSection401(k)oftheInternalRevenue
Code.Eligibleemployeesmaydeferupto90%ofeligiblecompensationuptotheannualmaximumasdeterminedbytheInternal
RevenueService.TheCompanyscontributionstotheplanarediscretionary.DuringtheninemonthsendedSeptember30,2014,
theCompanyhascontributed$0.38milliontotheplan.
14. PriorPeriodAdjustments
Subsequent to the issuance of our condensed consolidated financial statements for the period ended June 30, 2014, Prosper
Marketplacediscoveredanerrorinitsestimatesofnetserviceincomewhichresultedinanoverstatementofnetloanservicing
rightsasofDecember31,2013andanoverstatementofthegainrecognizedonthesaleofloanswhichwasincludedinother
revenuesinthefourthquarterof2013byapproximately$223.Furthermore,theCompanyinappropriatelynettedloanservicing
liabilities against its loan servicing assets. This resulted in a $223 overstatement of the loan servicing assets, which were
originallyincludedinBorrowerLoansReceivableatFairValuefor$144.TheCompanycorrectedthiserrorbyreclassifying
the adjusted gross serving assets of $260 to Prepaid and Other Assets and recognized the servicing liabilities of $339 in
AccountsPayableandOtherLiabilities.
The Company also discovered an error related to measurement of the Class Action Settlement Liability. Upon the courts
preliminaryapprovalofthesettlementduringthequarterendedDecember31,2013,thisliabilitybecamepayableatfixedfuture
datessotheCompanyshouldhaverecognizedtheliabilitybasedonthepresentvalueofthefuturepaymentsratherthanthegross
amountofsuchfuturepayments.ThiserrorresultedinanoverstatementoftheClassActionSettlementLiabilityandtheClass
ActionSettlementexpenserecognizedasofandfortheyearendDecember31,2013of$261.
Additionally, the Company discovered that the Convertible Preferred Stock was incorrectly classified within permanent
stockholdersequityinitsconsolidatedbalancesheetasofDecember31,2013.SincetheConvertiblePreferredStockholdersare
entitled to receive their liquidation preference upon a changeincontrol transaction the Convertible Preferred Stock should be
classified as temporary equity. This resulted in a $45,118 reclassification of the Convertible Preferred Stock from permanent
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equitytotemporaryequityasofDecember31,2013.
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Lastly,theCompanydiscoveredthefollowingclassificationerrorswithinitsCondensedConsolidatedStatementofCashFlows
fortheninemonthsendedSeptember30,2013:
ChangesinRestrictedCashwereinappropriatelyclassifiedaschangesincashflowsfromoperatingactivitiesratherthan
changesincashflowsfrominvestingactivities.
Cash flows from the purchase and sale of Loans held for sale was inappropriately classified within cash flows from
investingactivitiesratherthancashflowsfromoperatingactivities.
AportionofthechangeinfairvalueofBorrowerLoansandNoteswasinappropriatelyreflectedasacashflowfrom
investing and financing activities, respectively, rather than an adjustment to reconcile net income to net cash used in
operatingactivities.
Theproceedsfromsaleofborrowerloansheldatfairvaluewerenettedagainstoriginationofborrowerloansatfair
value.
Theaggregateimpactoftheseerrorswereanunderstatementofcashflowsfromoperatingactivitiesof$369anoverstatementof
cash flows from investing activities of $12,080 and an $11,711understatement of cash flows from financing activities for the
ninemonthsendedSeptember30,2013.
Finally,theCompanycorrectedthenumberofoutstandingcommonsharesonthefaceofthebalancesheetandintheStatements
ofStockholdersEquityasaresultofanerrorinthecalculationofrestrictedsharesrepurchased.Thenumberofcommonshares
outstandingatDecember31,2013waspreviouslystatedas13,902,478andhasbeencorrectedto13,588,803.
TheCompanyevaluatedtheseerrorsanddeterminedthattheywereimmaterialtothepreviouslyissuedfinancialstatementsand
therefore,amendmentofpreviouslyfiledreportswasnotrequired.However,inordertoprovideconsistencyintheconsolidated
financial statements, corrections for these immaterial amounts are reflected in the Companys accompanying Consolidated
BalanceSheetasofDecember31,2013andConsolidatedStatementofCashFlowsfortheninemonthsendedSeptember30,
2013.TheimpactofthecorrectionsonspecificlineitemsintheConsolidatedBalanceSheetasofDecember31,2013andthe
CondensedConsolidatedCashFlowsfortheninemonthsendedSeptember30,2013arepresentedbelow(inthousands):
CondensedConsolidatedStatementsofCashFlowsNinemonthsendedSeptember30,2013
Netincome(loss)
ChangeinfairvalueofBorrowerLoans
ChangeinfairvalueofNotes
Restrictedcashexceptforthoserelatedtoinvestingactivities
Loansheldforsaleatfairvalue
Netcashusedinoperatingactivities
OriginationofBorrowerLoansheldatfairvalue
RepaymentofBorrowerLoansheldatfairvalue
ProceedsfromsaleofBorrowerLoansHeldatFairValue
RepaymentofLoansheldforinvestmentatfairvalue
OriginationofLoansheldforinvestmentatfairvalue
Changesinrestrictedcashrelatedtoinvestingactivities
Netcashusedininvestingactivities
PaymentofNotesheldatfairvalue
Netcashprovidedbyfinancingactivities
As
previously
As
reported Adjustments corrected
$
(24,815) $
$
(24,815)
3,903
11,711
15,614
(4,484)
(11,711)
(16,195)
(2,334)
334
(2,000)
35
35
(17,666)
369
(17,297)
(118,349)
(80,786) (199,135)
77,215
(11,711)
65,504
80,786
80,786
106
(106)
(71)
71
(334)
(334)
(42,433)
(12,080)
(54,513)
(76,878)
11,711
(65,167)
87,099
11,711
98,810
CondensedConsolidatedBalanceSheetDecember31,2013
BorrowerLoansReceivableatFairValue
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As
previously
As
reported Adjustments corrected
$
226,238 $
(144) $ 226,094
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PrepaidandOtherAssets
TotalAssets
AccountsPayableandAccruedLiabilities
ClassActionSettlementLiability
RepurchaseLiabilityforUnvestedRestrictedStockAwards
TotalLiabilities
ConvertiblePreferredStock
ConvertiblePreferredStock
AdditionalPaidinCapital
AccumulatedDeficit
TotalStockholders'Equity(Deficit)
TotalLiabilities,ConvertiblePreferredStockandStockholders'Equity(Deficit)
708
268,289
6,737
10,000
609
244,172
273
128,140
(104,080)
24,117
268,289 $
260
116
339
(261)
(50)
28
45,118
(273)
(44,795)
38
(45,030)
116 $
968
268,405
7,076
9,739
559
244,200
45,118
83,345
(104,042)
(20,913)
268,405
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ProsperFundingLLC
CondensedConsolidatedBalanceSheets
(Unaudited)
(amountsinthousands)
Assets
Cashandcashequivalents
Restrictedcash
Loansheldforsaleatfairvalue
Borrowerloansreceivableatfairvalue
Propertyandequipment,net
Relatedpartyreceivable
Otherassets
TotalAssets
September
December
30,
31,
2014
2013*
$
2,862 $
5,789
8,721
12,299
16,350
3,917
253,068
226,094
2,048
1,980
73
1,450
255
$
284,572 $ 250,334
LiabilitiesandMembersEquity
Accountspayableandaccruedliabilities
Notesatfairvalue
Repurchaseandindemnificationobligation
Relatedpartypayable
TotalLiabilities
Member'sEquity
Member'sequity
Retainedearnings
TotalMember'sEquity
TotalLiabilitiesandMember'sEquity
4,684 $
252,911
157
257,752
15,877
10,943
26,820
284,572 $
4,026
226,794
32
205
231,057
16,082
3,195
19,277
250,334
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
*PleaseseeNote8
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ProsperFundingLLC
CondensedConsolidatedStatementsofOperations
(Unaudited)
(amountsinthousands)
Revenues
OperatingRevenues
AdministrationFeeRevenue
ServicingIncome,net
OtherRevenues
TotalOperatingRevenues
InterestIncomeonBorrowerLoans
InterestExpenseonNotes
NetInterestIncome
ChangeinFairValueonBorrowerLoans,Loans
HeldforSaleandNotes,net
TotalNetRevenues
Expenses
CostofServices
AdministrationFeeExpense
DepreciationandAmortization
ProfessionalServices
OtherOperatingExpenses
TotalExpenses
TotalNetIncome
ThreemonthsendedSeptember30, NinemonthsendedSeptember30,
2014
2013
2014
2013
$
8,574 $
2,042 $
19,525 $
4,178
1,574
89 $
2,965
106
635
814
10,783
2,131
23,304
4,284
10,724
8,892
31,014
22,391
(9,850)
(8,435)
(28,613)
(21,262)
874
457
2,401
1,129
59
11,716
958
6,836
273
1
128
8,196
3,520
91
2,679
292
1,520
148
6
63
2,029
650 $
448
26,153
2,297
15,018
761
16
313
18,405
7,748
578
5,991
1,004
2,534
355
26
157
4,076
1,915
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
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ProsperFundingLLC
CondensedConsolidatedStatementsofCashFlows
(Unaudited)
(amountsinthousands)
Cashflowsfromoperatingactivities:
NetIncome
Adjustmentstoreconcilenetincometonetcashprovidedby(usedin)operatingactivities:
ChangeinfairvalueofBorrowerLoans
ChangeinfairvalueofLoansheldforsale
ChangeinfairvalueofNotes
InitialGainandAmortizationofServicingRights
Depreciationandamortization
Provisionforrepurchaseandindemnificationobligation
Changesinoperatingassetsandliabilities:
Receivablesandotherassets
Loansheldforsaleatfairvalue
Accountspayableandaccruedliabilities
NetIntercompanyPayable/Receivable
Netcash(usedin)providedbyoperatingactivities
Cashflowsfrominvestingactivities:
OriginationofBorrowerLoansheldatfairvalue
RepaymentofBorrowerLoansheldatfairvalue
Proceedsfromsaleofborrowerloansheldatfairvalue
Purchasesofpropertyandequipment
Changeinrestrictedcash
Netcashusedininvestingactivities
Cashflowsfromfinancingactivities:
ProceedsfromissuanceofNotesheldatfairvalue
PaymentofNotesheldatfairvalue
NetcashincludedintransferofassetsfromPMI
Netcashprovidedbyfinancingactivities
Net(decrease)increaseincashandcashequivalents
Cashandcashequivalentsatbeginningoftheperiod
Cashandcashequivalentsatendoftheperiod
FortheNineMonths
EndedSeptember30,
2014
2013*
$
7,748 $
1,915
14,916
(16,195)
11
3
(15,375)
15,614
(808)
761
355
125
20
(21)
(12,444)
35
87
533
(278)
518
(5,278)
2,798
(823,841) (189,313)
88,944
59,126
693,007
80,786
(829)
(1,227)
3,578
(969)
(39,141)
(51,597)
130,828
108,527
(89,336)
(58,441)
1,875
41,492
51,961
(2,927)
3,162
5,789
5
$
2,862 $
3,167
Cashpaidforinterest
NonCashFinancingActivity,DistributiontoParent
28,976 $
(205) $
23,725
Theaccompanyingnotesareanintegralpartofthesecondensedconsolidatedfinancialstatements.
*PleaseseeNote8
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ProsperFundingLLC
NotestoCondensedConsolidatedFinancialStatements
(Unaudited)
1.
OrganizationandBusiness
ProsperFundingLLC(ProsperFunding)wasformedinthestateofDelawareinFebruary2012asalimitedliability
companywiththesoleequitymemberbeingProsperMarketplace,Inc.(PMI).
ProsperFundingwasformedbyPMItoholdBorrowerLoansandissueNotesthroughtheplatform.AlthoughProsper
Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a
manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy
proceeding. Prosper Fundings intention is to minimize the likelihood that its assets would be subject to claims by PMIs
creditorsifPMIweretofileforbankruptcy,aswellastominimizethelikelihoodthatProsperFundingwillbecomesubjectto
bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and
implementingcertainformalproceduresdesignedtoexpresslyreinforceitsstatusasadistinctcorporateentityfromPMI.
On January 22, 2013, PMI entered into an Asset Transfer Agreement with Prosper Funding pursuant to which PMI
transferredsubstantiallyallofitsremainingassetstoProsperFunding,including(i)alloutstandingNotesissuedbyPMIunder
theIndenturedatedJune15,2009betweenPMIandWellsFargoBank,astrustee,(ii)allBorrowerLoansheldbyPMI,(iii)all
lender/borrower/group leader registration agreements related to such Notes or Borrower Loans, and (iv) all documents and
informationrelatedtotheforegoing,effectiveFebruary1,2013.
Prosper Funding commenced operations as of February 1, 2013 when PMI transferred ownership of the platform,
includingalloftherightsrelatedtotheoperationoftheplatform,toProsperFunding.SinceFebruary1,2013,allNotesissued
and sold through the platform are issued, sold and serviced by Prosper Funding. Pursuant to a Loan Account Program
AgreementbetweenPMIandWebBank,PMImanagestheoperationoftheplatform,asagentofWebBank,inconnectionwith
the submission of loan applications by potential borrowers, the making of related loans by WebBank and the funding of such
loansbyWebBank.PursuanttoanAdministrationAgreementbetweenProsperFundingandPMI,PMImanagesallotheraspects
oftheplatformonbehalfofProsperFunding.
A borrower member who wishes to obtain a loan through the platform must post a loan listing, or listing, on the
platform.ProsperFundingallocateslistingstooneoftwoinvestormemberfundingchannels:(i)thefirstchannelallowsinvestor
members to commit to purchase Notes, the payments of which are dependent on the payments made on the corresponding
Borrower Loan (the Note Channel) and (ii) the second channel allows investor members to commit to purchase 100% of a
BorrowerLoandirectlyfromtheCompany(theWholeLoanChannel).
Allloansrequestedandobtainedthroughtheplatformareunsecuredobligationsofindividualborrowermemberswitha
fixedinterestrateandloantermssetatthreeorfiveyearsasofSeptember30,2014.Allloansmadethroughtheplatformare
fundedbyWebBank,anFDICinsured,Utahcharteredindustrialbank.Afterfundingaloan,WebBanksellstheloantoProsper
Funding, without recourse to WebBank, in exchange for the principal amount of the loan. WebBank does not have any
obligationtopurchasersoftheNotes.
ProsperFundingformedProsperAssetHoldingsLLC(PAH)inNovember2013asalimitedliabilitycompanywith
thesoleequitymemberbeingProsperFunding.PAHwasformedtopurchaseBorrowerLoansfromProsperFundingandsellthe
BorrowerLoanstothirdparties.
AsofSeptember30,2014,theplatformisopentoinvestorsin31statesandtheDistrictofColumbia.Additionally,asof
September30,2014theplatformisopentoborrowersin47statesandtheDistrictofColumbia.Currentlyourplatformisnot
offeredinternationally.
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2.
SummaryofSignificantAccountingPolicies
BasisofPresentation
Prosper Fundings unaudited interim condensed consolidated financial statements have been prepared in accordance
withU.S.generallyacceptedaccountingprinciples(USGAAP)anddisclosurerequirementsforinterimfinancialinformation
and the requirements of Rule 803 of Regulation SX. 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
shouldbereadinconjunctionwiththeauditedfinancialstatementsandnotestheretofortheyearendedDecember31,2013.The
balancesheetatDecember31,2013hasbeenderivedfromtheauditedfinancialstatementsatthatdate.Managementbelieves
these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring
nature,whicharenecessaryforafairpresentationoftheresultsfortheinterimperiodspresented.Theresultsofoperationsforthe
interimperiodsarenotnecessarilyindicativeoftheresultsthatmaybeexpectedforthefullyearoranyotherinterimperiod.
TheaccompanyinginterimcondensedconsolidatedfinancialstatementsincludetheaccountsofProsperFundingandits
whollyowned subsidiary PAH. All intercompany balances and transactions between Prosper Funding and PAH have been
eliminatedinconsolidation.
Reclassifications
During the nine months ended September 30, 2014, the Company changed the presentation of its revenues in the
statementofoperations.AnewlinecalledServicingFeeswascreatedandtheservicingfeesrelatedtowholeloansthatwere
previouslyincludedininterestincomewerereclassifiedtothisnewline.Also,theChangeinFairValueofBorrowerLoans,
LoansHeldforSaleandNotes,Netwasmovedintothetotalrevenuessubtotal.Lastly,thesubtotalswererealignedtoreflectthe
newpresentation.ThesechangeshadnoimpacttonetincomeandarereflectedintheReclassificationscolumninthetable
below.Managementbelievesthesechangesmaketheincomestatementmoreusefulforthereadersofthefinancialstatements
andcomparablewiththeCompanyscompetitors.
UseofEstimates
The preparation of Prosper Fundings interim condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires management to make certain estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the condensed
consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These
estimates,judgmentsandassumptionsincludebutarenotlimitedtothefollowing:valuationofBorrowerLoansandassociated
Notes,valuationofservicingrights,repurchaseandindemnificationobligation,valuationallowanceondeferredtaxassets,and
contingentliabilities.ProsperFundingbasesitsestimatesonhistoricalexperiencefromallBorrowerLoans,andonvariousother
assumptionsthatitbelievestobereasonableunderthecircumstances.Actualresultscoulddifferfromthoseestimates.
CertainRisksandConcentrations
In the normal course of its business, Prosper Funding encounters two significant types of risk: credit and regulatory.
Financial instruments that potentially subject Prosper Funding to significant concentrations of credit risk consist primarily of
cash,cashequivalents,andrestrictedcash.ProsperFundingplacescash,cashequivalents,andrestrictedcashwithhighquality
financialinstitutionsandisexposedtocreditriskintheeventofdefaultbytheseinstitutionstotheextenttheamountrecordedon
the balance sheet exceeds federally insured amounts. Prosper Funding performs periodic evaluations of the relative credit
standingofthesefinancialinstitutionsandhasnotsustainedanycreditlossesfrominstrumentsheldatthesefinancialinstitutions.
To the extent that Borrower Loan payments are not made, servicing income will be reduced. A series of Notes
correspondingtoaparticularBorrowerLoaniswhollydependentontherepaymentofsuchBorrowerLoan.Asaresult,Prosper
FundingdoesnotbeartheriskonsuchBorrowerLoan.
Prosper Funding is subject to various regulatory requirements. The failure to appropriately identify and address these
regulatory requirements could result in certain discretionary actions by regulators that could have a material effect on Prosper
Funding'sconsolidatedfinancialpositionandresultsofoperations.
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CashandCashEquivalents
Cash equivalents are recorded at cost, which approximates fair value. Such deposits periodically exceed amounts
insuredbytheFDIC.
RestrictedCash
Restrictedcashconsistsprimarilyofcashdepositsheldascollateralasrequiredforloanfundingandservicingactivities.
BorrowerLoansandNotes
Prosper Funding has adopted the provisions of ASC Topic 825, Financial Instrument. ASC Topic 825 permits
companiestochoosetomeasurecertainfinancialinstrumentsandcertainotheritemsatfairvalueonaninstrumentbyinstrument
basiswithunrealizedgainsandlossesonitemsforwhichthefairvalueoptionhasbeenelectedreportedinearnings.Thefair
valueelection,withrespecttoanitem,maynotberevokedonceanelectionismade.ProsperFundingdoesnotrecordaspecific
allowanceaccountrelatedtotheBorrowerLoansfundedthroughtheNoteChannelinwhichithaselectedthefairvalueoption,
but rather estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for
ProsperFundingshistoricalpayment,lossandrecoveryrates.
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ServicingAsset/Liability
TheCompanyrecordsservicingassetsandliabilitiesattheirestimatedfairvalueswhentheCompanysellsBorrowerLoansto
unrelatedthirdpartybuyers.ThegainorlossonaloansaleisrecordedinOtherRevenuewhilethewhilethefairvalueofthe
servicingrights,whichisbasedonthedegreetowhichthecontractualloanservicingfeeisaboveorbelowanestimatedmarket
loanservicingfeeisrecordedasanoffsetinservicingassetsorliabilities.ServicingassetsandliabilitiesarerecordedinPrepaid
and Other Assets and Accrued Expenses and Other Liabilities, respectively, on the condensed consolidated balance sheets.
Theinitialfairvalueofservicingassetsorliabilitiesareamortizedinproportiontoandovertheperiodofestimatedservicing
incomeorlossandarereportedinServicingFeesonthecondensedconsolidatedstatementofoperations.
The Company uses a discounted cash flow model to estimate the fair value of the loan servicing assets or liabilities which
considersthecontractualprojectedservicingfeerevenuethattheCompanyearnsontheloans,estimatedmarketservicingfeesto
servicesuchloans,prepaymentrates,defaultratesandthecurrentprincipalbalancesoftheloans.
The Company periodically assesses servicing assets accounted for using the amortization method for impairment. Impairment
occurswhenthecurrentfairvalueoftheservicingassetsfallsbelowtheassetscarryingvalue(carryingvalueistheamortized
costreducedbyanyrelatedvaluationallowance).Ifservicingassetsareimpaired,theimpairmentisrecognizedincurrentperiod
earningsandthecarryingvalueoftheassetsisadjustedthroughavaluationallowance.Ifthevalueofimpairedservicingassets
subsequentlyincreases,theCompanyrecognizestheincreaseinvalueincurrentperiodearningsandadjuststhecarryingvalueof
theservicingassetsthroughareductioninthevaluationallowancetoadjustthecarryingvalueonlytotheextentofthevaluation
allowance.
LoansHeldforSale
LoansheldforsaleareprimarilycomprisedofBorrowerLoansheldforshortdurationsandarerecordedatcostplus
accruedinterestwhichapproximatesfairvalue.ForBorrowerLoansheldlongterm,thefairvalueisestimatedusingdiscounted
cashflowmethodologiesbaseduponasetofvaluationassumptionssimilartothoseofotherBorrowerLoans,whicharesetforth
inNote2FairValueMeasurement.
FairValueMeasurement
Prosper Funding follows ASC Topic 820, Fair Value Measurements and Disclosures, which provides guidance
regarding a 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
usedinthevaluation.ASCTopic820applieswheneverotherstandardsrequire(orpermit)assetsorliabilitiestobemeasuredat
fairvaluebutdoesnotexpandtheuseoffairvalueinanynewcircumstances.
ASC Topic 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to
transferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.
The price used to measure the fair value is not adjusted for transaction costs. Under ASC Topic 820, the fair value
measurementalsoassumesthatthetransactiontosellanassetoccursintheprincipalmarketfortheassetor,intheabsenceofa
principalmarket,themostadvantageousmarketfortheasset.Theprincipalmarketisthemarketinwhichthereportingentity
wouldsellortransfertheassetwiththegreatestvolumeandlevelofactivityfortheasset.Indeterminingtheprincipalmarketfor
anassetorliabilityunderASCTopic820,itisassumedthatthereportingentityhasaccesstothemarketasofthemeasurement
date.Ifnomarketfortheassetexistsorifthereportingentitydoesnothaveaccesstotheprincipalmarket,thereportingentity
shoulduseahypotheticalmarket.
UnderASCTopic820,assetsandliabilitiescarriedatfairvalueinthebalancesheetsareclassifiedamongthreelevels
basedontheobservabilityoftheinputsusedtodeterminefairvalue:
Level1Thevaluationisbasedonquotedpricesinactivemarketsforidenticalinstruments.
Level2Thevaluationisbasedonobservableinputssuchasquotedpricesforsimilarinstrumentsinactivemarkets,quoted
prices for identical or similar instruments in markets that are not active, and modelbased valuation techniques for which all
significantassumptionsareobservableinthemarket.
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Level3Thevaluationisbasedonunobservableinputsthataresupportedbylittleornomarketactivityandthataresignificant
to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow
methodologies, or similar techniques, which incorporate managements own estimates of assumptions that market participants
woulduseinpricingtheinstrumentorvaluationsthatrequiresignificantmanagementjudgmentorestimation.
Fair value of financial instruments are determined based on the fair value hierarchy established in ASC Topic 820,
whichrequiresanentitytomaximizetheuseofquotedpricesandobservableinputsandtominimizetheuseofunobservable
inputswhenmeasuringfairvalue.Variousvaluationtechniquesareutilized,dependingonthenatureofthefinancialinstrument,
includingtheuseofmarketpricesforidenticalorsimilarinstruments,ordiscountedcashflowmodels.Whenpossible,activeand
observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using
assumptionsthatmanagementbelievesamarketparticipantwoulduseinpricingtheassetorliability.
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Financial instruments consist principally of Cash and cash equivalents, Restricted cash, Borrower loans receivable,
Loansheldforsale,Accountspayableandaccruedliabilities,andNotes.Theestimatedfairvaluesofcashandcashequivalents,
restrictedcash,accountspayableandaccruedliabilitiesapproximatetheircarryingvaluesbecauseoftheirshorttermnature.
ThefollowingtablespresenttheassetsandliabilitiesmeasuredatfairvalueonarecurringbasisatSeptember30,2014
andDecember31,2013(inthousands):
September30,2014
Assets
Borrowerloansreceivable
Certificatesofdeposit&restrictedcash
Loansheldforsale
Totalassets
Liabilities
Notes
December31,2013
Assets
Borrowerloansreceivable
Certificatesofdeposit&restrictedcash
Loansheldforsale
Totalassets
Liabilities
Notes
Fair
Level2 Level3
Value
$
$ 253,068 $ 253,068
7,448
1,273
8,721
16,350
16,350
7,448 $
1,273 $ 269,418 $ 278,139
$
$ 252,911 $ 252,911
Fair
Level1
Level2
Level3
Value
$
$ 226,094 $ 226,094
11,028
1,271
12,299
3,917
3,917
11,028 $
1,271 $ 230,011 $ 242,310
$
$ 226,794 $ 226,794
Level1
InternalUseSoftwareandWebsiteDevelopment
ProsperFundingaccountsforinternalusesoftwarecosts,includingwebsitedevelopmentcosts,inaccordancewithASC
Topic35040,InternalUseSoftwareandASCTopic35050,WebsiteDevelopmentCosts.InaccordancewithASCTopic35040
and35050,thecoststodevelopsoftwareforthewebsiteandotherinternalusesarecapitalizedwhenmanagementhasauthorized
andcommittedprojectfunding,preliminarydevelopmenteffortsaresuccessfullycompleted,anditisprobablethattheproject
willbecompletedandthesoftwarewillbeusedasintended.Capitalizedsoftwaredevelopmentcostsprimarilyincludesoftware
licensesacquired,feespaidtooutsideconsultants,andsalariesandpayrollrelatedcostsforemployeesdirectlyinvolvedinthe
developmentefforts.
Costsincurredpriortomeetingthesecriteria,togetherwithcostsincurredfortrainingandmaintenance,areexpensed.
Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are
capitalized. Capitalized costs are included in property and equipment and amortized to expense using the straightline method
over their expected lives. Prosper Funding evaluates its software assets for impairment whenever events or changes in
circumstancesindicatethatthecarryingamountofsuchassetsmaynotberecoverable.Recoverabilityofsoftwareassetstobe
heldandusedismeasuredbyacomparisonofthecarryingamountoftheassettothefuturenetundiscountedcashflowsexpected
tobegeneratedbytheasset.Ifsuchsoftwareassetsareconsideredtobeimpaired,theimpairmenttoberecognizedistheexcess
ofthecarryingamountoverthefairvalueofthesoftwareasset.
RepurchaseandIndemnificationObligation
UnderthetermsoftheNotes,theLenderRegistrationAgreementsbetweenProsperFundingandinvestormemberswho
participate in the Note Channel, and the loan purchase agreements between Prosper Funding and investor members that
participateintheWholeLoanChannel,ProsperFundingmay,incertaincircumstances,becomeobligatedtorepurchaseaNoteor
Borrower Loan from an investor member or indemnify an investor member against loss on a Note. Generally, these
circumstancesincludetheoccurrenceofverifiableidentitytheft,thefailuretoproperlyfollowloanlistingorbiddingprotocols,
oraviolationoftheapplicablefederal,state,orlocallendinglaws.Theindemnificationandrepurchaseobligationisestimated
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basedonhistoricalexperience.ProsperFundingaccruesaprovisionfortherepurchaseandindemnificationobligationwhenthe
Notes or Borrower Loans are issued. Indemnified or repurchased Notes and repurchased Borrower Loans associated with
violationsoffederal,state,orlocallendinglawsorverifiableidentitytheftarewrittenoffatthetimeofrepurchaseoratthetime
anindemnificationpaymentismade.
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RevenueRecognition
Revenueprimarilyresultsfromfeesearned.Feesincludeloanoriginationfeespaidbyborrowersandservicingfeespaid
byinvestors.Wealsohaveothersmallersourcesofrevenuereportedasotherrevenuethisincludesthegainsonwholeloansales.
AdministrationAgreementLicenseFees
ProsperFundingprimarilygeneratesrevenuesthroughlicensefeesitearnsthroughanAdministrationAgreementwith
PMI.TheAdministrationAgreementcontainsalicensegrantedbyProsperFundingtoPMIthatentitlesPMItousetheplatform
for and in relation to: (i) PMIs performance of its duties and obligations under the Administration Agreement relating to
corporateadministration,loanplatformservices,loanandnoteservicingandmarketing,and(ii)PMIsperformanceofitsduties
andobligationstoWebBankinrelationtoloanoriginationandfunding.Thelicensefeesarebasedonthenumberoflistingsthat
arepostedtotheplatform.
ServiceIncome
InvestorsinwholeloanstypicallypaytheCompanyaservicingfeewhichiscurrentlygenerallysetat1%perannumof
theoutstandingprincipalbalanceofthecorrespondingloanpriortoapplyingthecurrentpayment.Theservicingfeecompensates
the Company for the costs we incur in servicing the related loan, including managing payments from borrowers, payments to
investorsandmaintaininginvestorsaccountportfolios.Prosperrecordsservicingfeespaidbynoteholdersandborrowerloan
holdersasacomponentofoperatingrevenuewhenreceived.Theamortizationofservicingrightsisalsoincludedinthisline.
InterestIncomeonBorrowerLoansReceivableandInterestExpenseonNotes
ProsperFundingrecognizesinterestincomeonBorrowerLoansfundedthroughtheNoteChannelandinterestexpense
onthecorrespondingNotesusingtheaccrualmethodbasedonthestatedinterestratetotheextentProsperFundingbelievesitto
becollectable.
CostofServices
CostofServicesincludescoststhataredirectlyrelatedtotheservicingofBorrowerLoanssuchasfeesfromWebBank
forprocessingloanpayments.
ComprehensiveIncome
There is no comprehensive income (loss) other than the net income (loss) disclosed in the condensed consolidated
statementsofoperations.
RecentAccountingPronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial
ReportingStandards(IFRS),FASBissuedASU201409,RevenuefromContractswithCustomers.Thenewguidancesets
forth a new fivestep revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is
intended to eliminate numerous industryspecific pieces of revenue recognition guidance that have historically existed in U.S.
GAAP.Theunderlyingprincipleofthenewstandardisthatabusinessorotherorganizationwillrecognizerevenuetodepictthe
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 the Company in the first quarter of
fiscal2017.Earlyadoptionisnotpermitted.TheCompanyiscurrentlyassessingthepotentialimpactonitsfinancialstatements
fromadoptingthisnewguidance.
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
201415,"PresentationofFinancialStatementsGoingConcern(Subtopic20540)DisclosureofUncertaintiesaboutanEntity's
Ability to Continue as a Going Concern," which requires management of a company to evaluate whether there is substantial
doubtaboutthecompany'sabilitytocontinueasagoingconcern.ThisASUiseffectivefortheannualreportingperiodending
afterDecember15,2016,andforinterimandannualreportingperiodsthereafter,withearlyadoptionpermitted.TheCompanyis
currentlyassessingthepotentialimpactonitsfinancialstatementsfromadoptingthisnewguidance.
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3.
BorrowerLoansandNotesHeldatFairValue
AsobservablemarketpricesarenotavailablefortheBorrowerLoansandNotesfundedthroughtheNoteChannelthat
ProsperFundingholds,orforsimilarassetsandliabilities,ProsperFundingbelievessuchBorrowerLoansandNotesshouldbe
considered Level 3 financial instruments under ASC Topic 820. In a hypothetical transaction as of the measurement date,
Prosper Funding believes that differences in the principal marketplace in which such Borrower Loans are originated and the
principal marketplace in which it might offer such Borrower Loans for sale may result in differences between the originated
amount of the Borrower Loans and their fair value as of the transaction date. For Borrower Loans funded through the Note
Channel, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including
prepaymentspeeds,rollrates,recoveryratesanddiscountratesbasedontheperceivedcreditriskwithineachcreditgrade.
TheobligationtopayprincipalandinterestonanyseriesofNotesisequaltotheloanpayments,ifany,thatarereceived
on the corresponding Borrower Loan, net of its servicing fee. The fair value election for Notes and Borrower Loans funded
throughtheNoteChannelallowsboththeassetsandtherelatedliabilitiestoreceivesimilaraccountingtreatmentforexpected
losses,whichisconsistentwiththesubsequentcashflowstoinvestormembersthataredependentuponborrowerpayments.As
such,thefairvalueoftheNotesisapproximatelyequaltothefairvalueoftheBorrowerLoansfundedthroughtheNoteChannel,
adjustedfortheservicingfeeandthetimingofborrowerpaymentssubsequentlydisbursedtoNoteholders.Anyunrealizedgains
orlossesonsuchBorrowerLoansandNotesforwhichthefairvalueoptionhasbeenelectedisrecordedasaseparatelineitemin
thestatementofoperations.TheeffectiveinterestrateassociatedwithaseriesofNotesislessthantheinterestrateearnedonthe
corresponding Borrower Loan due to the servicing fee. See further discussion in this note for a rollforward and further
discussionofthesignificantassumptionsusedtovalueBorrowerLoansandNotesfundedthroughtheNoteChannel.
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ThefairvalueoftheBorrowerLoansandNotesfundedthroughtheNoteChannelisestimatedusingdiscountedcash
flowmethodologiesbaseduponasetofvaluationassumptions.ThemainassumptionsusedtovaluesuchBorrowerLoansand
Notes include prepayment rates derived from historical prepayment rates for each credit grade, default rates derived from
historicalperformance,recoveryratesanddiscountratesappliedtoeachcreditgradebasedontheperceivedcreditriskofeach
creditgrade.TheobligationtopayprincipalandinterestonanyseriesofNotesisequaltotheloanpayments,ifany,receivedon
thecorrespondingBorrowerLoan,netoftheservicingfee.Assuch,thefairvalueoftheNotesisapproximatelyequaltothefair
value of the Borrower Loans funded through the Note Channel, adjusted for the servicing fee and the timing of borrower
paymentssubsequentlydisbursedtotheNoteholders.TheeffectiveinterestrateassociatedwithaseriesofNoteswillbeless
thantheinterestrateearnedonthecorrespondingBorrowerLoanduetothe1.0%servicingfee.
AtSeptember30,2014andDecember31,2013,borrowerloans,notesandloansheldforsale(inthousands)were:
BorrowerLoans
Notes
LoansHeldforSale
September
December
September
December
September
December
30,2014
31,2013
30,2014
31,2013
30,2014
31,2013
Aggregateprincipalbalance
outstanding
$
256,026 $
225,953 $ (258,947) $ (229,271) $
16,360 $
3,915
Fairvalueadjustments
(2,958)
141
6,036
2,477
(10)
2
Fairvalue
$
253,068 $
226,094 $ (252,911) $ (226,794) $
16,350 $
3,917
Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those
assumptions at September 30, 2014 for Borrower Loans and Notes funded through the Note Channel are presented in the
followingtable(inthousands):
Borrower
Notes
Loans
9.36%*
9.36%*
$ 247,738 $ 244,736
244,715
241,743
$ 253,975 $ 250,912
257,188
254,085
7.40%*
7.40%*
$ 247,275 $ 244,275
244,418
241,452
$ 253,729 $ 250,663
256,584
253,493
Discountrateassumption:
Resultingfairvaluefrom:
100basispointincrease
200basispointincrease
Resultingfairvaluefrom:
100basispointdecrease
200basispointdecrease
Defaultrateassumption:
Resultingfairvaluefrom:
10%higherdefaultrates
20%higherdefaultrates
Resultingfairvaluefrom:
10%lowerdefaultrates
20%lowerdefaultrates
*Representsweightedaverageassumptionsconsideringallcreditgrades.
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ThechangesinLevel3assetsmeasuredatfairvalueonarecurringbasisareasfollows(inthousands):
FairValueMeasurementsUsingSignificantUnobservableInputs(Level3)
Loans
Borrower
Heldfor
Loans
Notes
Sale
Total
BalanceatJanuary1,2013
$
$
$
$
AssetstransferredonFebruary1,2013
170,344 (170,574)
175
(55)
Originations
189,313 (108,527)
71
80,857
Principalrepayments
(59,126)
58,441
(106)
(791)
Borrowerloanssoldtothirdparties
(80,786)
(80,786)
Changeinfairvalueonborrowerloansandnotes
(15,614)
16,195
581
Changeinfairvalueofloansheldforsale
(3)
(3)
BalanceatSeptember30,2013
$
204,131 $ (204,465) $
137 $
(197)
FairValueMeasurementsUsingSignificantUnobservableInputs(Level3)
Loans
Borrower
Heldfor
Loans
Notes
Sale
Total
BalanceatJanuary1,2014
$
226,094 $ (226,794) $
3,917 $
3,217
Originations
823,841 (130,828)
229,679
922,692
Principalrepayments
(88,944)
89,336
(899)
(507)
Borrowerloanssoldtothirdparties
(693,007)
(216,336) (909,343)
Changeinfairvalueonborrowerloansandnotes
(14,916)
15,375
459
Changeinfairvalueofloansheldforsale
(11)
(11)
BalanceatSeptember30,2014
$
253,068 $ (252,911) $
16,350 $
16,507
FairValueMeasurementsUsingSignificantUnobservableInputs(Level3)
LoansHeld
Borrower
for
Loans
Notes
Sale
Total
BalanceJuly1,2013
$
187,124 $ (187,489) $
153 $
(212)
Originations
94,098
(43,475)
25
50,648
Principalrepayments
(22,778)
22,718
(41)
(101)
Borrowerloanssoldtothirdparties
(50,623)
(50,623)
Changeinfairvalueonborrowerloansandnotes
(3,690)
3,781
91
BalanceatSeptember30,2013
$
204,131 $ (204,465) $
137 $
(197)
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FairValueMeasurementsUsingSignificantUnobservableInputs(Level3)
LoansHeld
Borrower
for
Loans
Notes
Sale
Total
BalanceJuly1,2014
$
246,203 $ (246,511) $
9,543 $
9,235
Originations
372,027
(44,115)
117,752
445,664
Principalrepayments
(31,226)
31,620
(586)
(192)
Borrowerloanssoldtothirdparties
(327,909)
(110,350) (438,259)
Changeinfairvalueonborrowerloansandnotes
(6,027)
6,095
68
Changeinfairvalueofloansheldforsale
(9)
(9)
BalanceatSeptember30,2014
$
253,068 $ (252,911) $
16,350 $
16,507
ThechangesinfairvaluewoulddirectlyimpactthechangeinfairvalueonBorrowerLoans,Loansheldforsale,and
Notesinthecondensedconsolidatedstatementsofoperations.Themajorityofthefairvalueadjustmentsincludedinearningsis
attributabletochangesinestimatedinstrumentspecificfuturecreditlosses.
Due to the recent origination of the Borrower Loans and Notes funded through the Note Channel, the change in fair
value attributable to instrumentspecific credit risk is immaterial. Of all Borrower Loans originated from July 13, 2009 to
September30,2014,282BorrowerLoanswere90daysormoredelinquent,whichrelatedtoanaggregateprincipalamountof
$1.5millionandafairvalueof$0.14millionasofSeptember30,2014.
4.
LoanServicingNote:
TheCompanyinitiallyrecordsservicingassetsandliabilitiesattheirestimatedfairvalueswhentheCompanysellswholeloans
tounrelatedthirdpartywholeloanbuyers.Theinitialfairvalueofsuchservicingassetsorliabilitiesisamortizedinproportion
toandovertheperiodofestimatedservicingincomeorloss.
Fairvalue
Discounted cash flow Discounted cash flow valuation techniques generally consist of developing an estimate of future cash
flowsthatareexpectedtooccuroverthelifeofafinancialinstrumentandthendiscountingthosecashflowsatarateofreturn
thatresultsinthefairvalueamount.
SignificantunobservableinputspresentedinthetablebelowarethosethattheCompanyconsiderssignificanttotheestimated
fairvaluesoftheLevel3servicingassetsandliabilities.TheCompanyconsidersunobservableinputstobesignificant,ifbytheir
exclusion,theestimatedfairvalueoftheLevel3assetorliabilitywouldbeimpactedbyasignificantpercentagechange,orbased
onqualitativefactorssuchasthenatureoftheinstrumentandsignificanceoftheunobservableinputsrelativetootherinputsused
withinthevaluation.Thefollowingisadescriptionofthesignificantunobservableinputsprovidedinthetable.
MarketservicingrateTheCompanyestimatesadequateservicingcompensationratesofwhatamarketparticipantwould
earntoservicetheloansthattheCompanysellstothirdparties.Thisrateiscalculatedontheloanbalanceonaperannum
basis. The Company estimated these market servicing rates based on observable market rates for other loan types in the
industry,adjustedfortheuniqueloanattributesthatarepresentinthespecificloansthattheCompanysellsandservicesand
informationfromabackupserviceprovider.
DiscountrateThediscountrateisarateofreturnusedtodiscountfutureexpectedcashflowstoarriveatapresentvalue,
which represents the fair value of the loan servicing rights. The discount rates for the projected net cash flows of loan
servicing rights are our estimates of the rates of return that investors in servicing rights for unsecured consumer credit
obligationswouldrequireforthevariouscreditgradesoftheunderlyingloans.Discountratesforservicingrightsonexisting
loansareadjustedtoreflectthetimevalueofmoney.Ariskpremiumcomponentisimplicitlyincludedinthediscountrates
to reflect the amount of compensation market participants require due to the uncertainty inherent in the instruments cash
flowsresultingfromriskssuchascreditandliquidity.
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DefaultRateThedefaultratepresentedisanannualized,averageestimateconsideringallloancategories,andrepresentsan
aggregateofconditionaldefaultratecurvesforeachcreditgradeorloancategory.Eachpointonaparticularloancategorys
curverepresentsthepercentageofprincipalexpectedtodefaultperperiodbasedonthetermandageoftheunderlyingloans.
Theassumptionregardingdefaultsdirectlyreducesservicingrevenuesbecausetheamountofservicingrevenuesreceivedis
basedontheamountofoutstandingprincipaleachperiod.Inaddition,defaultsalsoreducetheexpectedtermsoftheloans,
whichareusedtoprojectfutureservicingrevenues.
SignificantUnobservableInputs
The following table presents quantitative information about the significant unobservable inputs used for our servicing
asset/liabilityfairvaluemeasurementsatSeptember30,2014andDecember31,2013:
WeightedAverage
UnobservableInput
September30,2014
December31,2013
Discountrate
9.6%**
9.9%**
Defaultrate
5.5%**
5.6%**
Marketservicingrate
0.65%
0.65%
**Representsweightedaverageoraggregateassumptionsconsideringallcreditgrades.
Servicingasset/liabilityactivity:
ThefollowingtablespresentadditionalinformationaboutLevel3servicingassetsandliabilitiesbeingamortizedforthethree
andninemonthsendedSeptember30,2014(inthousands).TherewerenoservicingassetsorliabilitiesrecordedatSeptember
30,2013.
ThreeMonthsEnded
September30,2014
Servicing
Servicing
Assets Liabilities
AmortizedcostatJune30,2014
$
770 $
693
Additions
772
306
Less:Amortization
(126)
(114)
AmortizedcostatSeptember30,2014
$
1,416 $
885
AmortizedcostatDecember31,2013
Additions
Less:Amortization
AmortizedcostatSeptember30,2014
5.
NineMonthsEnded
September30,2014
Servicing
Servicing
Assets Liabilities
$
241 $
314
1,408
804
(233)
(233)
$
1,416 $
885
LoansHeldforSale
LoansheldforsaleonthecondensedconsolidatedbalancesheetsasofSeptember30,2014andDecember31,2013,
was $16.4 million and $3.9 million, respectively. For the nine months ended September 30, 2014 and 2013, a total of $229.7
millionand$0.07millionofBorrowerLoansoriginatedthroughtheplatformasLoansheldforsale.Fortheninemonthsended
September30,2014and2013,$216.3millionand$0oftheseBorrowerLoansweresoldtoanunrelatedthirdpartythroughthe
Whole Loan Channel. When a Borrower Loan has been funded by Prosper Funding in whole, or in part, the portion of the
borrowersmonthlyloanpaymentthatcorrespondstothepercentageoftheBorrowerLoanthatisfundedisretained.Inthese
cases,interestincomeisrecordedontheseBorrowerLoans.
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6.
RepurchaseandIndemnificationObligation
ForthethreemonthsendedSeptember30,2014and2013,theprovisionforrepurchaseandindemnificationobligation
was$0.03millionand$0.01million,respectively.FortheninemonthsendedSeptember30,2014and2013,theprovisionfor
repurchaseandindemnificationobligationwas$0.14millionand$0.02million,respectively.Thisexpenseisincludedinthe
Cost of Services line in the Statement of Operations. The balance of the Repurchase and indemnification obligation as of
September30,2014andDecember31,2013,was$0.16millionand$0.03million,respectively.
7.
IncomeTaxes
ProsperFundingincurrednoincometaxprovisionforthethreemonthsendedSeptember30,2014and2013.Prosper
FundingisaUSdisregardedentityandtheincomeandlossisincludedinthereturnofitsparent,PMI.SincePMIisinaloss
position,notcurrentlysubjecttoincometaxes,andhasfullyreserveditsdeferredtaxasset,theneteffectivetaxrateforProsper
Fundingis0%.
8.
PriorPeriodAdjustments
Subsequent to the issuance of our condensed consolidated financial statements for the period ended June 30, 2014, Prosper
Fundingdiscoveredanerrorinitsestimatesofnetserviceincomewhichresultedinanoverstatementofnetloanservicingrights
as of December 31, 2013 and an overstatement of the gain recognized on the sale of loans in the fourth quarter of 2013 by
approximately $223. Furthermore, Prosper Funding inappropriately netted loan servicing liabilities against its loan servicing
assets. Additionally, a net servicing liability of $6 was distributed to our parent, which was previously not recorded. This
resultedina$217understatementoftheloanservicingassetsandliabilities,whichwereoriginallyincludedinBorrowerLoans
ReceivableatFairValuefor$144.ProsperFundingcorrectedtheseerrorsbyreclassifyingtheadjustedgrossservicingassetsof
$241toPrepaidandOtherAssetsandrecognizedtheservicingliabilitiesof$314inAccountsPayableandOtherLiabilities.
Additionally, Prosper Funding discovered the following classification errors within its Condensed Consolidated Statement of
CashFlowsfortheninemonthsendedSeptember30,2013:
ChangesinRestrictedCashwereinappropriatelyclassifiedaschangesincashflowsfromoperatingactivitiesratherthan
changesincashflowsfrominvestingactivities.
Cash flows from the purchase and sale of Loans held for sale was inappropriately classified within cash flows from
investingactivitiesratherthancashflowsfromoperatingactivities.
AportionofthechangeinfairvalueofBorrowerLoansandNoteswasinappropriatelyreflectedasacashflowfrom
investing and financing activities, respectively, rather than an adjustment to reconcile net income to net cash used in
operatingactivities.
Theproceedsfromsaleofborrowerloansheldatfairvaluewerenettedagainstoriginationofborrowerloansatfair
value.
Theaggregateimpactoftheseerrorswereanunderstatementofcashflowsfromoperatingactivitiesof$1,004anoverstatement
ofcashflowsfrominvestingactivitiesof$12,715andan$11,711understatementofcashflowsfromfinancingactivitiesforthe
ninemonthsendedSeptember30,2013.
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ProsperFundingevaluatedtheseerrorsanddeterminedthattheywereimmaterialtothepreviouslyissuedfinancialstatements
and therefore, amendment of previously filed reports was not required. However, in order to provide consistency in the
consolidatedfinancialstatements,correctionsfortheseimmaterialamountsarereflectedintheProsperFundingsaccompanying
consolidatedbalancesheetasofDecember31,2013andCondensedConsolidatedStatementofCashFlowsfortheninemonths
ended September 30, 2013. The impact of the corrections on specific line items in the Consolidated Balance Sheet as of
December31,2013andtheCondensedConsolidatedCashFlowsfortheninemonthsendedSeptember30,2013arepresented
below(inthousands):
CondensedConsolidatedStatementsofCashFlowsNinemonthsendedSeptember30,2013
As
previously
As
reported Adjustments corrected
(4,484)
(11,711)
(16,195)
3,903
11,711
15,614
(969)
969
35
35
1,794
1,004
2,798
(108,527)
(80,786)
(189,313)
80,786
80,786
70,837
(11,711)
59,126
106
(106)
(71)
71
(969)
(969)
(38,882)
(12,715)
(51,597)
(70,152)
11,711
(58,441)
40,250
11,711
51,961
ChangeinfairvalueofBorrowerLoans
ChangeinfairvalueofNotes
Restrictedcash
Loansheldforsaleatfairvalue
Netcashprovidedby(usedin)operatingactivities
OriginationofBorrowerLoansHeldatFairValue
ProceedsfromsaleofBorrowerLoansHeldatFairValue
RepaymentofBorrowerLoansheldatfairvalue
Repaymentofloansheldforinvestmentatfairvalue
Originationofloansheldforinvestmentatfairvalue
Changeinrestrictedcash
Netcashusedininvestingactivities
PaymentofNotesheldatfairvalue
Netcashprovidedbyfinancingactivities
CondensedConsolidatedBalanceSheetDecember31,2013
As
previously
As
reported Adjustments corrected
226,238
(144)
226,094
14
241
255
250,237
97
250,334
3,712
314
4,026
230,743
314
231,057
16,076
6
16,082
3,418
(223)
3,195
19,494
(217)
19,277
250,237
97
250,334
BorrowerLoansReceivableatFairValue
OtherAssets
TotalAssets
Accountspayableandaccruedliabilities
TotalLiabilities
Member'sEquity
RetainedEarnings(AccumulatedDeficit)
TotalMember'sEquity
TotalLiabilitiesandMember'sEquity
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Item2.
MANAGEMENTSDISCUSSIONANDANALYSISOF
FINANCIALCONDITIONANDRESULTSOFOPERATION
This managements discussion and analysis of consolidated financial condition and results of operations, or MD&A, contains
forwardlooking statements that involve risks and uncertainties. Please see ForwardLooking Statements in this Quarterly
Report on Form 10Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This
discussionshouldbereadinconjunctionwiththeCompanyshistoricalcondensedconsolidatedfinancialstatementsandrelated
notes thereto, Prosper Fundings condensed financial statements and related notes thereto and the other disclosures contained
elsewhereinthisQuarterlyReportonForm10Q.Theresultsofoperationsfortheperiodsreflectedhereinarenotnecessarily
indicativeofresultsthatmaybeexpectedforfutureperiods,andtheCompanysconsolidatedactualresultsmaydiffermaterially
fromthosediscussedintheforwardlookingstatementsasaresultofvariousfactors,includingbutnotlimitedtothoseincluded
elsewhere in this Quarterly Report on Form 10Q and those included in the Risk Factors section and elsewhere in the
RegistrantsAnnualReportonForm10K.
PROSPERMARKETPLACE,INC.
Overview
ProsperMarketplace,Inc.(PMI)developedandbeganoperatingapeertopeeronlinecreditplatform(theplatform)
in2006.BeginninginJuly2009thisplatformpermittedborrowermemberstoapplyforBorrowerLoansandinvestormembers
to purchase Notes issued by PMI, the proceeds of which facilitated the funding of Borrower Loans. In February 2012, PMI
formed Prosper Funding LLC (Prosper Funding and, collectively with PMI, the Company or the Registrants) to hold
BorrowerLoansandissueNotes.ProsperFundinghasbeenorganizedtooperateinamannerthatisintendedtominimizethe
likelihoodthatProsperFundingwouldbesubstantivelyconsolidatedwithPMIinabankruptcyproceeding.PMIisthesoleequity
memberofProsperFunding.ProsperFundingcommencedoperationsonFebruary1,2013.
On February 1, 2013, PMI transferred ownership of the platform, including all of the rights related to the operation of the
platform,toProsperFunding.BeginningFebruary1,2013,allNotesissuedandsoldthroughtheplatformareissued,soldand
serviced by Prosper Funding. At that same time, Prosper Funding assumed all of PMIs obligations with respect to all then
outstandingNotes.PursuanttoanAdministrationAgreementbetweenPMIandProsperFunding,PMImanagesallaspectsofthe
platform on behalf of Prosper Funding. Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI
managestheoperationoftheplatform,asagentofWebBank,inconnectionwiththesubmissionofloanapplicationsbypotential
borrowers,themakingofrelatedBorrowerLoansbyWebBankandthefundingofsuchBorrowerLoansbyWebBank.
ProsperFundingformedProsperAssetHoldingsLLC(PAH)inNovember2013asalimitedliabilitycompanywith
thesoleequitymemberbeingProsperFunding.PAHwasformedtopurchaseBorrowerLoansfromProsperFundingandsellthe
purchasedBorrowerLoanstothirdparties.
The platform enables borrower members to request and obtain Borrower Loans by posting listings on the platform
indicatingtheprincipalamountofthedesiredloan.TheCompanyassignsaProsperRatingconsistingoflettergrades,basedin
partontheborrowerscreditscore,toeachmemberwhorequestsaBorrowerLoan.BorrowermembersProsperRating,credit
scorerange,debttoincomeratiosandothercreditdataaredisplayedwiththeirlistingsoncethemembermeetstheminimum
eligibilitycriteriaandareavailableforviewingbyinvestormembersonananonymousbasis.
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Listingsareallocatedtooneoftwoinvestormemberfundingchannels:(i)thefirstchannelallowsinvestormembersto
committopurchaseNotesfromtheCompany,thepaymentsofwhicharedependentonthepaymentsmadeonthecorresponding
Borrower Loan (the Note Channel) and (ii) the second channel allows investor members to commit to purchase 100% of a
BorrowerLoandirectlyfromtheCompany(theWholeLoanChannel).EachtimetheCompanypostsagroupoflistingsonthe
platform,itdeterminestherelativeproportionsofsuchlistingsthatwillbeallocatedtotheNoteChannelandtheWholeLoan
Channel,respectively,basedontheCompanysestimateoftherelativeoverallpurchasedemandineachchannel.TheCompany
thenusesarandomallocationmethodologytoallocateindividuallistingsbetweenthetwochannelsbasedonthoseproportions.
TheCompanycurrentlypostslistingsontheplatformtwiceperdayonweekdaysandonceperdayonweekends,althoughthe
frequencywithwhichtheCompanypostslistingsmaychangeinthefuture.IfalistingisnotfundedthroughtheWholeLoan
Channelwithinthefirsthourafteritsposting,thelistingwillberemovedfromtheWholeLoanChannelandpostedtotheNote
Channelfortheremainderofitslistingperiod.Suchlistingwillincludeadesignationindicatingthatthelistingcamefromthe
WholeLoanChannel.TheWholeLoanChannelwaslaunchedinApril2013andisonlyavailabletocertaininstitutionalinvestor
investor members approved by the Company that meet the definition of an accredited investor under Regulation D under the
Securities Act of 1933, as amended. The Whole Loan Channel is an important and growing part of the Companys business.
Investor members who participate in the Whole Loan Channel are required to enter into loan purchase and loan servicing
agreementswiththeCompanythatspecifythepartiesrightsandobligationswithregardtothesaleofBorrowerLoansthrough
theWholeLoanChannelandwhichnametheCompanyastheservicerofsuchBorrowerLoans.
AllBorrowerLoansaremadebyWebBank,anFDICinsured,Utahcharteredindustrialbank,andsoldtotheCompany.
WebBanksellstheloantotheCompany,withoutrecoursetoWebBank,inexchangefortheprincipalamountoftheBorrower
Loan. WebBank does not have any obligation to the purchasers of the Notes or Borrower Loans. The Company verifies the
identityof100%ofborrowersusingavarietyofmethodsincludingcreditbureaudata,otherelectronicdatasourcesandoffline
documentary procedures. The Company verifies income and/or employment on a subset of borrowers based on a proprietary
algorithm. The intention of the algorithm is to verify income or employment in cases where the selfreported income of the
borrowerishighlydeterminativeoftheborrowersriskrating.
The Company derives operating revenue from fees paid by WebBank. Upon funding a Borrower Loan, WebBank
charges the borrower an origination fee equal to a specified percentage of the principal amount of such Borrower Loan.
WebBank,inturn,paystheCompanyamountsequaltotheoriginationfeesascompensationfortheCompanysloanorigination
activitiesonWebBanksbehalf.
OperatingHistory
The platform was launched on February 13, 2006 and enables borrower members to request and obtain personal,
unsecured loans between $2,000 and $35,000 by posting anonymous listings indicating the principal amount of the desired
loan.BorrowerLoantermsaresubjecttominimumandmaximumloanamountsdeterminedbytheborrowersProsperRating
whichiscreatedusingproprietarymodelsthatincludenumerousfactors,atinterestratessetbytheCompany.Interestratesare
setforBorrowerLoansbasedontheborrowermembersProsperRating,aswellasadditionalfactors,suchasestimatedlossrate,
loanterms,generaleconomicenvironment,previousBorrowerLoansobtainedthroughtheplatformandcompetitiveconditions.
AsofSeptember30,2014,theplatformhadfacilitated183,948BorrowerLoanssinceitslaunchtotalinganaggregateprincipal
amountofapproximately$1.9billion.TheplatformhasalimitedoperatinghistoryanduntilthecurrentquartertheCompanyhas
incurred net losses since its inception. The Companys net income (loss) was $2.7 million and $(5.0) million for the three
months ended September 30, 2014 and 2013, respectively. The Companys net income (loss) was $0.2 million and $(24.8)
millionfortheninemonthsendedSeptember,2014and2013,respectively.
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The Company funds its operations primarily with proceeds from equity financings, which are described below under
LiquidityandCapitalResources.Theoperatingplancallsforacontinuationofthecurrentstrategyofincreasingborrowerand
lendermembertransactionvolumeandimprovingtheefficiencyoftheplatformtoincreaserevenueuntilprofitabilityisreached.
TrendsandUncertainties
Thepeertopeerlendingindustryremainsaveryinnovativeanduniqueindustry,andtheapplicationoffederalandstate
lawsinareassuchassecuritiesandconsumerfinancetotheindustryisstillevolving.TheCompanywillcontinuetomonitorthis
evolution actively in order to identify and respond quickly to any legislative or regulatory developments that may affect the
platform.
Duringthefirstthreequartersof2014,theplatformsoriginationvolumeincreasedconsistentlyintermsofbothunits
andtotaldollaramounts.TheCompanyhopestocontinuethistrendofgrowthastheplatformsborrowerandinvestormember
bases continue to strengthen and become more familiar with the platform. Over time, the Company expects the platforms
investormemberbasetogrowastheplatformgainsmoreexposuretopotentialinvestormembersandtheNotesandBorrower
Loansareestablishedasviableinvestmentalternatives.
CriticalAccountingPoliciesandEstimates
Managementsdiscussionandanalysisoftheconsolidatedfinancialconditionandresultsofoperationsisbasedonthe
condensed consolidated financial statements, which the Company has prepared in accordance with U.S. generally accepted
accountingprinciples.Thepreparationofcondensedconsolidatedfinancialstatementsrequiresmanagementtomakeestimates,
judgments and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the related
disclosures. Estimates are based on historical experience and on various other assumptions that the Company believes to be
reasonable under the circumstances. Actual results could differ from those estimates. Significant accounting policies which
includerevenuerecognition,stockbasedcompensation,repurchaseandindemnificationobligation,andincometaxesaremore
fullydescribedinNote2toProsperMarketplace,Inc.scondensedconsolidatedfinancialstatementsincludedelsewhereinthis
QuarterlyReport.
Critical accounting policies are those policies that the Company believes present the most complex or subjective
measurements and have the most potential to impact its financial position and operating results. While all decisions regarding
accountingpoliciesareimportant,theCompanybelievesthatthefollowingpoliciescouldbeconsideredcritical.
FairValueMeasurement
The Company determines the fair values of its financial instruments based on the fair value hierarchy established in
AccountingStandardsCodification(ASC)Topic820,FairValueMeasurementsandDisclosures,whichrequiresanentityto
maximizetheuseofquotedpricesandobservableinputsandtominimizetheuseofunobservableinputswhenmeasuringfair
value.TheCompanyusesvariousvaluationtechniquesdependingonthenatureofthefinancialinstrument,includingtheuseof
marketpricesforidenticalorsimilarinstruments,ordiscountedcashflowmodels.Whenpossible,activeandobservablemarket
data for identical or similar financial instruments are utilized. Alternatively, the Company determines fair value using
assumptionsthatitbelievesamarketparticipantwoulduseinpricingtheassetorliability.
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The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities
approximate their carrying values because of their shortterm nature. Loans held for sale, Borrower Loans, and Notes are
accounted for on a fair value basis. For additional information and discussion regarding significant accounting policies
surrounding fair value measurement, see Note 2, Note 3 and Note 4 to Prosper Marketplace, Inc.s condensed consolidated
financialstatementsincludedelsewhereinthisQuarterlyReport.
BorrowerLoansandNotes
Overall, if the fair value of the Borrower Loans held by the Company that were funded through the Note Channel
decreaseorincreaseduetoanychangesintheCompanysassumptions,therewillalsobeacorrespondingdecreaseorincreasein
thefairvalueofthelinkedNotes.Asaresult,theeffectontheCompanysearningsofadversechangesinkeyassumptionswould
bemitigated.
AstheCompanyreceivesscheduledpaymentsofprincipalandinterestontheBorrowerLoansitholdsthatwerefunded
through the Note Channel, the Company in turn makes principal and interest payments on the corresponding Notes. These
principalpaymentsreducethecarryingvalueofthoseBorrowerLoansandNotes.IftheCompanydoesnotreceivepaymentson
any such Borrower Loan, the Company is not obligated to and does not make payments on the corresponding Notes. The
aggregatefairvalueofaseriesofNotescorrespondingtoaparticularBorrowerLoanisapproximatelyequaltothefairvalueof
that Borrower Loan, less the servicing fee which is reflected in net interest income. If the fair value of the Borrower Loan
decreasesduetochangesintheCompanysexpectationsregardingthelikelihoodofdefaultortheamountoflossintheeventof
default,therewillalsobeacorrespondingdecreaseintheaggregatefairvalueoftherelatedNotes(anunrealizedaggregategain
relatedtotheNotesandanunrealizedlossrelatedtotheBorrowerLoan).
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ResultsofOperations
Revenues
ThefollowingtablesummarizesourrevenueforthethreeandninemonthsendedSeptember30,2014and2013(inthousands):
ThreeMonthsEnded
September30,
2014
2013
$Change %Change
OperatingRevenues
OriginationFees
$
22,233 $
4,038
18,195
451%
ServicingFees
1,749
83
1,666
2,007%
OtherRevenues
1,147
378
769
203%
TotalOperatingRevenues
25,129
4,499
20,630
459%
InterestIncome
Interestincomeonborrowerloans
10,705
8,799
1,906
22%
Interestexpenseonnotes
(9,850)
(8,435)
(1,415)
17%
NetInterestincome
855
364
491
135%
ChangeinFairValueofBorrowerLoans,LoansHeldfor
InvestmentandNotes,net
59
91
(32)
(35)%
TotalRevenues
26,043
4,954
21,089
426%
OperatingRevenues
OriginationFees
ServicingFees
OtherRevenues
TotalOperatingRevenues
InterestIncome
Interestincomeonborrowerloans
Interestexpenseonnotes
NetInterestincome
ChangeinFairValueofBorrowerLoans,LoansHeldfor
InvestmentandNotes,net
TotalRevenues
NineMonthsEnded
September30,
2014
2013
$Change %Change
46,849
8,488
38,361
452%
3,044
70
2,974
4,249%
2,090
810
1,280
158%
51,983
9,368
42,615
455%
30,995
24,785
6,210
25%
(28,613)
(23,770)
(4,843)
20%
2,382
1,015
1,367
135%
448
54,813
579
10,962
(131)
43,851
(23)%
400%
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OriginationFees
WebBank charges borrowers an origination fee equal to a specified percentage of the aggregate principal balance of
eachBorrowerLoanbasedontheProsperRatingandloanterm.WebBank,inturn,paystheCompanyamountsequaltothose
feesascompensationforitsmarketingandunderwritingactivities.
InMay2013,theoriginationfeeschedulewasupdatedasfollows:
ProsperRating
AA
A
BHR
May2013February2014
3YearLoan
5YearLoan
1.00%1.95% 1.95%4.95%
3.95%
4.95%
4.95%
4.95%
February2014September2014
3YearLoan
5YearLoan
1.00%2.00%
3.00%
4.00%
5.00%
5.00%
5.00%
InFebruary2014,theoriginationfeeschedulewasupdatedasfollows:
ProsperRating
AA
A
BHR
Origination fees for the three months ended September 30, 2014 and 2013 were $22.2 million and $4.0 million
respectively,representinganincreaseof$18.2millionor451%,whichwasprimarilyduetohigheroriginationvolumethrough
theplatformduring2014.OriginationfeesfortheninemonthsendedSeptember30,2014and2013were$46.8millionand$8.5
millionrespectively,representinganincreaseof$38.3millionor451%,whichwasprimarilyduetohigheroriginationvolume
throughtheplatformduring2014.
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OriginationVolume
FrominceptionthroughSeptember30,2014,atotalof183,948BorrowerLoans,totaling$1.9billionwereoriginated
throughtheplatform.
Atotalof37,439BorrowerLoanstotaling$493.0millionwereoriginatedthroughtheplatformduringthethreemonths
endedSeptember30,2014,comparedto9,143BorrowerLoanstotaling$94.8millionoriginatedduringthethreemonthsended
September30,2013.Thisrepresentedaunit,orloan,increaseof309%andadollarincreaseof420%.
ThegraphbelowshowsaggregatedollarBorrowerLoanoriginationsthroughtheplatformdatingbacktoJuly2009:
In January 2013, the Company undertook an equity financing that recapitalized the Company and brought in a new
seniormanagementteam.InFebruary2013,theCompanyimplementedanewpublicofferingofNotesandPMIManagement
Rights designed to provide the platforms investor members with protection in the event of the Companys bankruptcy. In
addition, commencing in the second quarter of 2013, the Company introduced the Whole Loan Channel and also increased
marketingcampaignstoattractnewborrowers.Investormembers,liquidityandBorrowerLoanoriginationshaveallincreasedas
aresultofthesechanges.ThedecreaseinBorrowerLoanoriginationsthatoccurredbetweenQ42012andQ12013wasdueto
lackofliquidity.
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ServicingFees
We earn a fee from whole loan investors for servicing the ongoing borrowerinvestor relationship. The servicing fee
compensatesusforthecostsweincurinservicingtherelatedloan,includingmanagingpaymentsfromborrowers,paymentsto
investorsandmaintaininginvestorsaccountportfolios.Theservicingfeeis generally set at 1% per annum of the outstanding
principalbalanceofthecorrespondingloanpriortoapplyingthecurrentpayment.Servicingfeesrevenueswere$1.7millionand
$0.1 million for the three months ended September 30, 2014 and 2013, respectively, which represented an increase of $1.6
millionor2,007%.Servicefeeswere$3.0millionand$0.1millionfortheninemonthsendedSeptember30,2014and2013,
respectively,whichrepresentedanincreaseof$2.9millionor4,187%.Theincreaseinservicingfeeswasduetotheincreasein
loansbeingservicedasaresultoftheincreaseinloanoriginations.
OtherRevenues
Other revenues consists primarily of credit referral fees, where partner companies pay the Company an agreed upon
amountforreferralsofcustomersfromthewebsite,andgainsonwholeloansales.Otherrevenueswere$1.1millionand$0.4
millionforthethreemonthsendedSeptember30,2014and2013,respectively,whichrepresentedanincreaseof$0.7millionor
203%.Otherrevenueswere$2.1millionand$0.8millionfortheninemonthsendedSeptember30,2014and2013,respectively,
whichrepresentedanincreaseof$1.3millionor158%.Theincreaseinotherrevenueswasduetothegainsonwholeloansales
duetoanincreaseinvolumeofwholeloansalesandtheadditionofnewcreditreferralpartners,aswellasincreasedtrafficto
existingpartners.
InterestIncomeonBorrowerLoansandInterestExpenseonNotes
The Company recognizes interest income on Borrower Loans funded through the Note Channel using the accrual
methodbasedonthestatedinterestratetotheextenttheCompanybelievesittobecollectable.TheCompanyrecordsinterest
expense on the corresponding Notes based on the contractual interest rates to the extent the Company believes they will be
collectable.
Overall, the increase in net interest income for the periods above was driven by the rise in the number of Borrower
LoansoriginatedthroughtheplatformandservicedbytheCompany.
ChangeinFairValueofBorrowerLoans,LoansHeldforSaleandNotes,net
ThefairvalueofBorrowerLoansandNotesareestimatedusingdiscountedcashflowmethodologiesbaseduponaset
ofvaluationassumptions.ThemainassumptionsusedtovaluesuchBorrowerLoansandNotesincludeprepaymentratesderived
from historical prepayment rates for each credit grade, default rates derived from historical performance, recovery rates and
discount rates applied to each credit grade based on the perceived credit risk of each credit grade. Loans held for sale are
primarily comprised of Borrower Loans held for short durations and are recorded at cost which approximates fair value. For
Borrower Loans held long term, the fair value is estimated using discounted cash flow methodologies based upon a set of
valuationassumptionssimilartothoseofotherBorrowerLoans.
ThefollowingtablesummarizesthefairvalueadjustmentsforthethreeandninemonthsendedSeptember30,2014and
2013,respectively(inthousands):
Borrowerloans $
Loansheldforsale
Notes
Total $
Threemonthsended
September30,
2014
2013
(6,027) $
(3,689) $
(9)
6,095
3,780
59 $
91 $
Ninemonthsended
September30,
2014
2013
(14,916) $
(15,614)
(11)
(3)
15,375
16,196
448 $
579
ThetotalfairvalueadjustmentforthethreemonthsendedSeptember30,2014and2013wasanetunrealizedgainof
$0.06millionand$0.09million,respectively.ThetotalfairvalueadjustmentfortheninemonthsendedSeptember30,2014and
2013wasanetunrealizedgainof$0.45millionandanetunrealizedgain$0.58million,respectively.
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Expenses
ThefollowingtablesummarizesourexpensesforthethreeandninemonthsendedSeptember30,2014and2013(inthousands):
Expenses
CostofServices
CompensationandBenefits
MarketingandAdvertising
DepreciationandAmortization
ProfessionalServices
FacilitiesandMaintenance
Other
TotalExpenses
ThreeMonthsEndedSeptember30,
2014
2013
$Change %Change
$
1,408 $
450
958
213%
6,260
3,259
3,001
92%
10,717
4,675
6,042
129%
462
229
233
102%
582
399
183
46%
1,441
530
911
172%
2,449
375
2,074
553%
$
23,319 $
9,917
13,402
135%
Expenses
CostofServices
CompensationandBenefits
MarketingandAdvertising
DepreciationandAmortization
ProfessionalServices
FacilitiesandMaintenance
ClassActionSettlement
LossonImpairmentoffixedassets
Other
TotalExpenses
NineMonthsEndedSeptember30,
$Change %Change
2014
2013
$
3,275 $
1,609
1,666
104%
16,327
9,101
7,226
79%
25,743
10,126
15,617
154%
1,201
643
558
87%
1,169
1,781
(612)
(34)%
2,604
1,323
1,281
97%
10,000
(10,000)
(100)%
215
62
153
247%
4,097
1,132
2,965
261%
$
54,631 $
35,777
18,854
53%
CostofServices
Cost of services consists primarily of credit bureau fees, payments which are due to strategic partners, collection
expenses, and other expenses directly related to Borrower Loan funding and servicing. Cost of services expenses were $1.4
millionand$0.5millionforthethreemonthsendedSeptember30,2014and2013,respectively,representinganincreaseof$0.9
millionor213%.Costofservicesexpenseswere$3.3millionand$1.6millionfortheninemonthsendedSeptember30,2014
and2013,respectively,representinganincreaseof$1.7millionor104%.Theprimarydriverfortheincreasewashigherlisting
volumeandanincreaseinstrategicpartnershipfeesundertheCompanyscontractswithWebBank.
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CompensationandBenefits
AllemployeesoftheCompanyareemployedbyPMI.Compensationandbenefitsexpenseswere$6.3millionand$3.3
million for the three months ended September 30, 2014 and 2013, respectively, an increase of $3.0 million or 92%.
Compensation and benefits expenses were $16.3 million and $9.1 million for the nine months ended September 30, 2014 and
2013, respectively, and increase of $7.2 million or 79%. This increase is largely due to the Companys steadily increasing its
employeeheadcount,whichinturnresultedinincreasedpayrollcostssuchassalaryandwages,payrolltaxes,andhealthcare.
The Company increased its headcount across its marketing and operations teams during this period in response to increased
volumedemands.TheCompanyintendstocontinuetoincreaseheadcountastheplatformslenderandborrowermemberbases
growandtheCompanycarriesoutitsbusinessplanhowever,theCompanyexpectsitsongoinginvestmentintheplatformand
website to improve operating expense efficiency going forward. In addition, spending increased related to the use of contract
labor,bonusexpense,variablepayexpenseandovertimeduring2014overthecorrespondingperiodin2013.
As of September 30, 2014, the Company had 186 fulltime employees compared to 83 fulltime employees as of
September30,2013.
Sales,marketingandoperations
Engineering
Administration
Totalheadcount
September30,2014 September30,2013
94
38
50
27
42
18
186
83
MarketingandAdvertising
Marketing and advertising costs consist primarily of affiliate marketing, search engine marketing, online and offline
campaigns,emailmarketing,publicrelations,gift/promotionalexpenses,anddirectmailmarketing.Marketingandadvertising
costswere$10.7millionand$4.7millionforthethreemonthsendedSeptember30,2014and2013,respectively,anincreaseof
$6.0 million or 129%. Marketing and advertising costs were $25.7 million and $10.1 million for the nine months ended
September30,2014and2013,respectively,andincreaseof$15.6millionor154%.Theincreaseinmarketingandadvertising
costswaslargelyduetoincreasedcostsrelatedtothecontinuinggrowthinoriginationsontheplatform.
DepreciationandAmortization
Depreciation and amortization expense was $0.4 million and $0.2 million for the three months ended September 30,
2014and2013,respectively,representinganincreaseof$0.2millionor102%.Depreciationandamortizationexpensewas$1.2
millionand$0.6millionfortheninemonthsendedSeptember30,2014and2013,respectively,andincreaseof$0.6millionor
87%.Theincreaseinoveralldepreciationandamortizationexpensewasprimarilyduetothecapitalizationofvariousinternally
developedsoftwareprojectsplacedinservicein2014,whichinturnincreaseddepreciationexpensetakenonthoseassetsduring
thethreeandninemonthperiodsendedSeptember30,2014.
ProfessionalServices
Professionalserviceexpensesarecomprisedoflegalexpenses,auditandaccountingfees,consultingservicesandother
outsidecosts.Professionalserviceexpenseswere$0.6millionand$0.4millionforthethreemonthsendedSeptember30,2014
and 2013, respectively, an increase of $0.2 million or 46%. This increase was due to additional professional services used in
conjunctionwiththeCompanysgrowth.Professionalservicesexpenseswere$1.2millionand$1.8millionfortheninemonths
endedSeptember30,2014and2013,respectively,adecreaseof$0.6millionor34%.Thisdecreasewasprimarilyduetoalarge
decrease in legal fees related to the settlement of the class action lawsuit and legal fees related to the formation of Prosper
FundingandregistrationoftheCompanysoffering.
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FacilitiesandMaintenance
FacilitiesandmaintenanceexpensesconsistprimarilyofrentpaidfortheCompanyscorporateofficeleaseanddataco
location facility, network and power usage costs, software licenses and subscriptions, and hardware and software maintenance
andsupport.Facilitiesandmaintenanceexpenseswere1.4millionand$0.5millionforthethreemonthsendedSeptember30,
2014 and 2013, respectively, an increase of $0.9 million or 172%. Facilities and maintenance expenses were $2.6 million and
$1.3 million for the nine months ended September 30, 2014 and 2013, respectively, an increase of $1.3 million or 97%. This
increasewasprimarilyduetoincreasesinsoftwarelicensesandsubscriptions,andtheleaseofadditionalofficespace.
Other
Otherexpensesconsistofbankservicecharges,travelandentertainmentexpenses,insuranceexpenses,taxes,licenses,
communicationscosts,recruitingcostsandothermiscellaneousexpenses.Otherexpenseswere$2.4millionand$0.4millionfor
thethreemonthsendedSeptember302014and2013,respectively,anincreaseof$2.0millionor553%.Otherexpenseswere
$4.1millionand$1.1millionfortheninemonthsendedSeptember30,2014and2013,respectively,anincreaseof$3.0million
or261%.Thisincreasewasattributabletoanincreaseinbankservicecharges,recruiting,andinsuranceduetotheincreasein
businessvolumeaswellasincreasedbusinesstravel.
LiquidityandCapitalResources
TheamountsdisclosedbelowhavebeenupdatedtoreflectthepriorperiodadjustmentsdisclosedinNote14tothe
condensedconsolidatedfinancialstatements.
ThefollowingtablesummarizesthecashflowfortheninemonthsendedSeptember30,2014and2013,respectively(in
thousands):
Forthenine
months
ended
September
30,
NetIncome(Loss)
Netcashgenerated(used)inoperatingactivities
Netcashusedininvestingactivities
Netcashprovidedbyfinancingactivities
Netincreaseincashandcashequivalents
Cashandcashequivalentsatthebeginningoftheperiod
Cashandcashequivalentsattheendoftheperiod
Forthe
nine
months
ended
September
30,
2014
2013
182 $
(24,815)
(12,069)
(17,297)
(46,519)
(54,513)
93,516
98,810
34,928
27,000
18,339
2,300
53,267 $
29,300
Net cash increased for the nine months ended September 30, 2014 primarily due to the $51.4 million ($69.9 million
raised net of $18.5 million spent on share repurchases) through a new equity offering during the period. Net cash used in
investingprimarilyrepresentsacquisitionsofBorrowerLoans(excludingacquisitionofBorrowerLoanssoldtounrelatedthird
parties which is included in cash flow from operations along with the corresponding proceeds from sale of Borrower Loans),
offset by repayment of Borrower Loans. Net cash provided by financing activities primarily represents proceeds from the
issuanceofBorrowerNotes,partiallyoffsetbypaymentsonBorrowerNotes.
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IncomeTaxes
The Company incurred no income tax provision for the three and nine months ended September 30, 2014 and 2013.
GiventheCompanyshistoryofoperatinglossesandinabilitytoachieveprofitableoperations,itisdifficulttoaccuratelyforecast
howfutureresultswillbeaffectedbytherealizationanduseofnetoperatinglosscarryforwards.
OffBalanceSheetArrangements
In February 2012, PMI formed Prosper Funding. PMI is the sole equity member of Prosper Funding and Prosper
FundingsaccountsareincludedinPMIsconsolidatedfinancialstatementsincludedinthisQuarterlyReport.ProsperFunding
has been organized and is operated in a manner that is intended to minimize the likelihood that it will (i) become subject to
bankruptcy proceedings or (ii) be substantively consolidated with PMI, and thus have its assets subject to claims by PMIs
creditors,intheeventPMIbecomessubjecttoabankruptcyproceeding.PMIrestructuredtheplatformsothatBorrowerLoans
areheldbyProsperFundingandProsperFundingissuesandsellstheNotes.
AdditionalInformationaboutthePlatform
ComparingEstimatedLossRatestoActualLosses
The Company reviews the performance of Borrower Loans on a monthly basis to determine how loss rate estimates
compare to actual performance. As part of this monthly review, the processes for calculating and assigning loss rates are
reassessed to ensure continued accuracy. The graphs below show the estimated versus actual cumulative dollar loss rates by
Prosper Rating for Borrower Loans, collectively, booked from July 13, 2009 through March 31, 2014. Performance is as of
September30,2014.Thelossperformanceistrackedbyvintage,meaningeachlinerepresentsallloansoriginatedinagiven
period.ThegraphsonlyincludeBorrowerLoansthathavebeenoutstandingatleast6months.Inaddition,dataforapointalong
thexaxisisonlyincludediftheentirevintageisatleastthatmature.SoalthoughloansoriginatedinJuly2013(partofthe2013
Q3 vintage) have 14 months of performance, only 12 months of performance are reflected in the graphs below because the
September2013loans,whicharealsoapartofthe2013Q3vintage,haveonlycompleted12monthsofperformance.
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Vintages generally contain enough loan volume for their performance curves to be meaningful. For presentation
purposes,someoftheoldervintageshavebeengroupedbyoriginationperiodsspanningmorethan3months.
ThegraphbelowshowscumulativenetchargeoffsasapercentageoforiginationsacrossallProsperRatingsbyvintage
forBorrowerLoansoriginatedfromJuly13,2009throughMarch31,2014.
Overall,vintagesoriginatedin2013aredemonstratinglowercumulativelossesthanthoseoriginatedin2011and2012.
Changesintheriskmanagementprocessattheendof2012andearly2013areanticipatedtobeameaningfuldriverofthistrend.
ThegraphsbelowshowcumulativenetchargeoffsforBorrowerLoans,collectively,asapercentageoforiginationsfor
eachProsperRatingpresentedbyvintagefromJuly13,2009.PerformanceisasofSeptember30,2014.
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Note:ExpectationlinesrepresentthehighendoftheestimatedlossraterangeforeachProsperRating,exceptforHR,wherethe
highendoftherangeis100%andtheexpectationcurvewassetat19.50%cumulativeprincipalloss.
Inmanyratinggrades,riskistrendingaboveexpectationsin2011and2012.Todate,themajorityofthe2013vintage
ratinggroupshavecumulativelossesbelowtheirrespectiveexpectationlines.Thesechangesarebelievedtobeadirectresultof
changesmadetotheriskmanagementpracticeattheendof2012andbeginningof2013.
PleasenotethatthehistoricalperformanceofPMIBorrowerLoansmaynotbeindicativeofthefutureperformanceof
ProsperFundingsborrowerloans.SeeItem1A.RiskFactorsRisksRelatedtoProsperFundingandPMI,thePlatformand
ProsperFundingandPMIsAbilitytoServicetheNotesintheRegistrantsAnnualReportonForm10KfiledwiththeSECon
March31,2014formoreinformation.
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LoanOriginations
The following table presents aggregated information about borrowers for Borrower Loans originated over the period
fromJuly13,2009toSeptember30,2014,groupedbyProsperRating(theAmountandAverageLoanSizecolumnsarein
thousands).
Prosper
Rating
AA
A
B
C
D
E
HR
Total
Number
12,164 $
31,104
32,120
35,019
22,124
14,834
7,570
154,935 $
Amount
153,642 $
390,938
430,581
411,933
192,718
74,202
26,365
1,680,379 $
Weighted
Average
Lender
Yield
6.58%
9.94%
13.34%
17.16%
21.96%
26.99%
30.54%
14.73%
Average
LoanSize
12.63
12.57
13.41
11.76
8.71
5.00
3.48
10.85
Weighted
Average
Borrower
Rate
7.58%
10.94%
14.34%
18.16%
22.96%
27.99%
31.54%
15.73%
Weighted
Average
Borrower
APR
8.81%
13.60%
17.25%
21.12%
26.16%
31.59%
35.40%
18.52%
The following table presents aggregated information about borrowers for Borrower Loans originated over the period
fromJuly13,2009toSeptember5,2013,groupedbyProsperRating.Theinformationforeachborrowerwasobtainedfroma
credit reporting agency at the time the borrowers application was submitted. Neither Prosper Funding nor PMI verifies the
informationobtainedfromtheapplicantscreditreport.
Prosper
Rating
AA
A
B
C
D
E
HR
Total
AverageExperian
ScorexPlusScore
796
752
724
705
692
673
688
713
Average
Numberof
Current
Delinquencies
0.06
0.17
0.27
0.35
0.45
0.66
0.60
0.38
Average
Numberof
Current
CreditLines
9.51
9.70
9.36
9.34
8.52
8.68
8.28
9.05
Average
Numberof
TotalCredit
Lines
27.55
27.91
27.24
27.70
26.27
27.39
26.97
27.25
OnSeptember6,2013,theCompanyceasedusingExperiansScorexPluscreditscoretodetermineProsperRatingsand
beganusingExperiansFICO08creditscoreinstead.AlllistingsbegunafterthisdateuseExperiansFICO08creditscore.
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The following table presents aggregated information about borrowers for Borrower Loans originated over the period
fromOctober1,2013toSeptember30,2014,groupedbyProsperRating.Theinformationforeachborrowerwasobtainedfrom
acreditreportingagencyatthetimetheborrowersapplicationwassubmitted.NeitherProsperFundingnorPMIverifiesthe
informationobtainedfromtheapplicantscreditreport.
Prosper
Rating
AA
A
B
C
D
E
HR
Total
AverageExperian
FICOScore
752
713
701
690
678
666
661
700
Average
Numberof
Current
Delinquencies
0.07
0.19
0.23
0.27
0.33
0.44
0.49
0.25
Average
Numberof
Current
CreditLines
11.21
10.65
10.58
10.79
10.53
10.01
11.50
10.67
Average
Numberof
TotalCredit
Lines
28.44
28.14
28.57
29.04
28.59
27.94
30.89
28.56
The following tables presents aggregated information about borrowers for Borrower Loans originating over the last
threemonthsendingSeptember30,2014,groupedbyProsperRating(theAmountandAverageLoanSizecolumnsarein
thousands).
Prosper
Rating
AA
A
B
C
D
E
HR
Total
Number
3,850 $
8,730 $
8,777 $
8,599 $
4,416 $
2,693 $
374 $
37,439 $
Amount
52,500 $
119,626
134,040
116,122
54,167
15,104
1,395
492,954 $
Average
LoanSize
13.64
13.70
15.27
13.50
12.27
5.61
3.73
13.17
Weighted
Average
Lender
Yield
6.20%
9.52%
12.58%
16.13%
20.18%
25.09%
28.65%
13.26%
Weighted
Average
Borrower
Rate
7.20%
10.52%
13.58%
17.13%
21.18%
26.09%
29.65%
14.26%
Weighted
Average
Borrower
APR
8.46%
13.25%
16.53%
19.99%
24.27%
29.64%
33.67%
16.99%
ThefollowingtablepresentsaggregatedinformationaboutborrowersforBorrowerLoansoriginatedoverthelastthree
monthsendingSeptember30,2014,groupedbyProsperRating.Theinformationforeachborrowerwasobtainedfromacredit
reportingagencyatthetimetheborrowersapplicationwassubmitted.NeitherProsperFundingnorPMIverifiestheinformation
obtainedfromtheapplicantscreditreport.
Prosper
Rating
AA
A
B
C
D
E
HR
Total
Average
Experian
FICOScore
748
711
699
690
678
665
657
699
Average
Numberof
Current
Delinquencies
0.09
0.23
0.28
0.31
0.36
0.48
0.49
0.28
Average
Numberof
CurrentCredit
Lines
11.44
10.63
10.53
10.78
10.87
10.06
12.19
10.73
Average
Numberof
TotalCredit
Lines
28.50
28.04
28.45
28.95
28.92
27.65
31.22
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PROSPERFUNDINGLLC
Overview
ProsperFundingLLC(ProsperFunding)wasformedinthestateofDelawareinFebruary2012asalimitedliability
company with its sole equity member being Prosper Marketplace, Inc. (PMI). Prosper Funding was formed by PMI to hold
BorrowerLoansandissueNotesthroughtheplatform.AlthoughProsperFundingisconsolidatedwithPMIforaccountingand
taxpurposes,ProsperFundinghasbeenorganizedandisoperatedinamannerthatisintendedtominimizethelikelihoodthatit
would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Fundings intention is to minimize the
likelihoodthatitsassetswouldbesubjecttoclaimsbyPMIscreditorsifPMIweretofileforbankruptcy,aswellastominimize
thelikelihoodthatProsperFundingwillbecomesubjecttobankruptcyproceedingsdirectly.ProsperFundingseekstoachieve
thisbyplacingcertainrestrictionsonitsactivitiesandimplementingcertainformalproceduresdesignedtoexpresslyreinforceits
statusasadistinctcorporateentityfromPMI.
PMIdevelopedtheplatformandownedtheproprietarytechnologythatmakesoperationoftheplatformpossible.On
February1,2013,PMItransferredtheplatformtoProsperFunding,givingProsperFundingtherighttooperatetheplatformto
originateandserviceBorrowerLoansandNotes.ProsperFundingenteredintoanAdministrationAgreementwithPMIpursuant
to which PMI has agreed to provide certain administrative services relating to the platform. The Administration Agreement
contains a license granted by Prosper Funding to PMI that entitles PMI to use the platform for and in relation to: (i) PMIs
performanceofitsdutiesandobligationsundertheAdministrationAgreementrelatingtocorporateadministration,loanplatform
services,loanandnoteservicingandmarketing,and(ii)PMIsperformanceofitsdutiesandobligationstoWebBankunderthe
Loan Account Program Agreement between PMI and WebBank in relation to loan origination and funding. The license is
terminableinwholeorinpartinrelationtofailurebyPMItopaythelicensingfeeortheterminationofPMIastheproviderof
someoralloftheaforementionedservices.
Prosper Funding commenced operations as of February 1, 2013 when PMI transferred ownership of the platform,
includingalloftherightsrelatedtotheoperationoftheplatform,toProsperFunding.SinceFebruary1,2013,allNotesissued
andsoldthroughtheplatformareissued,soldandservicedbyProsperFunding.AllBorrowerLoansareunsecuredobligationsof
individualborrowermemberswithafixedinterestrateandloantermssetatthreeorfiveyears.AllBorrowerLoansarefunded
by WebBank. After funding a Borrower Loan, WebBank sells the Borrower Loan to Prosper Funding, without recourse to
WebBank,inexchangefortheprincipalamountoftheBorrowerLoan.WebBankdoesnothaveanyobligationtopurchasersof
anyoftheNotes.
ProsperFundingformedProsperAssetHoldingsLLC(PAH)inNovember2013asalimitedliabilitycompanywith
thesoleequitymemberbeingProsperFunding.PAHwasformedtopurchasecertainBorrowerLoansfromProsperFundingand,
sellthemtocertainparticipantsintheWholeLoanChannel.
TrendsandUncertainties
TheperformanceofBorrowerLoansmaynotbeconsistentwiththehistoricaltrendsdemonstratedbypriorBorrower
Loans.During2013and2014,thevolumeofloansoriginatedthroughtheplatformincreasedconsistentlyintermsofbothunits
andtotaldollaramountsandProsperFundinghopestocontinuethattrendofgrowthintothefuture.Overtime,ProsperFunding
expectsitslenderbasetogrowasitgainsmoreexposuretopotentialborrowersandlendersandestablishesitsNotesasaviable
investmentalternative.ProsperFundingexpectsthegrowthofitslenderbasewillcontributetoincreasedoriginationvolumeon
theplatform.
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ProsperFundingsoperatingplancallsforastrategyofincreasingtransactionvolume,borrowerfocusedmarketingand
improvingtheefficiencyoftheplatformtoincreaserevenue.ProsperFundingwillgeneraterevenuethroughlicensefeesearned
undertheAdministrationAgreementandservicingfeesfrominvestormemberswhicharedescribedmorefullyintheProsper
FundingLLCnotestocondensedconsolidatedfinancialstatementsincludedelsewhereinthisQuarterlyReport.
Thepeertopeerlendingindustryremainsaveryinnovativeanduniqueindustry.Theapplicationoffederalandstate
laws in areas such as securities and consumer finance to Prosper Fundings business is still evolving. Prosper Funding will
continuetomonitorthisevolutionactivelyinordertoidentifyandrespondquicklytoanylegislativeorregulatorydevelopments
thatmayimpacttheplatform.
CriticalAccountingPoliciesandEstimates
ManagementsdiscussionandanalysisofProsperFundingsconsolidatedfinancialconditionandresultsofoperationsis
based on Prosper Fundings condensed consolidated financial statements, which Prosper Funding has prepared in accordance
with U.S. generally accepted accounting principles. The preparation of condensed consolidated financial statements requires
managementtomakeestimates,judgmentsandassumptionsthataffectthereportedamountsofassetsandliabilities,revenues
andexpensesandtherelateddisclosures.ProsperFundingbasesitsestimatesonthehistoricalexperienceofPMIandonvarious
otherassumptionsthatProsperFundingbelievestobereasonableunderthecircumstances.Actualresultscoulddifferfromthose
estimates. Prosper Fundings significant accounting policies are more fully described in Note 2 to its condensed consolidated
financialstatementsincludedelsewhereinthisQuarterlyReport.
Critical accounting policies are those policies that Prosper Funding believes present the most complex or subjective
measurements and have the most potential to impact its financial position and operating results. While all decisions regarding
accountingpoliciesareimportant,ProsperFundingbelievesthatthefollowingpoliciescouldbeconsideredcritical.
FairValueMeasurement
UponcommencementofoperationsonFebruary1,2013,ProsperFundingbegantopurchaseBorrowerLoansoriginated
throughtheplatformandissueNotes,whichareaccountedforonafairvaluebasis.
ProsperFundingdeterminesthefairvaluesofitsfinancialinstrumentsbasedonthefairvaluehierarchyestablishedin
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value
Measurements and Disclosures, 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. Prosper Funding uses various valuation techniques
depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or
discountedcashflowmodels.Whenpossible,activeandobservablemarketdataforidenticalorsimilarfinancialinstrumentsare
utilized.Alternatively,ProsperFundingmaydeterminefairvalueusingassumptionsthatitbelievesamarketparticipantwould
useinpricingtheassetorliability.
The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities
approximatetheircarryingvaluesbecauseoftheirshorttermnature.Loansheldforinvestment,BorrowerLoans,andNotesare
accounted for on a fair value basis. For additional information and discussion regarding significant accounting policies
surrounding fair value measurement, see Note 2, Note 3 and Note 4 to Prosper Fundings condensed consolidated financial
statementsincludedelsewhereinthisQuarterlyReport.
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BorrowerLoansandNotes
Overall,ifthefairvalueoftheBorrowerLoansheldbyProsperFundingthatwerefundedthroughtheNoteChannel
decrease or increase due to any changes in Prosper Fundings assumptions, there will also be a corresponding decrease or
increaseinthefairvalueofthelinkedNotes.Asaresult,theeffectonProsperFundingsearningsofadversechangesinkey
assumptionswouldbemitigated.
As Prosper Funding receives scheduled payments of principal and interest on the Borrower Loans it holds that were
fundedthroughtheNoteChannel,ProsperFundinginturnmakesprincipalandinterestpaymentsonthecorrespondingNotes.
These principal payments reduce the carrying value of those Borrower Loans and Notes. If Prosper Funding does not receive
paymentsonanysuchBorrowerLoan,ProsperFundingisnotobligatedtoanddoesnotmakepaymentsonthecorresponding
Notes.TheaggregatefairvalueofagroupofNotescorrespondingtoaparticularBorrowerLoanisapproximatelyequaltothe
fair value of that Borrower Loan, less the servicing fee. If the fair value of the Borrower Loan decreases due to changes in
ProsperFundingsexpectationsregardingthelikelihoodofdefaultortheamountoflossintheeventofdefault,therewillalsobe
acorrespondingdecreaseintheaggregatefairvalueoftherelatedNotes(anunrealizedaggregategainrelatedtotheNotesandan
unrealizedlossrelatedtotheBorrowerLoan).
ResultsofOperations
Revenues
RevenueRecognition
ProsperFundingsrevenuerecognitionpolicyisinaccordancewithASCTopic605,RevenueRecognition.UnderASC
Topic605,revenueisrecognizedwhenpersuasiveevidenceofanarrangementexists,deliveryhasoccurredorserviceshavebeen
rendered,thepriceoftheservicesisfixedanddeterminableandcollectabilityisreasonablyassured.
ThefollowingtablesummarizesourrevenueforthethreeandninemonthsendedSeptember30,2014and2013(inthousands):
Revenues
OperatingRevenues
AdministrationFeeRevenue
ServicingIncome
Otherrevenues
TotalOperatingRevenues
InterestIncomeonBorrowerLoans
InterestExpenseonNotes
NetInterestincome
ChangeinFVonBorrowerLoans,LoansHeldforInvestment
andNotes,net
TotalRevenues
$
$
Threemonthsended
September30,
2014
2013
$Change
%Change
8,574 $
2,042
6,532
320%
1,574
89
1,485
1,669%
635
635
100%
10,783
2,131
8,652
406%
10,724 $
8,892
1,832
21%
17%
(9,850) $
(8,435)
(1,415)
91%
874
457
417
59
11,716 $
91
2,679
(32)
9,037
(35)%
337%
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Revenues
OperatingRevenues
AdministrationFeeRevenue
ServicingIncome
Otherrevenues
TotalOperatingRevenues
InterestIncomeonBorrowerLoans
InterestExpenseonNotes
NetInterestincome
ChangeinFVonBorrowerLoans,LoansHeldforInvestment
andNotes,net
TotalRevenues
$
$
Ninemonthsended
September30,
2014
2013
$Change
%Change
19,525 $
4,178
15,347
367%
2,965
106
2,859
2,697%
814
814
100%
23,304
4,284
19,020
444%
31,014 $
22,391
8,623
39%
35%
(28,613) $
(21,262)
(7,351)
113%
2,401
1,129
1,272
448
26,153 $
578
5,991
(130)
20,162
(22)%
337%
AdministrationFeeRevenueRelatedParty
Prosper Funding primarily generates revenues through license fees it earns under its Administration Agreement with
PMI.TheAdministrationAgreementcontainsalicensegrantedbyProsperFundingtoPMIthatentitlesPMItousetheplatform
forandinrelationto:(i)PMIsperformanceofitsdutiesandobligationsundertheAdministrationAgreement,and(ii)PMIs
performanceofitsdutiesandobligationstoWebBankundertheLoanAccountProgramAgreement.Forthethreemonthsended
September30,2014and2013,ProsperFundingreceived$8.6millionand$2.0millioninadministrationfeerevenuefromPMI,
respectively.FortheninemonthsendedSeptember30,2014and2013,ProsperFundingreceived$19.5millionand$4.1million
inadministrationfeerevenuefromPMI,respectively.Theincreasesweretheresultofhigherloanvolumeduring2014.
ServicingFeeRevenue
Weearnafeefrominvestorsforservicingtheongoingborrowerinvestorrelationship.Theservicingfeecompensatesus
forthecostsweincurinservicingtherelatedloan,includingmanagingpaymentsfromborrowers,paymentstoinvestorsand
maintaininginvestorsaccountportfolios.Theservicingfeeiscurrentlysetat1%perannumoftheoutstandingprincipalbalance
ofthecorrespondingloanpriortoapplyingthecurrentpayment.Servicingfeesrevenueswere$1.6millionand$0.1millionfor
thethreemonthsendedSeptember30,2014and2013,respectively,whichrepresentedanincreaseof$1.5millionor1,669%.
Servicefeeswere$3.0millionand$0.1millionfortheninemonthsendedSeptember30,2014and2013,respectively,which
representedanincreaseof$2.9millionor2,697%.Theincreaseinservicingfeeswasduetotheincreaseinloansbeingserviced
asaresultoftheincreaseinloanoriginations.
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OtherRevenues(Expenses)
Otherrevenues(expenses)consistsprimarilyofgains(losses)onwholeloansales.Otherrevenues(expenses)was$0.6
millionincomeand$0forthethreemonthsendedSeptember30,2014and2013,respectively,whichrepresentedanincreaseof
$0.6million.Theincreasewasduetothegainsonwholeloansales.
InterestIncomeonBorrowerLoansandInterestExpenseonNotes
Prosper Funding recognizes interest income on Borrower Loans funded through the Note Channel using the accrual
method based on the stated interest rate to the extent Prosper Funding believes it to be collectable. Prosper Funding records
interestexpenseonthecorrespondingNotesbasedonthecontractualinterestratestotheextentProsperFundingbelievesthey
willbecollectable.
TheoverallincreaseinnetinterestincomeforthethreeandninemonthsendedSeptember30,2014wasdrivenbythe
increaseinthevolumeofBorrowerLoansthatProsperFundingowned.
ChangeinFairValueofBorrowerLoans,LoansHeldforSaleandNotes,net
ThefairvalueofBorrowerLoansandNotesareestimatedusingdiscountedcashflowmethodologiesbaseduponaset
ofvaluationassumptions.ThemainassumptionsusedtovaluesuchBorrowerLoansandNotesincludeprepaymentratesderived
from historical prepayment rates for each credit grade, default rates derived from historical performance, recovery rates and
discount rates applied to each credit grade based on the perceived credit risk of each credit grade. Loans held for sale are
primarily comprised of Borrower Loans held for short durations and are recorded at cost which approximates fair value. For
Borrower Loans held long term, the fair value is estimated using discounted cash flow methodologies based upon a set of
valuationassumptionssimilartothoseofotherBorrowerLoans.
ThefollowingtablesummarizesthefairvalueadjustmentsforthethreeandninemonthsendedSeptember30,2014and
2013,respectively(inthousands):
Borrowerloans $
Loansheldforsale
Notes
Total $
Threemonthsended
September30,
2014
2013
(6,027) $
(3,689) $
(9)
6,095
3,780
59 $
91 $
Ninemonthsended
September30,
2014
2013
(14,916) $
(15,614)
(11)
(3)
15,375
16,196
448 $
578
ThetotalfairvalueadjustmentforthethreemonthsendedSeptember30,2014and2013wasanetunrealizedgainof
$0.06millionand$0.09million,respectively.ThetotalfairvalueadjustmentfortheninemonthsendedSeptember30,2014and
2013wasanetunrealizedgainof$0.45millionandanetunrealizedgain$0.58million,respectively.
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Expenses
ThefollowingtablesummarizesourexpensesforthethreeandninemonthsendedSeptember30,2014and2013(inthousands):
Expenses
CostofServices
AdministrationFeeExpense
DepreciationandAmortization
ProfessionalServices
OtherOperatingExpenses
TotalExpenses
Threemonthsended
September30,
$Change %Change
2014
2013
958
292
666
228%
6,836
1,520
5,316
350%
273
148
125
84%
1
6
(5)
(83)%
128
63
65
103%
8,196
2,029
6,167
304%
Expenses
CostofServices
AdministrationFeeExpense
DepreciationandAmortization
ProfessionalServices
OtherOperatingExpenses
TotalExpenses
Ninemonthsended
September30,
$Change %Change
2014
2013
2,297
1,004
1,293
129%
15,018
2,534
12,484
493%
761
355
406
114%
16
26
(10)
(38)%
313
157
156
99%
18,405
4,076
14,329
352%
CostofServices
ProsperFundingalsoincurscertainrecurringexpensesrelatingtofeesundertheAdministrationAgreementwithPMI,
aswellasitsagreementswithWebBank,WellsFargo,FOLIOfnInvestments,Inc.andFirstAssociatesLoanServicing,LLC.In
addition,ProsperFundingincurscertainongoingexpensesrelatedtocollateralrequirementsunderitsagreementswithWebBank
andWellsFargoBank.ForthethreemonthsendedSeptember30,2014and2013,ProsperFundingincurred$1.0millionand
$0.3millionincostofservices,respectively,anincreaseof$0.7millionor228%.FortheninemonthsendedSeptember30,2014
and2013,ProsperFundingincurred$2.3millionand$1.0millionincostofservices,respectively,anincreaseof$1.3millionor
129%.Thisincreasewaslargelyduetohigherloanlistingvolumeandanincreaseinstrategicpartnershipfees.
DuringtheyearendedDecember31,2013,CSCLogic,Inc.servedastheCompanysbackupservicer.InJanuary2014,
theCompanyreplacedCSCLogic,Inc.withFirstAssociatesLoanServicing,LLCasitsbackupservicer.
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AdministrationFeeExpenseRelatedParty
PursuanttoanAdministrationAgreementbetweenProsperFundingandPMI,PMImanagestheplatformonbehalfof
ProsperFunding.Accordingly,eachmonth,ProsperFundingisrequiredtopayPMI(a)anamountequaltoonetwelfth(1/12)of
the specified annual Corporate Administration Fees of $1.2 million, (b) a fee for each Borrower Loan originated through the
platform,(c)90%ofallservicingfeescollectedbyoronbehalfofProsperFunding,and(d)allnonsufficientfundsfeescollected
by or on behalf of Prosper Funding. In addition, under a second Administration Agreement between PMI and PAH, PAH is
required to pay PMI an annual fee of $0.2 million, payable on a monthly basis, for PMI being the administrator of PAHs
operations.Administrationfeeexpenseswere$6.8millionand$1.5millionforthethreemonthsendedSeptember30,2014and
2013,respectively,representinganincreaseof$5.3millionor350%.Administrationfeeexpenseswere$15.0millionand$2.5
million for the nine months ended September 30, 2014 and 2013, respectively, an increase of $12.5 million or 493%. The
increasewasprimarilyduetothegrowthoftheplatform,resultinginincreasedfeesowedPMIbyProsperFunding.
DepreciationandAmortization
Depreciation and amortization expense was $0.3 million and $0.1 million for the three months ended September 30,
2014and2013,respectively,anincreaseof$0.2millionor84%.Depreciationandamortizationexpensewas$0.8millionand
$0.4millionfortheninemonthsendedSeptember30,2014and2013,respectively,anincreaseof$0.4millionor114%.The
increaseindepreciationisprimarilyduetothecapitalizationofvariousinternallydevelopedsoftwareprojectsplacedinservice
inlate2013and2014,whichinturnincreaseddepreciationexpensetakenonthoseassetsduringtheperiodendedSeptember30,
2014.
OtherOperatingExpenses
Otheroperatingexpensesconsistprimarilyofbankservicecharges.Otheroperatingexpenseswere$0.13millionand
$0.06millionforthethreemonthsendedSeptember30,2014and2013,respectively,representinganincreaseof$0.07or103%.
Otherexpenseswere$0.31millionand$0.16millionfortheninemonthsendedSeptember30,2014and2013,respectively,and
increaseof$0.16millionor99%.Thisincreaseisprimarilyduetobankservicecharges.
IncomeTaxes
ProsperFundingincurrednoincometaxprovisionforthethreeandninemonthsendedSeptember30,2014and2013.
ProsperFundingisaUSdisregardedentityandtheincomeandlossisincludedinthereturnofitsparent,PMI.GivenPMIs
history of operating losses and inability to achieve profitable operations, it is difficult to accurately forecast how PMIs and
ProsperFundingsresultswillbeaffectedbytherealizationanduseofnetoperatinglosscarryforwards.
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LiquidityandCapitalResources
TheamountsdisclosedbelowhavebeenupdatedtoreflectthepriorperiodadjustmentsdisclosedinNote8tothe
condensedconsolidatedfinancialstatements.
The following table summarizes the cash flow for the nine months ended September 30, 2014 and 2013, respectively (in
thousands):
Fortheninemonthsended
September
September
30,2014 30,2013
$
7,748 $
1,915
(5,278)
2,798
(39,141)
(51,597)
41,492
51,961
(2,927)
3,162
5,789
5
$
2,862 $
3,167
Netincome
Netcash(usedin)providedbyoperatingactivities
Netcashusedininvestingactivities
Netcashprovidedbyfinancingactivities
Net(decrease)increaseincashandcashequivalents
Cashandcashequivalentsatthebeginningoftheperiod
Cashandcashequivalentsattheendoftheperiod
NetcashdecreasedfortheninemonthsendedSeptember30,2014.Operatingcashflowswerepositivegenerallydueto
thecashusedfortheloansheldforsaleatfairvalueandthiswasoffsetduetothepositivenetincomefortheperiodof$7.7
million. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower
Loanssoldtounrelatedthirdpartieswhichisincludedincashflowfromoperationsalongwiththecorrespondingproceedsfrom
saleofBorrowerLoans),offsetbyrepaymentofBorrowerLoans.Netcashprovidedbyfinancingactivitiesprimarilyrepresents
proceedsfromtheissuanceofBorrowerNotes,partiallyoffsetbypaymentsonBorrowerNotes.
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Item3. QuantitativeandQualitativeDisclosuresaboutMarketRisk
Notapplicableforsmallerreportingcompanies.
Item4. ControlsandProcedures
ConclusionRegardingtheEffectivenessofDisclosureControlsandProcedures
InconnectionwiththepreparationofthisSeptember30,2014Form10Q,ourmanagement,underthesupervisionandwiththe
participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), evaluated the effectiveness of the
designandoperationofourdisclosurecontrolsandproceduresasdefinedinRules13a15(e)and15d15(e)undertheSecurities
Exchange Act of 1934, as amended, as of September 30, 2014. As described below, management has identified a material
weakness in our internal controls over financial reporting, which is an integral component of our disclosure controls and
procedures. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a
reasonablepossibilitythatamaterialmisstatementoftheCompany'sannualorinterimfinancialstatementswillnotbeprevented,
ordetectedandcorrectedonatimelybasis.Asaresultofthematerialweakness,ourCEOandCFOhaveconcludedthat,asof
September30,2014,ourdisclosurecontrolsandprocedureswerenoteffective.
MaterialWeaknessinInternalControloverFinancialReporting
ManagementconcludedthattheCompany'sinternalcontroloverfinancialreportingwasnoteffectiveasofSeptember30,2014,
becauseofamaterialweaknessinitsinternalcontrolasdescribedbelow:
SufficiencyofAppropriateAccountingDepartmentResourcesTheCompanyhasinsufficientappropriateaccountingdepartment
resourcestodevelopandoperateeffectiveinternalcontrolsoverfinancialreporting.Thelackofcertainappropriateresourcesin
theCompanysaccountingdepartmentledtocontroldeficienciesintheCompanysfinancialreportingprocessandcontributed
significantlytotheerrorsidentifiedthatledtothecorrectionsofpriorfinancialinformationreferredtoinnote14andnote8in
theCondensedConsolidatedFinancialStatementsofProsperMarketplaceInc.andProsperFundingLLC,respectivelyandItem
5OtherInformation.
Thematerialweaknessdescribedaboveresultedinmisstatementsoftheaforementionedaccountsanddisclosuresthatresultedin
misstatementsthathadthepotentialtobematerialinourannualandinterimconsolidatedfinancialstatements.
PlansforRemediationofMaterialWeakness
AsaresulttheCompanyhashiredadditionalfinancepersonnelwithtechnicalaccountingexpertiseandplanstocontinuesuch
hiring.Weareformalizingouraccountingpoliciesandinternalcontrolsdocumentationandstrengtheningsupervisoryreviews
bymanagement.Managementhastakenstepstoaddressthecausesofidentifiederrorsandtoimproveourinternalcontrolover
financialreporting,includingtheimplementationofnewaccountingprocessesandcontrolproceduresandtheidentificationof
gapsinourskillsbaseandexpertiseofthestaffrequiredtomeetthefinancialreportingrequirements.Managementiscommitted
to improving the Companys internal control over financial reporting processes and will meet frequently with the Audit
Committeetomonitorandreportontheongoingeffectivenessofsuchremediationactivitiesandcontrols.
ChangesinInternalControloverFinancialReporting
Withtheoversightofseniormanagementandourauditcommittee,wehavebeguntakingthestepssetforthaboveand
plantotakeadditionalmeasurestoremediatetheunderlyingcausesofthematerialweakness.
Other than with respect to the ongoing remediation of the material weakness pursuant to the plan described above,
therehasbeennochangetoourinternalcontroloverfinancialreportingduringourmostrecentfiscalquarterthathasmaterially
affected,orisreasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.
The DoddFrank Wall Street Reform and Consumer Protection Act exempts any company that is not a large
acceleratedfileroranacceleratedfiler(asdefinedbySECrules)fromtherequirementthatsuchcompanyobtainanexternal
auditoftheeffectivenessofitsinternalcontroloverfinancialreportingpursuanttoSection404(b)oftheSarbanesOxleyAct.As
aresult,eachoftheRegistrantsisexemptfromtherequirementthatitincludeinitsAnnualReportonForm10Kanattestation
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reportoninternalcontroloverfinancialreportingbyanindependentregisteredpublicaccountingfirmhowever,managements
annualreportoninternalcontroloverfinancialreporting,pursuanttoSection404(a)oftheSarbanesOxleyAct,isstillrequired
withrespecttoeachRegistrant.
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PARTII.OTHERINFORMATION
Item1. LegalProceedings
See Note 11: Commitments and Contingencies of Prosper Marketplace, Inc.s Notes to Condensed Consolidated
FinancialStatementscontainedinPartI,Item1ofthisQuarterlyReportforinformationregarding
ProsperMarketplace,Inc.s(PMI)NASAAsettlementagreement
ClassactionlitigationinvolvingPMI
ThisinformationisincorporatedintothisItembyreference.
Becauseofthenatureandinherentuncertaintiesoflitigation,shouldtheoutcomeofanylegalactionsbeunfavorable,
theCompanymayberequiredtopaydamagesandotherexpenses,whichcouldhaveamaterialadverseeffectontheCompanys
consolidatedfinancialpositionandresultsofoperations.TheCompanyisnotcurrentlysubjecttoanymateriallegalproceedings.
Exceptforthosematters,theCompanyisnotawareofanylitigationmattersthathavehad,orareexpectedtohave,amaterial
adverseeffectontheCompany.
ThisItemshouldbereadinconjunctionwiththeLegalProceedingsdisclosuresintheRegistrantsAnnualReporton
Form10KfortheyearendedDecember31,2013(PartI,Item3).
Item
1A.
RiskFactors
Notapplicableforsmallerreportingcompanies.
Item2. UnregisteredSaleofEquitySecuritiesandUseofProceeds
On May 1, 2014, PMI entered into a Series C Preferred Stock Purchase Agreement with several new investors
(collectively, the Series C Share Purchasers), pursuant to which the Company issued and sold to such Series C Share
Purchasers4,880,954sharesofPMIsSeriesCpreferredstockforanaggregatepurchasepriceof$70,075.
INFORMATION FOR THIS ITEM IS NOT REQUIRED FOR PROSPER FUNDING BECAUSE IT MEETS THE
CONDITIONSSETFORTHINGENERALINSTRUCTIONH(1)(a)AND(b)OFFORM10QANDTHEREFOREISFILING
THISFORMWITHAREDUCEDFILINGFORMAT.
Item3. DefaultsuponSeniorSecurities
Notapplicable.
Item4. MineSafetyDisclosures
Notapplicable.
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Item5. OtherInformation
ProsperMarketplaceInc.:
SubsequenttotheissuanceofourcondensedconsolidatedfinancialstatementsfortheperiodendedJune30,2014theCompany
discoveredthefollowingclassificationerrorswithinitsCondensedConsolidatedStatementofCashFlows:
ChangesinRestrictedCashwereinappropriatelyclassifiedaschangesincashflowsfromoperatingactivitiesratherthan
changesincashflowsfrominvestingactivities.
Cash flows from the purchase and sale of Loans held for sale was inappropriately classified within cash flows from
investingactivitiesratherthancashflowsfromoperatingactivities.
A portion of the change in fair value of Borrower Loans and Notes was inappropriately reflected as cash flows from
investing and financing activities, respectively, rather than an adjustment to reconcile net income to net cash used in
operatingactivities.
Aportionoforiginationofborrowerloansheldatfairvalueandproceedsoffromsaleofborrowerloansheldatfair
valuewererecordednetinsteadofgross.
TheimpactoftheseerrorsontheConsolidatedStatementofCashFlowsisreflectedinthetablebelow:
CondensedConsolidatedStatementsofCashFlowsThreemonthsendedMarch31,2014
Netincome(loss)
ChangeinfairvalueofBorrowerLoans
ChangeinfairvalueofNotes
Changeinservicingrights
Classactionsettlementliability
Restrictedcashexceptforthoserelatedtoinvestingactivities
Loansheldforsaleatfairvalue
Accountspayableandaccruedliabilities
Netcashusedinoperatingactivities
OriginationofBorrowerLoansheldatfairvalue
RepaymentofBorrowerLoansheldatfairvalue
RepaymentofLoansheldforinvestmentatfairvalue
OriginationofLoansheldforinvestmentatfairvalue
Proceedsfromsaleofloansheldforinvestmentatfairvalue
Changesinrestrictedcashrelatedtoinvestingactivities
Netcashusedininvestingactivities
PaymentofNotesheldatfairvalue
Netcashprovidedbyfinancingactivities
As
previously
reported Adjustments Ascorrected
$
(2,166) $
(498) $
(2,664)
(332)
4,436
4,104
32
(4,436)
(4,404)
(94)
(94)
(2,000)
30
(1,970)
(1,189)
1,189
(156)
(156)
1,442
18
1,460
(3,823)
489
(3,334)
(166,608)
544
(166,064)
32,642
(4,436)
28,206
100
(100)
(28,858)
28,858
28,602
(28,602)
(1,189)
(1,189)
(12,950)
(4,925)
(17,875)
(32,910)
4,436
(28,474)
$
11,409 $
4,436 $
15,845
CondensedConsolidatedStatementsofCashFlowsSixmonthsendedJune30,2014
Netincome(loss)
ChangeinfairvalueofBorrowerLoans
ChangeinfairvalueofNotes
Changeinservicingrights
Classactionsettlementliability
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As
previously
reported Adjustments Ascorrected
$
(2,169) $
(376) $
(2,545)
958
7,930
8,888
(1,350)
(7,930)
(9,280)
(189)
(189)
(2,000)
60
(1,940)
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Restrictedcashexceptforthoserelatedtoinvestingactivities
Loansheldforsaleatfairvalue
Accountspayableandaccruedliabilities
Netcashusedinoperatingactivities
OriginationofBorrowerLoansheldatfairvalue
RepaymentofBorrowerLoansheldatfairvalue
RepaymentofLoansheldforinvestmentatfairvalue
OriginationofLoansheldforinvestmentatfairvalue
Proceedsfromsaleofloansheldforinvestmentatfairvalue
Proceedsfromsaleofborrowerloansheldatfairvalue
Changesinrestrictedcashrelatedtoinvestingactivities
Netcashusedininvestingactivities
PaymentofNotesheldatfairvalue
Netcashprovidedbyfinancingactivities
(2,473)
3,662
(3,970)
(330,464)
65,648
312
(111,927)
105,986
243,235
(28,972)
(65,646)
91,405 $
2,473
(5,629)
(9)
(3,670)
(121,347)
(7,930)
(312)
111,927
(105,986)
121,861
(2,473)
(4,260)
7,930
7,930 $
(5,629)
3,653
(7,640)
(451,811)
57,718
365,096
(2,473)
(33,232)
(57,716)
99,335
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Subsequent to the issuance of our condensed consolidated financial statements for the period ended June 30, 2014, Prosper
Marketplace discovered an error in its estimates of net service income which resulted in a misstatement of net loan servicing
rights recognized during the six months ended June 30, 2013. The misstatement of these servicing rights resulted in a
misstatementofthegainonthesaleofloansrecognizedduringthisperiodwhichwasrecordedinOtherRevenues.
TheCompanyalsodiscoveredthatitusedaninappropriatemethodofamortizingloanservicingrights.TheCompanyincorrectly
amortized the net servicing assets as a grossedup amount that resulted in a reversal of revenues and various costs. This
inappropriate methodology also resulted in the Company incorrectly recognizing an increase in the net servicing assets. The
Companycorrectedthiserrorbyreversingtheamountspreviouslyrecognizedasareversalofrevenuesandcosts.TheCompany
furtherrecordedtheappropriateamountofamortizationasanadjustmenttoServicingFees,net.
TheCompanyalsodiscoveredanumberofadditionalerrorsthatindividuallyandintheaggregateareimmaterial.
DuringtheninemonthsendedSeptember30,2014,theCompanyalsochangedthepresentationofitsrevenuesinthestatement
ofoperations.AnewlinecalledServicingFeeswascreatedandtheservicingfeesrelatedtowholeloansthatwerepreviously
includedininterestincomewerereclassifiedtothisnewline.Furthermore,theRebatesandPromotionslinewasremoved,with
the amounts in that line reclassified to the Servicing Fees or Origination Fees lines based on the underlying transactions.
Also, the Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net was moved into the total revenues
subtotal.Lastly,thesubtotalswererealignedtoreflectthenewpresentation.Thesechangeshadnoimpacttonetincomeandare
reflectedintheReclassificationscolumninthetablebelow.
Asaresult,theCompanywillprospectivelycorrectitspreviouslypresentedconsolidatedfinancialstatementsasofandforthe
yearendedDecember31,2013anditsinterimcondensedconsolidatedfinancialstatementsasofJune30,2014andMarch31,
2014.Managementbelievestheeffectsoftheseerrorsarenotmaterialtoitspreviouslyissuedconsolidatedfinancialstatements.
Theimpactofthecorrectionstospecificlineitemsarepresentedbelow(inthousands,exceptpershareamounts):Theimpactof
correctingtheerrorsdescribedaboveontheCompanysCondensedConsolidatedStatementofOperationsisreflectedinthetable
below:
CondensedConsolidatedStatementsofOperationsThreeMonthsEndedJune30,2014
As
previously
As
reported Reclassifications reclassified Adjustments Ascorrected
$
16,448 $
(429) $
16,019 $
127 $
16,146
83
83
699
782
(639)
639
269
*
269
252
521
*
16,371
1,078
17,449
10,702
(293)
10,409
10,409
*
*
915
915
17,377
17,377
1,078
18,455
767
54
821
304
1,125
OriginationFees
ServicingFees
Rebatesandpromotions
OtherRevenues
TotalOperatingRevenues
Interestincomeonborrowerloans
NetInterestincome
TotalRevenues
CostofServices
ProvisionforRepurchaseandIndemnification
Obligation
54
CompensationandBenefits
5,277
ProfessionalServices
364
FacilitiesandMaintenance
621
Other
879
TotalExpenses
17,382
NetIncome(Loss)
(5)
*Thislinewasnewlycreatedaspartofthereclassifications
(54)
5,277
364
621
879
17,382
(5)
495
22
57
76
954
124
5,772
386
678
955
18,336
119
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CondensedConsolidatedStatementsofOperationsThreeMonthsEndedMarch31,2014
As
previously
As
reported Reclassifications reclassified Adjustments Ascorrected
$
8,701 $
(231) $
8,470 $
$
8,470
99
99
414
513
(361)
361
696
696
(274)
422
*
*
9,265
140
9,405
10,110
(229)
9,881
9,881
*
*
612
612
10,175
10,175
140
10,315
525
62
587
155
742
OriginationFees
ServicingFees
Rebatesandpromotions
OtherRevenues
TotalOperatingRevenues
Interestincomeonborrowerloans
NetInterestincome
TotalRevenues
CostofServices
ProvisionforRepurchaseandIndemnification
Obligation
62
CompensationandBenefits
3,901
ProfessionalServices
176
FacilitiesandMaintenance
445
Other
668
TotalExpenses
12,341
NetIncome(Loss)
(2,166)
*Thislinewasnewlycreatedaspartofthereclassifications
(62)
43
(43)
3,944
176
445
625
12,341
(2,166)
351
25
40
62
633
(493)
4,295
201
485
687
12,974
(2,659)
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CondensedConsolidatedStatementsofOperationsSixMonthsEndedJune30,2014
As
previously
As
reported Reclassifications reclassified Adjustments Ascorrected
$
25,149 $
(660) $
24,489 $
127 $
24,616
182
182
1,113
1,295
(999)
999
965
965
(22)
943
*
*
25,636
1,218
26,854
20,812
(522)
20,290
20,290
*
*
1,527
1,527
27,553
(1)
27,552
1,218
28,770
1,293
115
1,408
459
1,867
OriginationFees
ServicingFees
Rebatesandpromotions
OtherRevenues
TotalOperatingRevenues
Interestincomeonborrowerloans
NetInterestincome
TotalRevenues
CostofServices
ProvisionforRepurchaseandIndemnification
Obligation
116
CompensationandBenefits
9,219
ProfessionalServices
541
FacilitiesandMaintenance
1,066
Other
1,503
TotalExpenses
29,722
NetIncome(Loss)
(2,169)
*Thislinewasnewlycreatedaspartofthereclassifications
(116)
2
(1)
1
1
(2)
9,221
540
1,066
1,504
29,723
(2,171)
846
47
97
138
1,587
(369)
10,067
587
1,163
1,642
31,310
(2,540)
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Subsequent to the issuance of our condensed consolidated financial statements for the period ended June 30, 2014, Prosper
Marketplace discovered an error in its estimates of net service income which resulted in a misstatement of net loan servicing
rightspriortoJune30,2013.Furthermore,theCompanyinappropriatelynettedloanservicingliabilitiesagainstitsloanservicing
assets.ThisresultedinanunderstatementoftheloanservicingassetswhichwereincludedinBorrowerLoansReceivableatFair
Value.TheCompanycorrectedthiserrorbyreclassifyingtheadjustedgrossservicingassetstoPrepaidandOtherAssetsand
recognizedtheservicingliabilitiesinAccountsPayableandOtherLiabilities.
TheCompanyalsodiscoveredanerrorrelatedtothemeasurementoftheClassActionSettlementLiability.Since,thisliabilityis
payableatfixedfuturedatestheCompanyshouldhaverecognizedtheliabilitybasedonthepresentvalueofthefuturepayments
rather than the gross amount of such future payments. This error resulted in an overstatement of the Class Action Settlement
Liabilityandthelossrecognizedinthefourthquarterof2013of$261.
Additionally, the Company discovered that the Convertible Preferred Stock was incorrectly classified within permanent
stockholders equity. Since the Convertible Preferred Stockholders are entitled to receive their liquidation preference upon a
changeincontroltransactiontheConvertiblePreferredStockshouldbeclassifiedastemporaryequity.
TheimpactofcorrectingtheseerrorsontheCompanysCondensedConsolidatedBalanceSheetisreflectedinthetablebelow:
CondensedConsolidatedBalanceSheetMarch31,2014
Assets
BorrowerLoansReceivableatFairValue
PrepaidandOtherAssets
TotalAssets
AccountsPayableandAccruedLiabilities
ClassActionSettlementLiability
TotalLiabilities
ConvertiblePreferredStock
ConvertiblePreferredStock
AdditionalPaidinCapital
AccumulatedDeficit
TotalStockholders'Equity(Deficit)
TotalLiabilities,ConvertiblePreferredStockandStockholders'Equity(Deficit)
As
previously
reported Adjustments Ascorrected
$ 238,672 $
(688) $
237,984
1,153
495
1,648
277,225 $
(193) $
277,032
8,179
498
8,677
8,000
(231)
7,769
254,911
267
255,178
45,118
45,118
273
(273)
128,486
(44,845)
83,641
(106,246)
(460)
(106,706)
22,314
(45,578)
(23,264)
$ 277,225 $
(193) $
277,032
CondensedConsolidatedBalanceSheetJune30,2014
Assets
BorrowerLoansReceivableatFairValue
PrepaidandOtherAssets
TotalAssets
AccountsPayableandAccruedLiabilities
ClassActionSettlementLiability
TotalLiabilities
ConvertiblePreferredStock
ConvertiblePreferredStock
AdditionalPaidinCapital
AccumulatedDeficit
TotalStockholders'Equity(Deficit)
TotalLiabilities,ConvertiblePreferredStockandStockholders'Equity(Deficit)
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As
previously
reported Adjustments Ascorrected
$ 246,861 $
(658) $
246,203
2,870
968
3,838
358,451
310
358,761
10,399
848
11,247
8,000
(200)
7,800
265,777
648
266,425
115,076
115,076
322
(322)
198,777
(114,754)
84,023
(106,249)
(338)
(106,587)
92,674
(115,414)
(22,740)
$ 358,451 $
310 $
358,761
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ProsperFundingLLC:
Subsequent to the issuance of our condensed consolidated financial statements June 30, 2014 Form 10Q the Company
discoveredthefollowingclassificationerrorswithinitsCondensedConsolidatedStatementofCashFlows:
ChangesinRestrictedCashwereinappropriatelyclassifiedaschangesincashflowsfromoperatingactivitiesratherthan
changesincashflowsfrominvestingactivities.
Cash flows from the purchase and sale of Loans held for sale was inappropriately classified within cash flows from
investingactivitiesratherthancashflowsfromoperatingactivities.
A portion of the change in fair value of Borrower Loans and Notes was inappropriately reflected as cash flows from
investing and financing activities, respectively, rather than an adjustment to reconcile net income to net cash used in
operatingactivities.
Aportionoforiginationofborrowerloansheldatfairvalueandproceedsoffromsaleofborrowerloansheldatfair
valuewererecordednetinsteadofgross.
TheimpactoftheseerrorsontheCondensedConsolidatedStatementofCashFlowsisreflectedinthetablebelow:
CondensedConsolidatedStatementsofCashFlowsThreemonthsendedMarch31,2014
NetIncome(loss)
ChangeinfairvalueofBorrowerLoans
ChangeinfairvalueofNotes
Initialgainandamortizationofservicingasset
Restrictedcash
Loansheldforsaleatfairvalue
Accountspayableandaccruedliabilities
Netcashprovidedby(usedin)operatingactivities
OriginationofBorrowerLoansheldatfairvalue
RepaymentofBorrowerLoansheldatfairvalue
Repaymentofloansheldforinvestmentatfairvalue
Originationofloansheldforinvestmentatfairvalue
Proceedsfromsaleofloansheldforinvestmentatfairvalue
Changeinrestrictedcash
Netcashusedininvestingactivities
ProceedsfromissuanceofNotesheldatfairvalue
Netcashprovidedbyfinancingactivities
As
previously
reported Adjustments Ascorrected
$
2,088 $
(469) $
1,619
(332)
4,436
4,104
32
(4,436)
(4,404)
(94)
(94)
(1,122)
1,122
(156)
(156)
494
19
513
1,006
422
1,428
(166,608)
544
(166,064)
32,642
4,436
37,078
100
(100)
(28,858)
28,858
28,602
(28,602)
(1,122)
(1,122)
(12,441)
4,014
(8,427)
44,199
(4,436)
39,763
$
11,289 $
(4,436) $
6,853
CondensedConsolidatedStatementsofCashFlowsSixmonthsendedJune30,2014
NetIncome(loss)
ChangeinfairvalueofBorrowerLoans
ChangeinfairvalueofNotes
Initialgainandamortizationofservicingasset
Restrictedcash
Loansheldforsaleatfairvalue
Accountspayableandaccruedliabilities
Netcashprovidedby(usedin)operatingactivities
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As
previously
reported Adjustments Ascorrected
$
4,672 $
(444) $
4,228
958
7,930
8,888
(1,350)
(7,930)
(9,280)
(189)
(189)
(1,971)
1,971
(5,629)
(5,629)
44
119
163
2,921
(4,172)
(1,251)
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OriginationofBorrowerLoansheldatfairvalue
RepaymentofBorrowerLoansheldatfairvalue
Repaymentofloansheldforinvestmentatfairvalue
Originationofloansheldforinvestmentatfairvalue
Proceedsfromsaleofloansheldforinvestmentatfairvalue
Proceedsfromsaleofborrowerloansheldatfairvalue
Changeinrestrictedcash
Netcashusedininvestingactivities
ProceedsfromissuanceofNotesheldatfairvalue
Netcashprovidedbyfinancingactivities
(330,464)
65,648
312
(111,927)
105,986
243,235
(27,763)
86,713
21,067 $
(121,347)
7,930
(312)
111,927
(105,986)
121,861
(1,971)
12,102
(7,930)
(7,930) $
(451,811)
73,578
365,096
(1,971)
(15,661)
78,783
13,137
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Subsequent to the issuance of our condensed consolidated financial statements for the period ended June 30, 2014, Prosper
Fundingdiscoveredanerrorinitsestimatesofnetserviceincomewhichresultedinamisstatementofnetloanservicingrights
recognizedduringthesixmonthsendedJune30,2013.Themisstatementoftheseservicingrightsresultedinamisstatementof
thegainonthesaleofloansrecognizedduringthisperiod.
TheCompanyalsodiscoveredthatitusedaninappropriatemethodofamortizingloanservicingrights.TheCompanyincorrectly
amortized the net servicing assets as a grossedup amount that resulted in a reversal of revenues and various costs. This
inappropriate methodology also resulted in the Company incorrectly recognizing an increase in the net servicing assets. The
Companycorrectedthiserrorbyreversingtheamountspreviouslyrecognizedasareversalofrevenuesandcosts.TheCompany
furtherrecordedtheappropriateamountofamortizationasanadjustmenttoServicingFees,net.
TheCompanyalsodiscoveredanumberofadditionalerrorsthatindividuallyandintheaggregateareimmaterial.
DuringtheninemonthsendedSeptember30,2014,theCompanyalsochangedthepresentationofitsrevenuesinthestatement
ofoperations.AnewlinecalledServicingFeeswascreatedandtheservicingfeesrelatedtowholeloansthatwerepreviously
includedininterestincomewerereclassifiedtothisnewline.Also,theChangeinFairValueofBorrowerLoans,LoansHeld
for Sale and Notes, Net was moved into the total revenues subtotal. Lastly, the subtotals were realigned to reflect the new
presentation.ThesechangeshadnoimpacttonetincomeandarereflectedintheReclassificationscolumninthetablebelow.
Asaresult,theCompanywillprospectivelycorrectitspreviouslypresentedconsolidatedfinancialstatementsasofandforthe
yearendedDecember31,2013anditsinterimcondensedconsolidatedfinancialstatementsasofJune30,2014andMarch31,
2014.Managementbelievestheeffectsoftheseerrorsarenotmaterialtoitspreviouslyissuedconsolidatedfinancialstatements.
Theimpactofthecorrectionstospecificlineitemsarepresentedbelow(inthousands,exceptpershareamounts):Theimpactof
correctingtheerrorsdescribedaboveontheCompanysCondensedConsolidatedStatementofOperationsisreflectedinthetable
below:
CondensedConsolidatedStatementsofOperationsThreeMonthsEndedJune30,2014
As
previously
As
reported Reclassifications reclassified Adjustments Ascorrected
$
6,898 $
$
6,898 $
$
6,898
109
109
700
809
(155)
(155)
252
97
*
*
6,852
952
7,804
10,518
(109)
10,409
10,409
*
*
915
915
7,858
7,858
952
8,810
654
56
710
130
840
AdministrationFeeRevenue
ServicingIncome
Otherrevenues
TotalOperatingRevenues
InterestIncomeonBorrowerLoans
NetInterestincome
TotalRevenues
CostofServices
ProvisionforRepurchaseandIndemnification
Obligation
56
AdministrationFeeExpense
4,234
DepreciationandAmortization
253
ProfessionalServices
OtherOperatingExpenses
77
TotalExpenses
5,274
TotalNetIncome(Loss)
$
2,584
*Thislinewasnewlycreatedaspartofthereclassifications
(56)
$
4,234
253
77
5,274
2,584 $
782
1
13
926
26 $
5,016
253
1
90
6,200
2,610
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CondensedConsolidatedStatementsofOperationsThreeMonthsEndedMarch31,2014
AdministrationFeeRevenue
ServicingIncome
Otherrevenues
TotalOperatingRevenues
InterestIncomeonBorrowerLoans
NetInterestincome
ChangeinFVonBorrowerLoans,LoansHeld
forInvestmentandNotes,net
TotalRevenues
CostofServices
ProvisionforRepurchaseandIndemnification
Obligation
AdministrationFeeExpense
ProfessionalServices
OtherOperatingExpenses
TotalExpenses
TotalNetIncome(Loss)
As
previously
As
reported Reclassifications reclassified Adjustments Ascorrected
$
4,053 $
$
4,053 $
$
4,053
170
170
412
582
356
356
(274)
82
*
*
4,579
138
4,717
10,050
(169)
9,881
9,881
*
*
612
612
298
5,488
397
(1)
62
297
5,488
459
138
38
297
5,626
497
62
2,606
12
88
3,400
2,088
(62)
$
2,606
12
88
3,400
2,088 $
560
1
8
607
(469) $
3,166
13
96
4,007
1,619
CondensedConsolidatedStatementsofOperationsSixMonthsEndedJune30,2014
As
previously
As
reported Reclassifications reclassified Adjustments Ascorrected
$
10,951 $
$
10,951 $
$
10,951
279
279
1,112
1,391
201
201
(22)
179
*
*
11,431
1,090
12,521
20,568
(278)
20,290
20,290
*
*
1,527
1,527
13,346
13,346
1,090
14,436
1,051
118
1,169
168
1,337
AdministrationFeeRevenue
ServicingIncome
Otherrevenues
TotalOperatingRevenues
InterestIncomeonBorrowerLoans
NetInterestincome
TotalRevenues
CostofServices
ProvisionforRepurchaseandIndemnification
Obligation
118
AdministrationFeeExpense
6,840
ProfessionalServices
12
OtherOperatingExpenses
166
TotalExpenses
8,674
TotalNetIncome(Loss)
$
4,672
*Thislinewasnewlycreatedaspartofthereclassifications
(118)
$
6,840
12
166
8,674
4,672 $
1,342
2
21
1,533
(443) $
8,182
14
187
10,207
4,229
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Subsequent to the issuance of our condensed consolidated financial statements for the period ended June 30, 2014, Prosper
Marketplace discovered an error in its estimates of net service income which resulted in a misstatement of net loan servicing
rightspriortoJune30,2014.Furthermore,theCompanyinappropriatelynettedloanservicingliabilitiesagainstitsloanservicing
assets.Additionally,certainservicingassetsandliabilitiesweredistributedtoourparent,whichwasnotoriginallyrecorded.This
resultedinanunderstatementoftheloanservicingassetswhichwereincludedinBorrowerLoansReceivableatFairValue.
TheCompanycorrectedthiserrorbyreclassifyingtheadjustedgrossservingassetstoPrepaidandOtherAssetsandrecognized
theservicingliabilitiesinAccountsPayableandOtherLiabilities.
TheimpactofcorrectingtheseerrorsontheCompanysCondensedConsolidatedBalanceSheetisreflectedinthetablebelow:
CondensedConsolidatedBalanceSheetMarch31,2014
As
previously
reported Adjustments Ascorrected
$ 238,672 $
(688) $
237,984
11
426
437
264,004
(262)
263,742
4,206
439
4,645
242,422
439
242,861
16,076
(10)
16,066
5,506
(691)
4,815
21,582
(701)
20,881
$ 264,004 $
(262) $
263,742
BorrowerLoansReceivableatFairValue
OtherAssets
TotalAssets
Accountspayableandaccruedliabilities
TotalLiabilities
Member'sEquity
RetainedEarnings(AccumulatedDeficit)
TotalMember'sEquity
TotalLiabilitiesandMember'sEquity
CondensedConsolidatedBalanceSheetJune30,2014
As
previously
reported Adjustments Ascorrected
$ 246,861 $
(658) $
246,203
19
770
789
274,753
112
274,865
3,756
811
4,567
250,587
811
251,398
16,076
(34)
16,042
8,090
(665)
7,425
24,166
(699)
23,467
$ 274,753 $
112 $
274,865
BorrowerLoansReceivableatFairValue
OtherAssets
TotalAssets
Accountspayableandaccruedliabilities
TotalLiabilities
Member'sEquity
RetainedEarnings(AccumulatedDeficit)
TotalMember'sEquity
TotalLiabilitiesandMember'sEquity
Item6. Exhibits
TheexhibitslistedontheaccompanyingExhibitIndexarefiledorincorporatedbyreferenceasapartofthisreportand
suchExhibitIndexisincorporatedhereinbyreference.
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SIGNATURES
PursuanttotherequirementsoftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonits
behalfbytheundersignedthereuntodulyauthorized.
Date:November18,2014
Date:November18,2014
PROSPERMARKETPLACE,INC.
PROSPERFUNDINGLLC
/s/AaronVermut
AaronVermut
ChiefExecutiveOfficerofProsperMarketplace,Inc.
ChiefExecutiveOfficerofProsperFundingLLC
(PrincipalExecutiveOfficer)
/s/XiaopeiLee
XiaopeiLee
ChiefFinancialOfficerofProsperMarketplace,Inc.
TreasurerofProsperFundingLLC
(PrincipalFinancialOfficerandPrincipalAccountingOfficer)
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EXHIBITINDEX
Exhibit
Number
ExhibitDescription
3.1 FifthAmendedandRestatedLimitedLiabilityCompanyAgreementofProsperFunding,datedOctober21,2013
(incorporatedbyreferencetoExhibit3.1ofthePostEffectiveAmendmentNo.3totheRegistrationStatementon
FormS1,filedOctober23,2013byProsperFundingandPMI)
3.2 AmendedandRestatedCertificateofIncorporationofPMI(incorporatedbyreferencetoExhibit3.2oftheAnnual
ReportonForm10K,filedJune30,2014byProsperFundingandPMI)
3.3 ProsperFundingCertificateofFormation(incorporatedbyreferencetoExhibit3.2oftheRegistrationStatementon
FormS1/A,filedApril23,2012byProsperFundingandPMI)
3.4 BylawsofPMI,datedMarch22,2005(incorporatedbyreferencetoExhibit3.2oftheRegistrationStatementonForm
S1,filedOctober30,2007byPMI)
4.1 AmendedandRestatedInvestorsRightsAgreement,datedMay15,2014(incorporatedbyreferencetoExhibit(d)(7)
onFormSCTOI/A,filedJuly16,2014)
4.2 AmendedandRestatedVotingAgreement,datedMay15,2014(incorporatedbyreferencetoExhibit(d)(8)onForm
SCTOI/A,filedJuly10,2014)
4.3 AmendedandRestatedRightofFirstRefusalandCoSaleAgreement,datedMay15,2014(incorporatedbyreference
toExhibit(d)(9)onFormSCTOI/A,filedJuly16,2014)
31.1 CertificationofPrincipalExecutiveOfficerpursuanttoSection302oftheSarbanesOxleyActof2002,withrespectto
PMIsQuarterlyReportonForm10QforthequarterendedSeptember30,2014.
31.2 CertificationofPrincipalFinancialOfficerpursuanttoSection302oftheSarbanesOxleyActof2002,withrespectto
PMIsQuarterlyReportonForm10QforthequarterendedSeptember30,2014.
31.3 CertificationofPrincipalExecutiveOfficerpursuanttoSection302oftheSarbanesOxleyActof2002,withrespectto
ProsperFundingsQuarterlyReportonForm10QforthequarterendedSeptember30,2014.
31.4 CertificationofPrincipalFinancialOfficerpursuanttoSection302oftheSarbanesOxleyActof2002,withrespectto
ProsperFundingsQuarterlyReportonForm10QforthequarterendedSeptember30,2014.
32.1 CertificationofPrincipalExecutiveOfficerandPrincipalFinancialOfficerpursuanttoSection906oftheSarbanes
OxleyActof2002,withrespecttoPMIsQuarterlyReportonForm10QforthequarterendedSeptember30,2014.
32.2 CertificationofPrincipalExecutiveOfficerandPrincipalFinancialOfficerpursuanttoSection906oftheSarbanes
OxleyActof2002,withrespecttoProsperFundingsQuarterlyReportonForm10QforthequarterendedSeptember
30,2014.
101.INS XBRLInstanceDocuments
101.SCH XBRLTaxonomyExtensionSchemaDocument
101.CAL TaxonomyExtensionCalculationLinkbaseDocument
101.LAB TaxonomyExtensionLabelLinkbaseDocument
101.PRE TaxonomyExtensionPresentationLinkbaseDocument
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