SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
20152017 |
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File Number | | Exact Name of Registrant as Specified in its Charter, State or Other Jurisdiction of Incorporation, Address of Principal Executive Offices, Zip Code and Telephone Number (Including Area Code) | | I.R.S.
Identification
Number |
| | |
333-204880 | | PROSPER MARKETPLACE, INC. 221 Main Street, 3rd3rd Floor Telephone: (415)593-5400 | | 73-1733867 |
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333-204880-01 | | a Delaware limited liability company 221 Main Street, 3rd Floor Telephone: (415)593-5479
| | 45-4526070 |
Securities registered pursuant to Section 12(b) of the Act:
Registrant
|
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| Registrant | | Title of Each Class | | Name of Each Exchange on Which Registered |
Prosper Marketplace, Inc. | | None | | None |
Prosper Funding LLC | | None | | None |
Securities registered pursuant to Section 12(g) of the Act:
Registrant
|
| | | | |
| Registrant | | Title of Each Class | | |
Prosper Marketplace, Inc. | | None | | |
Prosper Funding LLC | | None | | |
Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (applicable to Prosper Marketplace, Inc. only). ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | Large
Accelerated
Filer
| | Accelerated
Filer
| | Non-
Accelerated
Filer
| | Smaller
Reporting
Company
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| Large Accelerated Filer | | Accelerated Filer | | Non-Accelerated Filer | | Smaller Reporting Company |
| Prosper Marketplace, Inc. | ¨ | ¨
| ¨ | ¨
| ý | ¨
| | x
¨ |
Prosper Funding LLC | ¨ | ¨
| ¨ | ¨
| ý
| ¨
| | x
¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Prosper Funding LLC meets the conditions set forth in General Instruction I(1)(a), (b) and (d) of Form 10-K and is therefore filing this Annual Report on Form 10-K with the reduced disclosure format specified in General Instruction I(2) of Form 10-K. Registrant
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| Registrant | | Aggregate Market Value of Voting and Non-Voting Common Equity Held by Non-Affiliates of the Registrant at June 30, 20152016 | | Number of Shares of
Common Stock of the
Registrant
Outstanding at
March 3, 20165, 2018 |
Prosper Marketplace, Inc. | | (a) | | 69,509,045
70,313,915 ($.01 par value) |
Prosper Funding LLC | | (a)(b) | | None |
(b)
| |
| (b) | All voting and non-voting common equity is owned by Prosper Marketplace, Inc. |
THIS COMBINED FORM 10-K IS SEPARATELY FILED BY PROSPER MARKETPLACE, INC. AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.
ITEM
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PART I
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ITEM 1 | | Business
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Page |
PART I | | | | |
| ITEM 1 | | | | |
| ITEM 1A | | | | |
ITEM 1B | | | | 34
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ITEM 2 | | | | 34
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ITEM 3 | | | | 34
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ITEM 4 | | | | 35
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PART II
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PART II | | | | |
| ITEM 5 | | | | 36
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ITEM 6 | | | | 36
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ITEM 7 | | | | 36
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ITEM 7A | | | | 48
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ITEM 8 | | | | 48
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ITEM 9 | | | | 48
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ITEM 9A | | | | 48
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ITEM 9B | | | | 50
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PART III
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PART III | | | | |
| ITEM 10 | | | | 51
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ITEM 11 | | | | 56
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ITEM 12 | | | | 60
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ITEM 13 | | | | 63
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ITEM 14 | | | | 65
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PART IV
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PART IV | | | | |
| ITEM 15 | | | | 67
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SIGNATURES
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Exhibit 31.1 | | | | |
Exhibit 31.2 | | | | |
Exhibit 32.1 | | | | |
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| XBRL Content | | | | |
Except as the context requires otherwise, as used herein, “Registrants” refers to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “we,” “us,” “our,” “Prosper,” and the “Company” refer to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. (“BillGuard”), a Delaware corporation,
Prosper Capital Management LLC (“PCM”), a Delaware limited liability company, and Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis. In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” Finally, although historically we have referred to investors as “lender members,” we call them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace. All share and per share numbers presented in this Annual Report on Form 10-K have been adjusted to reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
The following filings are available for download free of charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public at the SEC’s Internet site at http://www.sec.gov. The information posted on our website
and blog is not incorporated herein by reference and is not a part of this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. These statements may appear throughout this Annual Report on Form 10-K, including the sections titled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PMI or PFL expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our respective managements, is expressed in good faith, and is believed to have a reasonable basis. Nevertheless, we can give no assurances that any of the events anticipated by these forward-looking statements will occur or, if any of them does
occur, what impact they will have on Prosper or Prosper Funding’s results of operations and financial condition.
There are a number of important factors that could cause actual results or events to differ materially from those indicated in the forward-looking statements, including, among other things:
| ×
| the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
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| ×
| PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding Borrower Loans;
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the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured; | ×
| our ability to attract potential borrowers and investors to our marketplace;
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PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding Borrower Loans; | ×
| the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;
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our ability to attract potential borrowers and investors to our marketplace; | ×
| our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
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the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors; | ×
| our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft; credit risks posed by the credit worthiness of borrowers and the effectiveness of our credit rating systems; |
| ×
| potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;
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| the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;
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| ×
| our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
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potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans; | ×
| potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the loans originated through our marketplace;
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the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes; | ×
| the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
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our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws; | ×
| the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;
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our compliance with applicable regulations and regulatory developments or court decisions affecting our business; | ×
| the lack of a public trading market for the Notes and any inability to resell the Notes on the Note Trader platform;
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potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the loans originated through our marketplace; | ×
| the federal income tax treatment of an investment in the Notes and the PMI Management Rights;
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the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI; | ×
| our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of the platform or adversely impact our ability to service Borrower Loans; and
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the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes; | ×
| the other risks discussed under the “Risk Factors” section of this Annual Report on Form 10-K.
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the lack of a public trading market for the Notes and the current lack of any trading platform on which investors can resell the Notes;the federal income tax treatment of an investment in the Notes and the PMI Management Rights;
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of the platform or adversely impact our ability to service Borrower Loans; and
the other risks discussed under the “Risk Factors” section of this Annual Report on Form 10-K.
There may also be other factors that could cause our actual results to differ materially from the forward-looking statements in this Annual Report on Form 10-K. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should carefully read the factors described in the “Risk Factors” section of this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause PMI or PFL’s actual results to differ from these forward-looking statements.
All forward-looking statements included in this report speak only as of the date hereof and are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K. PMI and PFL undertake no obligation to update or revise such forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
PART I
PART IOverview
Overview
Prosper is a pioneer of online marketplace lending. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return. Our marketplace facilitated
$3.7$2.9 billion in Borrower Loan originations during
20152017 and
$6.1$11.2 billion in Borrower Loan originations since it first launched in 2006.
We believe our online marketplace model has key advantages relative to traditional bank lending, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology driven automation that increases efficiency, and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure; instead, we use data and technology to drive automation and efficiency in our
operation.operations. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, underwriting, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.
We believe that we offer many consumers access to better pricing, on average, than the pricing
thanthat they would pay on outstanding credit card balances or unsecured installment loans from a traditional
bank.bank or finance company. We also believe that we offer faster decisions and loan originations, and greater transparency, resulting in a better customer experience than that provided by traditional consumer finance institutions.
To individual and institutional investors, we offer an asset class that we believe has attractive risk adjusted returns, transparency, and
lowerlow duration risk.
Our marketplace offers fixed rate, fully amortizing, unsecured consumer loans ranging from $2,000 to $35,000 with no prepayment penalty. Loan terms of three and five years are available, depending upon the rating assigned to the borrower at issuance and loan amount being sought. All Borrower Loans are originated and funded by WebBank, an FDIC-insured, state chartered industrial bank organized under the laws of Utah. After origination, WebBank sells the Borrower Loans to PFL, which either holds them or sells them to accredited
and institutional investors.
Investors invest in Borrower Loans through two channels – (i) the “Note Channel,” which allows investors to purchase Notes from PFL, the payments of which are dependent on PFL’s receipt of payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows accredited
and institutional investors to purchase a Borrower Loan in its entirety directly from PFL. PFL continues to own the Borrower Loans originated through the Note Channel. Prosper services all of the Borrower Loans made through the marketplace.
Company Background and History
PMI was incorporated in the state of Delaware on March 22, 2005. PFL was formed as a limited liability company in the state of Delaware on February 17, 2012, and is a wholly-owned subsidiary of PMI.
PMI developed our marketplace and, until February 1, 2013, owned the proprietary technology that makes operation of our marketplace possible. On February 1, 2013, PMI transferred the marketplace to PFL. PFL has been organized and is operated in a manner that is intended (i) to minimize the likelihood that it will become subject to a voluntary or involuntary bankruptcy or similar proceeding, and (ii) to minimize the likelihood that, in the event of PMI’s bankruptcy, PFL would be substantively consolidated with PMI and thus have its assets subjected to claims of PMI’s creditors. We believe we have achieved this by imposing through PFL’s organizational documents and covenants in the Amended and Restated Indenture (as defined below in “Item 13. Certain Relationships and related Transactions, and Director Independence”) certain restrictions on PFL’s activities and certain formalities designed to reinforce PFL’s status as a distinct entity from PMI. In addition, under the Administration Agreement, dated February 1, 2013, between PMI and PFL (the(as amended to date, the “Administration Agreement”), PMI has agreed, in its dealings with PFL and with third parties, to observe certain “separateness covenants” related to its corporate formalities.
PMI has also adopted resolutions limiting its own activities and interactions with PFL in order to further reduce the likelihood that PFL would be substantively consolidated with PMI in the event of PMI’s bankruptcy.
PFL has retained PMI, pursuant to the Administration Agreement, to provide certain administrative services relating to our marketplace. Specifically, the Administration Agreement contains a license granted by PFL to PMI that entitles PMI to use the marketplace for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement relating to corporate administration, loan platform services, loan and note servicing, and marketing, and (ii) PMI’s performance of its duties and obligations to WebBank in relation to loan origination and funding. The license is terminable in whole or in part upon the failure by PMI to pay PFL the licensing fee, or upon PMI’s termination as the provider of some or all of the aforementioned services. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Prosper Marketplace, Inc.—Agreements with PFL” for more information.
How our Marketplace Works
Our marketplace is an online marketplace that matches individuals who wish to obtain unsecured consumer loans with individuals and institutions who are willing to commit funds to those loans. A borrower who wishes to obtain a loan through our marketplace must apply and, if accepted, post a loan listing to our marketplace. Each time we post a group of listings on our marketplace, we determine the relative proportions of such listings that will be allocated to the Note Channel and the Whole Loan Channel, respectively, based on our estimate of the relative overall demand in each channel. We then use a random allocation methodology to allocate individual listings between the two channels based on those proportions. If a listing receives enough investor commitments, WebBank will originate the Borrower Loan requested and then sell it to PFL.
Any natural person at least 18 years of age who is a U.S. resident in a state where loans through our marketplace are available with a U.S. bank account and a social security number may apply to become a borrower. All potential borrowers are subject to anti-fraud, anti-terrorism and identity verification processes and a potential borrower cannot obtain a loan without passing those processes.
When a borrower requests a loan, we first evaluate whether the borrower meets the underwriting criteria required by WebBank. The underwriting criteria apply to all loans originated through our marketplace and may not be changed without WebBank's consent. All borrowers who request a loan are subject to the following minimum eligibility criteria: (1) have at least a 640 credit score, (2) have fewer than
sevenfive credit bureau inquiries
(after excluding duplicate inquiries) within the last 6 months, (3) have an annual income greater than $0, (4) have a debt-to-income ratio below 50%, (5) have at least three open trades reported on their credit report, and (6) have not filed for bankruptcy within the last 12 months. Borrowers may have up to two loans through Prosper outstanding at one time, provided that (1) the first loan is current, (2) the aggregate outstanding principal balance of both loans does not exceed the then-current maximum allowable loan amount for loans (currently $35,000), and (3) the borrower complies with the prior-borrower constraints above. From time to time, we have, with WebBank’s consent, tested new products that include features which are outside the standard eligibility criteria discussed above. These products are available on a limited basis, exclusively through our Whole Loan Channel and did not have a material impact on our business or our financial statements during the fiscal year ended December 31,
2015. 2017.
Investors are individuals and institutions that have the opportunity to buy Notes or Borrower Loans. An individual investor must be a natural person at least 18 years of age and a U.S. resident, must provide his or her social security number, and may be required to provide his or her state driver’s license or state identification card number. An institutional investor must provide its taxpayer identification number and entity formation documentation. All potential investors are subject to anti-fraud, anti-terrorism and identity verification processes and a potential investor cannot invest in Notes or Borrower Loans without passing those processes.
At the time an individual investor registers to participate in the Note Channel, such investor must satisfy any minimum financial suitability standards established for the Note Channel by the state in which the investor resides. Investors who participate in the Note Channel must enter into an investor registration agreement, which agreement governs all sales of Notes to such investors.
Only investors that are approved by us are eligible to participate in the Whole Loan Channel. At a minimum, to participate in the Whole Loan Channel, an investor must meet the definition of an “accredited investor” set forth in Regulation D under the Securities Act of 1933. Investors who participate in the Whole Loan Channel must enter into loan purchase and loan servicing agreements with us.
Relationship with WebBank
WebBank is an FDIC-insured, Utah-chartered industrial bank that originates all Borrower Loans made through our marketplace. WebBank and PMI are parties to an agreement under which PMI manages the operations of our marketplace that relate
to the submission of loan applications by borrowers and the making of related Borrower Loans by WebBank in exchange for a fee. WebBank makes each Borrower Loan with its own funds. A joint WebBank-Prosper Credit Policy, which can be changed only with WebBank’s approval, constitutes the policy Prosper must follow in reviewing, approving and administering Borrower Loans made by WebBank through the marketplace. WebBank, PMI and PFL are parties to a Loan Sale Agreement, under which WebBank sells and assigns the promissory notes evidencing the Borrower Loans to PFL. As consideration for WebBank's agreement to sell and assign the promissory notes, PFL pays WebBank a monthly fee in addition to the purchase price of the promissory notes.notes, as well as a monthly fee, which is partially tied to the terms and performance of the loans. PMI receives payments from WebBank as compensation for the activities it undertakes on WebBank's behalf.
Each loan listing is assigned a Prosper Rating, which is a letter grade that indicates the expected level of risk associated with the listing. Each letter grade corresponds to an estimated average gross annualized loss rate range. The Prosper Rating associated with a loan listing reflects the loss expectations for that listing as of the time the rating is given. This means that otherwise similar borrowers may have different Prosper Ratings at different points in time as the Prosper Rating is updated to incorporate more recent information.
The estimated loss rate for each loan listing is based primarily on the historical performance of Borrower Loans with similar characteristics and is primarily determined by two scores: (i) a custom Prosper Score, and (ii) a credit score obtained from a credit reporting agency. The custom Prosper Score is updated periodically to include new information that is predictive of borrower risk as such information becomes available or as the evidence supporting a particular datum becomes strong enough to merit its inclusion in the custom Prosper Score.
The Prosper Score predicts the probability of a Borrower Loan going “bad,” where “bad” is defined as going more than 60 days past due within twelve months of the application date. To create the Prosper Score, we have developed and refined a custom risk model using our historical data as well as a data archive from a consumer credit bureau. We built the model on our borrower population, and included as variables information provided directly by the borrowers as well as included in their credit reports, so that the model would incorporate behavior that is unique to that population. In addition to the Prosper Score, another major element used to determine the Prosper Rating for a loan listing is a credit score from a consumer reporting agency. We currently use
Experian’sTransUnion’s FICO08 score. We obtain a borrower’s credit score at the time the loan listing is created, unless we already have a credit score on file that is not more than thirty days old.
Sale of Notes and Borrower Loans
If an investor successfully bids on a loan listing, the principal amount of the loan will be set aside in the investor’s account and may not be used for other bids. In the event a listing does not result in a loan being originated, the funds are made available for bidding by the investor.
For loan listings allocated to the Note Channel, a bid on a listing is an investor’s commitment to purchase a Note from PFL. PFL generally issues and sells a series of Notes for each Borrower Loan that is
fundedoriginated through the Note Channel. The Notes are sold to the investors who successfully bid on the corresponding loan listing in the principal amounts of their respective bids. Each series of Notes is dependent for payment on PFL’s receipt of payments on the corresponding Borrower Loan. PFL uses the proceeds of each series of Notes to purchase the corresponding Borrower Loan from WebBank on the
second business day after WebBank has originated the Borrower Loan.
For listings allocated to the Whole Loan Channel, a bid on a listing is an investor’s commitment to purchase the Borrower Loan from PFL after origination by WebBank and sale to PFL. On the second business day after WebBank has originated
the Borrower Loan, PFL purchases the Borrower Loan from WebBank and re-sells the Borrower Loan that same day to the corresponding investor. PFL records the investor as the owner of the Borrower Loan.
Loan Servicing and Collection
We are responsible for servicing the Borrower Loans made through our marketplace. We will pay each Note holder principal and interest on the Note in an amount equal to each such Note’s pro-rata portion of the principal and interest payments, if any, which we receive on the corresponding Borrower Loan, net of our servicing fee. We will also pay Note holders their pro rata portion of any other amounts we receive on the corresponding Borrower Loans, including late fees and prepayments, subject to our servicing fee; provided, that we will not pay Note holders any non-sufficient funds fees we receive for failed borrower payments. In addition, the funds available for payment on the Notes will be reduced by the amount of any attorneys’ fees or collection fees we, a third-party servicer or a collection agency imposes in connection with collection efforts related to the corresponding Borrower Loan. No
payments will be made on any Note after its final maturity date.
We will pay each investor that has purchased a Borrower Loan through the Whole Loan Channel principal and interest on the Borrower Loan purchased in an amount equal to the principal and interest payments, if any, that we receive, net of our servicing fee. We will also pay these investors any other amounts we receive on the Borrower Loans, including late fees and prepayments, subject to our servicing fee, provided that we will not pay these investors any non-sufficient funds fees we receive for failed borrower
payments.payments or any payment processing fees we may collect. In addition, the funds available for payment on the Borrower Loans will be reduced by the amount of any attorneys' fees or collection fees we, a third-party servicer or a collection agency imposes in connection with collection efforts related to the Borrower Loan.
If a Borrower Loan becomes past due, we may collect on it directly or refer it to a third-party collection agency. Our in-house collections department and third-party collection agencies are compensated by keeping a portion of the payments they collect based on a predetermined schedule.
Recent Acquisitions
On January 23, 2015, PMI acquired
Customers
A relatively small number of investors provide the funding commitments for a large percentage of all listings that result in Borrower Loans originated through our marketplace. Of all Borrower Loans originated in the year ended December 31, 2017, the largest party purchased a total of the outstanding limited liability company interests70% of American HealthCare Lending, LLC (“American HealthCare Lending”), a company that operates a patient financing platform, and merged American HealthCare Lending with and into PHL, with PHL surviving the merger.On October 9, 2015, PMI acquired all of the outstanding shares of BillGuard, a privately held personal finance analytics company that develops consumer apps that help consumers manage their identity, finances and credit, pursuant to an Agreement and Plan of Merger, dated as of September 23, 2015, by and among PMI, BillGuard, Beach Merger Sub, Inc., a wholly owned subsidiary of PMI, and Shareholder Representative Services LLC, solely in its capacity as the Stockholders’ Representative.
those loans.
Industry Background and Trends
According to the Board of Governors of the Federal Reserve System, as of December
2015,2017, the balance of outstanding consumer credit
(excluding mortgages) in the United States totaled
$3.5$3.8 trillion. This amount included
$936 billion$1.0 trillion of revolving consumer credit, which many consumers seek to refinance for a lower interest rate.
The market for consumer lending is competitive and rapidly evolving, and there is an opportunity for the online marketplace model to transform the traditional lending process. We believe our marketplace offers a superior solution for both borrowers and investors.
For borrowers, we believe our marketplace offers the following principal competitive factors: better pricing versus other alternatives; a simple, easy and intuitive customer experience; a fast and efficient process; and trust and transparency.
For investors, we believe our marketplace offers the following principal competitive factors: attractive risk adjusted returns;
lowerlow duration risk; diversification from other asset classes; a simple, easy and intuitive customer experience; and trust and transparency.
We compete for borrowers and investors against other financial products and companies. For borrowers, we compete withour competition includes banking institutions, credit unions, credit card issuers and other consumer finance companies. We also faceFor investors, our competition fromincludes other onlineinvestment vehicles such as consumer lending companies. For investors, we compete with other investment vehiclesfunds and asset classes such as equities, bonds and commodities. Our competition for borrowers and investors also includes other online consumer lending companies, such as
LendingClub Corporation, Social Finance Inc. and other marketplace lending platforms. We may also face potential competition from new market entrants, or business expansion from established
companies.companies, like Goldman Sachs. These companies may have significantly greater financial, technical, marketing and other resources and may be able to devote greater resources to the development, promotion, sale and support of their offerings.
Our Competitive Strengths
We believe the following strengths differentiate us from our competitors and provide us with sustainable competitive advantages:
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| Leading Online Marketplace: Since inception, our marketplace has facilitated $6.1 billion in loan originations, of which $3.7 billion was for the year-ended December 31, 2015. As our business grows, our brand, reputation and scale
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Leading Online Marketplace: Since inception, our marketplace has facilitated $11.2 billion in loan originations, of which $2.9 billion was for the year-ended December 31, 2017. As our business grows, our brand, reputation and scale strengthens. This allows us to attract top talent, speed up product innovation, attract market place participants and drive down our cost structure, all of which further benefit borrowers and investors.
Robust Network Effect: The attractiveness of our marketplace increases as the number of participants on our marketplace increases, yielding a classic network effect. Our marketplace offers consumer borrowers access to affordable credit, and allows individual and institutional investors to invest in an asset class with attractive risk-adjusted returns. The diversity of investors brings scale and breadth of funding to our marketplace and makes credit more affordable. As both sides of the equation grow, the advantages (reduced risk, lower cost) scale accordingly, attracting even more borrowers and investors. The increased participant pool reduces costs and generates more data which we use to improve the effectiveness of our credit decisioning and scoring models. This enhances our aggregate loan performance and builds increased trust in our marketplace, which in turn attracts more borrowers and investors.
Technology Platform: Our technology platform automates key aspects of our operations, including the borrower application process, data gathering, underwriting, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. This provides a significant time and cost advantage over traditional consumer lending business models and, we believe, enables us to provide a superior user experience to our borrowers and investors. Using our accumulated performance data, we continually invest in incremental improvements in our algorithms thus extending our technological advantage.
Proprietary Risk Management Capabilities: We have developed a proprietary risk model based on consumer loan performance data, which we believe allows us to accurately assess the credit risk profile of borrowers and which we believe also allows investors to earn attractive risk adjusted returns. We leverage the results from our growing data stream to continually refine this risk model and more accurately predict loan performance.
Unique Corporate Structure: Our corporate structure was designed to offer our investors extra protection. The organization and operation of PFL and PMI as separate and distinct entities should serve to protect our Note investors in the event of a bankruptcy filing by or against PMI. This organizational structure, along with the federal and state registration process, is expensive and time consuming to undertake, and is not easily duplicated by competitors.
Efficient and Attractive Financial Model: We have multiple revenue streams and an efficient cost model. We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, as well as from servicing fees related to Borrower Loans for which we retain the servicing rights. Additionally, our technology platform significantly reduces the need for physical infrastructure and therefore allows our business to grow with a lower cost operating model, providing us with significant operating leverage.
Sources of Revenues
| | strengthens. This allows us to attract top talent, speed up product innovation, attract marketplace participants and drive down our cost structure, all of which further benefit borrowers and investors.
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| ×
| Robust Network Effect: The attractiveness of our marketplace increases as the number of participants on our marketplace increases, yielding a classic network effect. Our marketplace offers consumer borrowers access to affordable credit, and allows individual and institutional investors to invest in an asset class with attractive risk-adjusted returns. The diversity of investors brings scale and breadth of funding to our marketplace and makes credit more affordable. As both sides of the equation grow, the advantages (reduced risk, lower cost) scale accordingly, attracting even more borrowers and investors. The increased participant pool generates more data which we use to improve the effectiveness of our credit decisioning and scoring models. This enhances our aggregate loan performance and builds increased trust in our marketplace, which in turn attracts more borrowers and investors.
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| ×
| Technology Platform: Our technology platform automates key aspects of our operations, including the borrower application process, data gathering, underwriting, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. This provides a significant time and cost advantage over traditional consumer lending business models and, we believe, enables us to provide a superior user experience to our borrowers and investors. Using our accumulated performance data, we continually invest in incremental improvements in our algorithms thus extending our technological advantage.
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| ×
| Proprietary Risk Management Capabilities: We have developed a proprietary risk model based on consumer loan performance data, which we believe allows us to accurately assess the credit risk profile of borrowers and which we believe also allows investors to earn attractive risk adjusted returns. We leverage the results from our growing data stream to continually refine this risk model and more accurately predict loan performance.
|
| ×
| Unique Corporate Structure: Our corporate structure was designed to offer our investors extra protection. The organization and operation of PFL and PMI as separate and distinct entities should serve to protect our Note investors in the event of a bankruptcy filing by or against PMI. This organizational structure, along with the federal and state registration process, is expensive and time consuming to undertake, and is not easily duplicated by competitors.
|
| ×
| Efficient and Attractive Financial Model: We have multiple revenue streams and an efficient cost model. We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, as well as from servicing fees related to Borrower Loans for which we retain the servicing rights. Our technology platform significantly reduces the need for physical infrastructure and therefore allows our business to grow with a lower cost operating model, providing us with significant operating leverage.
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Sources of Revenues
We have two primary sources of revenues: transaction fees and servicing fees. Prosper earns transaction fees from WebBank by facilitating the origination of Borrower Loans through the marketplace. Prosper earns servicing fees from investors for processing principal and interest payments made by borrowers and passing such payments on to investors.
Our sales and marketing efforts are designed to attract individuals and institutions to our marketplace, encourage their enrollment and participation as users, and facilitate and enhance their understanding and utilization of the services for borrowing or investing. We employ a wide range of marketing channels to reach potential customers and build our brand and value proposition. These channels include
word-of-mouth referrals, online marketing, direct mail,
radio campaigns, partner and affiliate introductions, emails, and public media. We are constantly seeking new methods to reach more potential members, while testing and optimizing the end to end customer experience.
Origination and Servicing
We have
highly efficient and scalable systems for credit risk assessment, loan underwriting, and servicing. Our risk model takes borrowers’ supplied information and combines that information with public and proprietary data to make real time decisions. Our verification agents use automated tools to confirm credit eligibility. Our loan servicing platform calculates a loan’s amortization and processes payments received from borrowers and passes such payments on to investors. In addition, we have a back-up servicing agreement with First Associates Loan Servicing, LLC (“First Associates”), a loan servicing company that is willing and able to
assume servicing responsibilities in the event that we are no longer able to service the Borrower Loans and Notes. First Associates is a financial services company that has entered into numerous successor loan servicing agreements.
We have made substantial investment in our customer acquisition capability, customer experience, and credit underwriting, loan servicing and payment systems. Our marketplace utilizes proprietary
accounting software to process electronic cash movements, record book entries and calculate cash balances in users’ funding accounts. Electronic deposits and payments are mostly done via Automated Clearing House (“ACH”) transactions. The technology platform allows us to economically acquire and service Borrower Loans and Notes, and allows WebBank to efficiently originate and fund Borrower Loans.
We believe the growth of our marketplace will give us the economies of scale to lower unit costs.The system hardware for our marketplace is located in hosting facilities in Scottsdale,
Arizona;Arizona and Las Vegas,
Nevada; and San Francisco, California.Nevada. We own all of the hardware deployed in support of our marketplace. We continuously monitor the performance and availability of our marketplace. The infrastructure is scalable and utilizes standard techniques such as load-balancing and redundancies.
Key aspects of our technology include:
Scalability: Our marketplace is designed and built as a highly scalable, multi-tier, redundant system. It incorporates technologies designed to prevent any single point of failure within the data center from taking the entire system offline. This is achieved by utilizing load-balancing technologies at the front end and business layer tiers and clustering technologies in the back-end tiers to allow scaling both horizontally and vertically depending on marketplace utilization. Data integrity and security: We are committed to protecting our user’susers' information and we take the integrity and security of the data provided by them very seriously. To that end, we have established data protection policies which are implemented and enforced using the latest technologies. All sensitive information is transmitted on secure channels using SSL technology, with SSL certificates issued by VeriSign (Symantec).Symantec or DigiCert. We employ principles of least privilege and layered security to protect stored sensitive information. Information at rest is encrypted using the industry level encryption technologies with appropriate controls to access the data. We protect the network perimeter using the latest technologies including but not limited to firewall and anti-virus threat management techniques. We use strong multi-factor authentication to protect and monitor remote access. We back up all data securely and would expect to recover operations in a short period of time in the event of a disaster. Extensive loggingLogging and monitoring of the systems and security controls enables us to ensure that the controls are functional and that alerts are triggered on policysecurity violations.
Fraud detection: We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud. These include knowledge-based authentication, out-of-band authentication and notification, behavioral analytics and digital fingerprinting to prevent identity fraud. We use services from third-party vendors for user identification, credit checks and for checking customer names against the list of Specially Designated Nationals maintained by the Office of Foreign Assets Control (“OFAC”). In addition, we use specialized third-party software to augment the identity fraud detection systems. We also have a dedicated team which conducts additional investigations of cases flagged for high fraud risk. Finally, we enable investors to report suspicious activity, which we may then evaluate further. We rely on a combination of copyright, trade secret, trademark, and other rights, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology, processes and other intellectual property. We enter into confidentiality and other written agreements with our employees, consultants and service providers, and through these and other written agreements, attempt to control access to and distribution of the software, documentation and other proprietary technology and information. Despite these efforts to protect our proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality. Policing all unauthorized use of intellectual property rights is nearly impossible. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.
We have registered trademarks in the United States for “Prosper,” “Prosper Healthcare Funding,” “Prosper.com,” the Prosper and Prosper Healthcare Funding logos, and other trademarks.
Employees and Contractors
As of December 31,
2015,2017, we employed
619377 full-time employees. The following table shows a breakdown by function:
| | Employees
| |
| | |
| Employees |
| Origination and Servicing | 163 | | 221
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Sales and Marketing | 13 | | 115
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General and Administrative - Research and Development | 81 | | 133
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General and Administrative – Other | 120 | | 150
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Total Headcount | 377 | | 619
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None of our employees are represented by labor unions. We have not experienced any work stoppages, and we believe that our relations with our employees are good.
The lending and securities industries are highly regulated. The marketplace, Notes and Borrower Loans are all subject to extensive and complex rules and regulations. We also are subject to licensing and examination by various federal, state and local government authorities. These authorities impose obligations and restrictions on our activities,
and WebBank’s activities and the Borrower Loans acquired and Notes issued through our marketplace. In particular, these rules may limit the fees that may be assessed on the Borrower Loans, require extensive disclosure to, and consents from, borrowers, prohibit discrimination and impose multiple qualification and licensing obligations on marketplace activities. Failure to comply with these requirements may result in, among other things, revocation of required licenses or registrations, loss of approved status, voiding of loan contracts, indemnification liabilities to contract counterparties, class action lawsuits, administrative enforcement actions and civil and criminal liabilities. While compliance with such requirements is at times complicated by our novel business model, we believe we are in substantial compliance with these rules and regulations. These rules and regulations are subject to continuous change, however, and a material change could have an adverse effect on our compliance efforts and ability to operate.
State and Federal Laws and Regulations
State Licensing Requirements. In most states we believe that WebBank, as originator of all Borrower Loans originated through our marketplace, satisfies any relevant licensing requirements with respect to the origination of such Borrower Loans. In addition, as needed, we seek licenses and/or authorizations of various types so that we may conduct activities such as servicing and marketing in all states and the District of Columbia, with the exceptions of Iowa, Maine, North Dakota and Pennsylvania.West Virginia. We are subject to supervision and examination by the state regulatory authorities that administer these state lending laws. The licensing statutes vary from state to state and prescribe or impose different requirements, on us, including: restrictions on loan origination and servicing practices, including limits on finance charges and the type, amount and manner of charging fees; disclosure requirements; requirements that licensees submit to periodic examination; surety bond and minimum specified net worth requirements; periodic financial reporting requirements; notification requirements for changes in principal officers, stock ownership or corporate control; restrictions on advertising; and requirements that loan forms be submitted for review. State Usury Laws. Section 521 of the Depository Institution Deregulation and Monetary Control Act of 1980 (12 U.S.C. § 1831d) (“DIDA”) and Section 85 of the National Bank Act (“NBA”) (12 U.S.C. § 85), federal case law interpreting the NBA such as Tiffany v. National Bank of Missouri and Marquette National Bank of Minneapolis v. First Omaha Service Corporation and FDIC advisory opinion 92-47 permit FDIC-insured depository institutions, such as WebBank, to “export” the interest rate permitted under the laws of the state where the bank is located, regardless of the usury limitations imposed by the state law of the borrower’s state of residence unless the state has chosen to opt out of the exportation regime. WebBank is located in Utah, and Title 70C of the Utah Code does not limit the amount of fees or interest that may be charged by WebBank on loans of the type offered through our marketplace. Only Iowa and Puerto Rico have opted out of the exportation regime under Section 525 of DIDA and we do not operate in either jurisdiction. However, we believe that if a state in which we did operate opted out of rate exportation, judicial interpretations support the view that such opt outs only apply to loans “made” in those states.
In May 2015, the U.S. Court of Appeals for the Second Circuit issued a decision in Madden v. Midland Funding, LLC that interpreted the scope of federal preemption under the NBA and held that a nonbank assignee of a loan originated by a national bank
was not entitled to the benefits of federal preemption of claims of usury. The
On November 10, 2015, the defendant in the Madden case filed a petition for a writ of certiorari with the United States Supreme Court for further review of the Second Circuit’s decision. On June 27, 2016, the United States Supreme Court denied the petition and refused to review the case, leaving the decision isof the Second Circuit intact and binding on federal courts located in Connecticut, New York and Vermont, but the decision could also be adopted by other courts. The defendant’s petition to the U.S. Supreme Court to review the decision is currently pending. We are unable to predict whether the U.S. Supreme Court will review the decision and, if it does, what the outcome will be.Vermont. If applied to any of the Borrower Loans originated through our marketplace, the Second Circuit’s decision could adversely impact our business. In January 2017, the Administrator of the Colorado Uniform Consumer Credit Code filed suits against online loan platforms Marlette Funding, LLC and Avant, Inc. The Administrator claims that loans to Colorado residents facilitated through these platforms were required to comply with Colorado laws regarding interest rates and fees, and that such laws were not preempted by the federal laws that apply to loans originated by Cross River Bank and WebBank, the federally regulated issuing banks that originate loans through the platforms operated by Marlette and Avant, respectively. In response to the Colorado regulator's lawsuits, Cross River Bank and WebBank have each filed its own lawsuit against the Administrator seeking declaratory relief that the loans originated by the bank are subject to federal requirements that pre-empt Colorado state requirements. We are currently in discussions with the Colorado Department of Law regarding the terms of the loans offered to Colorado residents. No assurance can be provided as to the timing or outcome of these matters.
If a Borrower Loan made through our marketplace was deemed to be subject to the usury laws of a state that has opted-out of the exportation regime or becomes bound by the Second Circuit’s or a similar judicial decision, we could become subject to fines, penalties, and possible forfeiture of amounts charged to borrowers, and we may decide not to originate Borrower Loans through our marketplace in that applicable jurisdiction, which may adversely impact our growth. For more information, see “Item 1 A. Risk Factors—If our marketplace were found to violate a state’s usury laws, we might have to alter our business model and our business could be harmed.”
State Securities Laws. We are subject to the securities laws of each state in which the registration or qualification to offer and sell the Notes and PMI Management Rights has been approved. Certain of these state laws require us to renew the registration or qualification of Notes and PMI Management Rights on an annual basis. The Dodd-Frank Wall Street Reform and Consumer Protection Act.The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) created many new restrictions and an expanded framework of regulatory oversight for the financial services industry. Among other things, the Dodd-Frank Act centralized responsibility for consumer financial protections by creating the Consumer Financial Protection Bureau (the “CFPB”), which has broad authority to write regulations under federal consumer financial protection laws, such as the Truth-in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act, and to enforce those laws against and examine large financial institutions, such as our issuing bank, for compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. We are subject to the CFPB’s jurisdiction, including its enforcement authority and may become subject to their supervisory authority, as a servicer and acquirer of consumer credit. The CFPB may request reports concerning our organization, business conduct, markets and activities, and also conduct on-site examinations of our business on a periodic basis. Truth-in-Lending Act. The federal Truth-in-Lending Act (“TILA”), and Regulation Z, which implements TILA, require creditors to provide consumers with uniform, understandable information concerning certain terms and conditions of their loan and credit transactions. These rules apply to WebBank as the creditor for Borrower Loans facilitated through our marketplace, but because the transactions are carried out on our hosted website, we facilitate compliance at WebBank’s direction. For closed-end credit transactions of the type provided through our marketplace, these disclosures include providing the annual percentage rate, the finance charge, the amount financed, the number of payments and the amount of the monthly payment. The creditor must provide the disclosures before the Borrower Loan is closed. TILA also regulates the advertising of credit and gives borrowers, among other things, certain rights regarding updated disclosures and the treatment of credit balances. Our marketplace provides borrowers with a TILA disclosure prior to the time a Borrower Loan is originated. We also seek to comply with TILA’s disclosure requirements related to credit advertising. Equal Credit Opportunity Act. The federal Equal Credit Opportunity Act (“ECOA”) prohibits creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, or the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law. Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from applicants and from making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application. These requirements apply both to a lender such as WebBank as well as to a party such as Prosper that regularly implements and communicates a credit decision. Investors may also be subject to the ECOA in their capacity as purchasers of Notes, if they are deemed to regularly participate in credit decisions. In the underwriting of Borrower Loans on our marketplace, both WebBank and we seek to comply with ECOA’s provisions prohibiting discouragement and discrimination. ECOA also requires creditors to provide consumers with timely notices of adverse action taken on credit applications. WebBank and we provide prospective borrowers who apply for a Borrower Loan through our marketplace but are denied credit with an adverse action notice in compliance with applicable requirements (see also below regarding “Fair Credit Reporting Act”).
Fair Credit Reporting Act.The federal Fair Credit Reporting Act (“FCRA”), administered by the CFPB, promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. FCRA requires a permissible purpose to obtain a consumer credit report, and requires persons to report loan payment information to credit bureaus accurately. FCRA also imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in a credit report. WebBank and we have a permissible purpose for obtaining credit reports on potential borrowers and WebBank and we also
obtain explicit consent from borrowers to obtain such reports. As the servicer for the Borrower Loan, we have systems in place to report Borrower Loan payment and delinquency information to appropriate reporting agencies. We provide an adverse action notice to a rejected
borrower on WebBank’s behalf at the time the borrower is rejected that includes all the required disclosures. We have
also implemented an identity theft prevention
program. program as required by law.
Fair Debt Collection Practices Act. The federal Fair Debt Collection Practices Act (“FDCPA”) provides guidelines and limitations on the conduct of third-party debt collectors in connection with the collection of consumer debts. The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA applies to third-party debt collectors, debt collection laws of certain states impose similar requirements on creditors who collect their own debts. Our agreement with our investors prohibits investors from attempting to collect directly on the Borrower Loan. We use our internal collection team and professional external debt collection agents to collect delinquent accounts. They are required to comply with all other applicable laws in collecting delinquent accounts of our borrowers. Servicemembers Civil Relief Act.The federal Servicemembers Civil Relief Act (“SCRA”) allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties. The SCRA, requiresas well as certain state laws with similar protections for military members, require us to adjust the interest rate of borrowers who qualify for and request relief. If a borrower with an outstanding Borrower Loan qualifies for protection under the SCRA protection,or similar state laws, we will reduce the interest rate on the Borrower Loan to 6% for the duration of the borrower’s active duty. During this period, the investors who have invested in such Borrower Loan will not receive the difference between 6% and the Borrower Loan’s original interest rate. For a borrower to obtain an interest rate reduction on a Borrower Loan due to military service, we require the borrower to send us a written request and a copy of the borrower’s mobilization orders. We do not take military service into account in assigning Prosper Ratings to borrower loan requests and we do not disclose the military status of borrowers to investors. Military Lending Act. The federal Military Lending Act (“MLA”) provides specific protections for active duty service members and their dependents (or covered borrowers) in consumer credit transactions. Although originally enacted in 2006, the MLA applies to persons engaged in the business of extending consumer credit subject to the disclosure requirements of the TILA and Regulation Z with respect to loans made on or after October 3, 2016. The MLA prohibits creditors from imposing a Military Annual Percentage Rate (“MAPR”) greater than 36% in any consumer credit transaction involving a covered borrower. It also requires certain oral and written disclosures to be provided to covered borrowers. Additionally, the MLA prohibits creditors from requiring covered borrowers to waive rights to legal recourse, submit to arbitration, or pay a prepayment penalty or fee. Both Prosper and WebBank have ensured that the loan program complies with the MLA requirements for covered borrowers, including but not limited to the restriction on MAPR, the delivery of required disclosures and the prohibition of mandatory arbitration and waiver of legal recourse.
Other Lending Regulations. We are subject to and seek to comply with other state and federal laws and regulations applicable to consumer lending, including additional requirements relating to loan disclosure, credit discrimination, credit reporting, debt collection and unfair, deceptive or abusive business practices. These laws and regulations may be enforced by state consumer credit regulatory agencies, state attorneys general, the CFPB and private litigants, among others. Given our novel business model and the subjective nature of some of these laws and regulations, particularly laws regulating unfair, deceptive or abusive business practices, we may become subject to regulatory scrutiny or legal challenge with respect to our compliance with these requirements. Electronic Funds Transfer Act. The federal Electronic Fund Transfer Act (“EFTA”), and Regulation E, which implements it, provide guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts. In addition, transfers performed by ACH electronic transfers are subject to detailed timing and notification rules and guidelines administered by the National Automated Clearinghouse Association (“NACHA”). Most transfers of funds in connection with the origination and repayment of the Borrower Loans are performed by ACH. We obtain necessary electronic authorization from borrowers and investors for such transfers in compliance with such rules. Transfers of funds through our marketplace are currently executed by Wells Fargo and conform to the EFTA, its regulations and NACHA guidelines. Electronic Signatures in Global and National Commerce Act/Uniform Electronic Transactions Act. The federal Electronic Signatures in Global and National Commerce Act (“ESIGN”) and similar state laws, particularly the Uniform Electronic Transactions Act (“UETA”), authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures. ESIGN and UETA require businesses that want to use electronic records or signatures in consumer transactions to obtain the consumer’s consent to receive information electronically. When a borrower or individual investor registers with our marketplace, we obtain his or her consent to transact business electronically and maintain electronic records in compliance with ESIGN and UETA requirements.
Privacy and Data Security Laws. The federal Gramm-Leach-Bliley Act (“GLBA”) limits the disclosure of nonpublic personal information about a consumer to nonaffiliated third parties and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information. Additional state and federal privacy and data security laws require safeguards to protect the privacy and security of consumers’ personally identifiable information, require notification to affected customers in the event of a breach, and restrict certain sharing of nonpublic personal information about a consumer with affiliated entities. We have a detailed privacy policy, which complies with GLBA and is accessible from our website. We maintain participants’ personal information securely, and we do not sell, rent or share such information with nonaffiliated third parties for marketing purposes unless previously agreed to by the participant.participant or otherwise permitted by applicable law. In addition, we take a number of measures to safeguard the personal information of our borrowers and investors and to protect it against unauthorized access.
Bank Secrecy Act. In cooperation with WebBank, we have implemented an anti-money laundering policy and various anti-money laundering procedures to comply with applicable federal law. With respect to new borrowers and investors, we apply the customer identification and verification program rules and screen names against the list of Specially Designated Nationals maintained by the U.S. Department of the Treasury Office of Foreign Asset Control’s (“OFAC”) pursuant to the USA PATRIOT Act amendments to the Bank Secrecy Act (“BSA”) and its implementing regulation.
New Laws and Regulations. From time to time, various types of federal and state legislation are proposed and new regulations are introduced that could result in additional regulation of, and restrictions on, the business of consumer lending. We cannot predict whether any such legislation or regulations will be adopted or how this would affect our business or our important relationships with third parties. In addition, the interpretation of existing legislation may change or may prove different than anticipated when applied to our novel business model. Compliance with such requirements could involve additional costs, which could have a material adverse effect on our business. As a consequence of the extensive regulation of commercial lending in the United States, our business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the cost of doing business. Foreign Laws and Regulations
We do not permit non-U.S. based individuals to register as borrowers on our marketplace and the marketplace does not operate outside the United States. Therefore, we do not believe that our marketplace is subject to foreign laws or regulations.
You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, when evaluating our business. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial condition, operating results and prospects. While we believe the risks and uncertainties described below include all material risks currently known by us, it is possible that these may not be the only ones we face.
RISKS RELATED TO BORROWER DEFAULT
The Notes are risky and speculative investments for suitable investors only.
Investors should be aware that the Notes offered through our marketplace are risky and speculative investments. The Notes are special, limited obligations of PFL and depend entirely for payment on PFL’s receipt of payments under the corresponding Borrower Loans. Notes are suitable only for investors of adequate financial means. If an investor cannot afford to lose the entire amount of such investor’s investment in the Notes, the investor should not invest in the Notes.
Payments on the Notes depend entirely on payments PFL receives on corresponding Borrower Loans. If a borrower fails to make any payments on the corresponding Borrower Loan related to a Note, payments on such Note will be correspondingly reduced.
PFL will only make payments pro rataon a series of Notes after it receives a borrower’s payment on the corresponding Borrower Loan, net of servicing fees. PFL also will retain from the funds received from the relevant borrower and otherwise available for payment on the Notes any non-sufficient funds fees and the amounts of any attorneys’ fees or collection fees imposed in connection with collection efforts. Under the terms of the Notes, if PFL does not receive any or all payments on
the corresponding Borrower Loan, payments on the Note will be correspondingly reduced in whole or in part. If the relevant borrower does not make a payment on a specific monthly loan payment date, no payment will be made on the Note on the corresponding succeeding Note payment date.
Information provided by borrowers may be incomplete, inaccurate or intentionally false, and should generally not be relied upon.
Information in loan listings regarding the purpose of the loan and an applicant’s income, occupation and employment status is supplied directly by the applicant. Not all of this self-reported information is verified by us, and it may be incomplete, inaccurate or intentionally false. Moreover, loan listings do not disclose the identity of applicants, and investors have no ability to obtain or verify applicant information either before or after they purchase a Note. Investors are therefore cautioned not to rely on self-reported information such as income, occupation and employment status when making investment decisions. If an applicant supplies false, misleading or inaccurate information, an investor may lose part or all of the purchase price paid for a Note.
Investors should be aware that all listings are posted to our marketplace without our verifying self-reported information such as the purpose of the loan, income, occupation and employment status. Neither we nor WebBank verifies any statements by applicants as to how loan proceeds are to be used nor do we or WebBank confirm after loan funding how loan proceeds were used. In the cases in which we select applicants for income and employment verification, the verification is generally completed after the loan listing has been created but prior to the time the Borrower Loan is funded.originated. For the period from July 14, 2009 to December 31, 2015,2017, we verified employment and/or income on approximately 58%65% of the Borrower Loans originated through our marketplace on a unit basis (275,607(555,084 out of 473,986)857,206) and approximately 72%75% of originations on a dollar basis ($4,319,3038.3 billion out of $5,979,755)$11.0 billion). Of these loans, we canceled 11% of the loan listings for which we verified employment and/or income information because the listings contained inaccurate or insufficient employment or income information. We selected these listings based on a combination of factors, including amount of loan requested, Prosper Rating, debt-to-income ratio and stated income. The number or percentage of applicants whose income and employment information is verified in relation to future listings may differ from the historical information supplied above. No assurance is made that such information will be verified with respect to any particular applicant or borrower. Further, Note holders will not have any contractual or other relationship with any borrowers that would enable them to make any claim against such borrowers for fraud or breach of any representation or warranty in relation to any false, incomplete or misleading information supplied by such borrowers in relation to the relevant Borrower Loan or Note.
The Borrower Loans are not secured by any collateral or guaranteed or insured by any third party, and investors must rely on us or a third-party collection agency to pursue collection against any borrower.
Borrower Loans are unsecured obligations of borrowers. They are not secured by any collateral, and they are not guaranteed or insured by PFL, PMI or any third party, or backed by any governmental authority in any way. We and our third-party collection agencies will, therefore, be limited in our ability to collect on Borrower Loans. Moreover, Borrower Loans are obligations of borrowers to PFL as successor to WebBank, not obligations to the holders of Notes. Although payments on the Notes are dependent on the borrowers’ payments on the corresponding Borrower Loans, Note holders will have no recourse to the borrowers and no ability to pursue borrowers to collect payments under Borrower Loans. Holders of the Notes may look only to PFL for payment of the Notes.
The credit information of an applicant may be inaccurate or may not accurately reflect the applicant’s creditworthiness, which may cause an investor to lose all or part of the price paid for a Note. We obtain applicant credit information from consumer reporting agencies, and assign Prosper Ratings to loan listings based in part on the applicant’s credit score. A credit score that forms a part of the Prosper Rating assigned to a listing may not reflect the applicant’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data. Similarly, the credit data taken from the applicant’s credit report and displayed in listings may also be based on outdated, incomplete or inaccurate consumer reporting data. We do not verify the information obtained from the applicant’s credit report. Moreover, investors do not, and will not, have access to financial statements of applicants or to other detailed financial information about applicants.
The Prosper Rating may not accurately set forth the risks of investing in the Notes, no assurances can be provided that actualloss rates for the Notes will come within the estimated loss rates indicated by the Prosper Rating, and investors have limited rights to cause Prosper to repurchase the Notes.
The Prosper Rating assigned to a loan listing may not accurately reflect the risks of investing in the Notes, and is not a recommendation by us to buy, sell or hold a Note. For example, the Prosper Rating for a listing could be inaccurate because the applicant’s credit report contained incorrect information. Similarly, although most of the information provided by applicants that is relevant to the Prosper Rating is verified by us before calculating the Prosper Rating, we do not verify all such information. For example, we do not verify the income information on all applications. Further, the Prosper Rating does not reflect PFL’s credit risk as a debtor (such credit risk exists even though, as the debtor on the Notes, PFL’s only obligation is to pay to the Note holders their pro rata shares of collections received on the related Borrower Loans net of applicable fees). In addition, no assurances can be provided that actual loss rates for the Notes will fall within the expected loss rates indicated by the Prosper Rating. The interest rates on the Notes might not adequately compensate Note investors for these additional risks.
If we include in a listing a Prosper Rating that is different from the Prosper Rating calculated by us or calculate the Prosper Rating for a listing incorrectly, and such error materially and adversely affects a holder’s interest in the related Note, PFL will indemnify the holder or repurchase the Note. PFL will not, however, have any indemnity or repurchase obligation under the Amended and Restated Indenture, the Notes, the investor registration agreement or any other agreement associated with the Note Channel as a result of any other inaccuracy with respect to a listing’s Prosper Score or Prosper Rating. PFL’s contractual repurchase obligations do not affect a Note holder’s rights under federal or state securities laws.
Investors who use the
QuickRecurring Investment or Auto Invest
tooltools may face additional risk of funding Borrower Loans that have been erroneously selected by
Quick Invest.Quick Invest is a loan search tool that allows investors to identify loan listings in the Note Channel that meet their criteria. Investors who use the Quick Invest tool may face additional risk of funding Borrower Loans that have been erroneously selected by Quick Invest. tool.
Since
itsit was first
implementationimplemented in July 2011 through December 31,
2015,2017, the
Recurring Investment tool (formerly known as Auto Quick
InvestInvest) tool has experienced programming errors that affected 8,630 Notes
and PMI Notes out of the
6,182,15910,203,780 Notes and PMI Notes purchased.
The Auto Invest tool was first implemented on June 2, 2016. Since such time through December 31, 2017, the Auto Invest tool has experienced programming errors that affected 2 Notes out of the 2,458,365 Notes purchased.
In the event thatof any errors in QuickRecurring Investment or Auto Invest that cause an investor to purchase a Note from PFL that such investor would not otherwise have purchased or that differs materially from the Note such investor would have purchased had there been no error, PFL will either repurchase the Note, indemnify the investor against losses suffered on that Note or cure such error. See “Item 1A. Risk Factors—"Risk Factors - Risks Related to PFL and PMI, ourOur Marketplace and Our Ability to Service the Notes”Notes" for more information.
Some borrowers may use our marketplace to defraud investors, which could adversely affect investors’ ability to recoup their investment.
We perform identity and fraud checks with external databases to authenticate each borrower’s identity. There is a risk, however, that these checks could fail and fraud may occur. In addition, applicants may misrepresent their intentions regarding loan purpose or other information contained in listings, and we do not verify the majority of this information. Except in certain limited circumstances (including, e.g., a material payment default on the Borrower Loan resulting from verifiable identity theft), we are not obligated to indemnify or repurchase a Note or Borrower Loan from an investor if the investment is not realized in whole or in part due to fraud in connection with a loan listing, or due to false or inaccurate statements or omissions of fact in a listing, whether in credit data, a borrower’s representations, similar indicia of borrower intent and ability to repay the Borrower Loan. If PFL does repurchase a Note or Borrower Loan, the repurchase price will be equal to the Note’s or Borrower Loan’s outstanding principal balance and will not include accrued interest. Further, at the time of such repurchase of a Note, PMI will also concurrently repurchase the related PMI Management Rights for zero consideration. The fact thatwe have the exclusive right and ability to investigate claims of identity theft in the origination of Borrower Loans creates a significant conflict of interest between us and our investors. We have the exclusive right to investigate claims of identity theft and determine, in our sole discretion, whether verifiable identity theft has occurred. Such a determination of verifiable identity theft may trigger an obligation by PFL to either repurchase the related Notes or Borrower Loans or indemnify the applicable Note holders. The denial of a claim under PFL’s identity theft guarantee would save PFL from its indemnification or repurchase obligation. Because investors rely solely on us to investigate incidents that might require PFL to indemnify the applicable Note holders or repurchase the related Notes or Borrower Loans, a conflict of interest exists between us and such investors.
PFLdoes not have significant historical performance data about performance on the Borrower Loans. Loss rates on the Borrower Loans may increase and prior to investing you should consider the risk of non-payment and default. The estimated loss rates displayed on loan listings and used to determine Prosper Ratings have been developed from the loss histories of all Borrower Loans originated through our marketplace. However, future Borrower Loans originated through our marketplace may default more often than similar Borrower Loans have defaulted in the past, which increases the risk of investing in the Notes.
If payments on the Borrower Loan corresponding to an investor’s Note become more than 30 days overdue, such investor will be unlikely to receive the full principal and interest payments that were expected on the Note, and such investor may not recover the original purchase price on the Note. We may refer Borrower Loans that become past due to a third party collection agency for collection or we may collect on such Borrower Loans directly. If a borrower fails to make a required payment on a Borrower Loan within 30 days of the due date, we will pursue reasonable collection efforts in respect of the Borrower Loan, including referring the delinquent Borrower Loan to a collection agency within five business days after it becomes 30 days past due. If payment amounts on a delinquent Borrower Loan are received from a borrower after the loan has been referred to our in-house collections department or an outside collection agency, we or that collection agency may retain a percentage of that payment as a fee before any principal or interest becomes payable to an investor. Collection fees may be up to 40% of recovered amounts, in addition to any legal fees and transaction fees associated with accepting payments incurred in the collection effort.
For some non-performing Borrower Loans, we may not be able to recover any of the unpaid loan balance and, as a result, an investor who has purchased a corresponding Note may receive little, if any, of the unpaid principal and interest payable under the Note. In all cases, investors must rely on our collection efforts or the applicable collection agency to which such Borrower Loans are referred, and are not permitted to collect or attempt collection of payments on the Borrower Loans in any manner.
Loss rates on the Borrower Loans may increase as a result of economic conditions beyond our control and beyond the control of the borrower. Borrower Loan loss rates may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrowers. In particular, loss rates on Borrower Loans may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, residential real estate values, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions in the credit markets and other factors.
The Borrower Loans do not restrict borrowers from incurring additional unsecured or secured debt, nor do they impose any financial restrictions on borrowers during the term of the Borrower Loan, which may reduce the likelihood that an investor will receive the full principal and interest payments that such investor expects to receive on a Note.
If a borrower incurs additional debt after the date a loan listing is posted, the additional debt may impair the ability of that borrower to make payments on his or her Borrower Loan and, as such, reduce the likelihood that an investor will receive the principal and interest payments that such investor expects to receive on a corresponding Note. Moreover, the additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the borrower. To the extent that the borrower has or incurs other indebtedness and cannot pay all of his or her indebtedness, the borrower may choose to make payments to other creditors, rather than to PFL.
To the extent borrowers incur other indebtedness that is secured, such as a mortgage, a home equity line or an auto loan, the ability of the secured creditors to exercise remedies against the assets of the borrower may impair the borrower’s ability to repay the Borrower Loan on which an investor’s Note is dependent for payment. Borrowers may also choose to repay obligations under secured indebtedness or other unsecured indebtedness before repaying Borrower Loans because there is no collateral securing the Borrower Loans. An investor will not be notified if a borrower incurs additional debt after the date a loan listing is posted.
Marketplace lending is a new lending method and our marketplace has a limited operating history. Borrowers may not view or treat their obligations to PFL as having the same significance as loans from traditional lending sources.
The investment return on the Notes depends on borrowers fulfilling their payment obligations in a timely and complete manner under the corresponding Borrower Loan. Borrowers may not view marketplace lending obligations originated through our marketplace as having the same significance as other credit obligations arising under more traditional circumstances. If a borrower neglects his or her payment obligations on a Borrower Loan upon which payment of an investor’s Note is dependent or chooses not to repay his or her Borrower Loan entirely, such investor may not be able to recover any portion of the investment in a Note.
In general,the Borrower Loans do not contain any cross-default or similar provisions. If a borrower defaults on any of his or her other debt obligations, our ability to collect on the Borrower Loan on which an investor’s Note is dependent for payment may be substantially impaired. The Borrower Loans do not contain cross-default provisions. A cross-default provision makes a default under certain debt of a borrower an automatic default on other debt of that borrower. Because the Borrower Loans do not contain cross-default provisions, a Borrower Loan will not be placed automatically in default upon that borrower’s default on any of the borrower’s other debt obligations. If a borrower defaults on debt obligations owed to a third party and continues to satisfy the payment obligations under the Borrower Loan, the third party may seize the borrower’s assets or pursue other legal action against the borrower before the borrower defaults on the Borrower Loan, which may affect our ability to collect from the borrower when or if the Borrower Loan becomes delinquent.
Borrowersmay seek the protection of debtor relief under federal bankruptcy or state insolvency laws, which may result in the nonpayment of an investor’s Notes. Borrowers may seek protection under federal bankruptcy law or similar laws. If a borrower files for bankruptcy (or becomes the subject of an involuntary petition), a stay will go into effect that will automatically put any pending collection actions on the Borrower Loan on hold and prevent further collection action absent bankruptcy court approval. If we receive notice that a borrower has filed for protection under the federal bankruptcy laws, or has become the subject of an involuntary bankruptcy petition, we will put the borrower’s account into “bankruptcy status.” When this occurs, we terminate automatic monthly ACH debits on Borrower Loans and we will not undertake collection activity without bankruptcy court approval. Whether any payment will ultimately be made or received on a Borrower Loan after a bankruptcy status is declared depends on the borrower’s particular financial situation. In most cases, however, unsecured creditors such as PFL receive nothing, or only a fraction of their outstanding debt and, as a result, an investor who has purchased a corresponding Note may receive none or very little of the unpaid principal and interest payable on the Note.
Federal law entitles borrowers who enter active military service to an interest rate cap and certain other rights that may inhibit the ability to collect on Borrower Loans and reduce the amount of interest paid on the corresponding Notes.
Federal law provides borrowers on active military service with rights that may delay or impair our ability to collect on a Borrower Loan corresponding to an investor’s Note. The Servicemembers Civil Relief Act (“SCRA”)
requiresand other similar state laws require that the interest rate on preexisting debts, such as Borrower Loans, be set at no more than 6% while the qualified service member or reservist is on active
duty. A holder of a Note that is dependent on such a Borrower Loan for payment will not receive the difference between 6% and the original stated interest rate for the Borrower Loan during any such period. The SCRA also permits courts to stay proceedings and the execution of judgments against service members and reservists on active duty, which may delay recovery on any Borrower Loans in default, and, accordingly, payments to investors on the corresponding Notes.
Beginning October 3, 2016, the Military Lending Act (“MLA”) prohibits requiring covered borrowers, which include active military servicemembers and their dependents, to waive the right to legal recourse or to submit to arbitration. This may present a greater risk of litigation costs related to covered borrowers.
If there are any amounts under such a Borrower Loan still due and owing to PFL after the final maturity of the investors’ corresponding Notes, PFL will have no further obligation to make payments to the investors on such Notes, even if it receives payments on the Borrower Loan after the final maturity of such Notes. We do not take military service into account in assigning a Prosper Rating to loan listings. In addition, as part of the borrower registration process, we do not request borrowers to confirm if they are qualified service members or reservists within the meaning of the
SCRA.SCRA or the MLA. See “Item 1. Government Regulation” for more information.
As of December 31,
2015, forty2017, ninety Borrower Loans, with a total outstanding balance of
$461,000,$770 thousand are subject to the SCRA.
The death ofa borrower may substantially impair an investor’s ability to recoup the full purchase price of a Note or to receive the interest payments that such investor expects to receive on the Note. If a borrower dies while his or her Borrower Loan is still outstanding, generally, we will seek to work with the executor of the borrower’s estate to obtain repayment of the loan. However, the borrower’s estate may not contain sufficient assets to repay the loan, or the related executor or trustee may prioritize repayment of other creditors. In addition, if a borrower dies near the end of the term of his or her Borrower Loan, it is unlikely that any further payments will be made on the corresponding Notes because the time required for the probate of the borrower’s estate will probably extend beyond the final maturity date of the Notes.
RISKS INHERENT IN INVESTING IN THE NOTES
The Notes are special, limited obligations of PFL only and are not directly secured by any collateral or guaranteed or insured by PMI or any third party.
The Notes will not represent an obligation of borrowers, PMI or any other party except PFL, and are special, limited obligations of PFL. The Notes are not guaranteed or insured by PMI, any governmental agency or instrumentality, or any third party. Although PFL has granted the indenture trustee, for the benefit of the Note holders, a security interest in the Borrower Loans corresponding to the Notes, the payments and proceeds that PFL receives on such Borrower Loans, the bank account in which such Borrower Loan payments are deposited, and the accounts in which investors’ funding amounts are deposited, the Note holders do not themselves have a direct security interest in the Borrower Loans or the right to payment thereunder. If an event of default under the Amended and Restated Indenture were to occur, the Note holders would be dependent on the indenture trustee’s ability to realize on the collateral and make payments on the Notes in the manner contemplated by the Amended and Restated Indenture. In addition, although PFL will take all actions that it believes are required under applicable law to perfect the security interest of the indenture trustee in the collateral, if its analysis of the required actions is incorrect or if it fails timely to take any required action, the indenture trustee’s security interest may not be effective and holders of the Notes could be required to share the collateral (and any proceeds thereof) with PFL’s other creditors, or, if a bankruptcy court were to order the substantive consolidation of PMI and PFL (as described below), PMI’s creditors.
PFLis not obligated to repurchase Notes or indemnify Note holders except in limited circumstances. PFL is only obligated to repurchase Notes or indemnify holders of Notes in limited circumstances. These circumstances include if (i) a material payment default under the corresponding Borrower Loan occurs as a result of verifiable identify theft; (ii) we include a Prosper Rating in a listing that is different from the Prosper Rating we calculated, or we calculate the Prosper Rating incorrectly; or (iii) if any errors in
Recurring Investment (formerly known as Auto Quick
Invest) or Auto Invest cause an investor to purchase a Note from PFL that such investor would not otherwise have purchased or that differs materially from the Note, in which cases PFL also has the option to cure such error. PFL is not required to repurchase Notes or indemnify holders of Notes, however, if the Note holder’s investment is not realized in whole or in part due to fraud other than identity theft, or due to other false or inaccurate statements or omissions of fact in a loan listing, whether in credit data, borrower representations or similar indicia of borrower intent and ability to repay the loan. Further, PFL is under no obligation to repurchase a Note or indemnify any holder of Notes if a correctly-determined Prosper Rating fails to accurately predict the actual losses on a Borrower Loan.
PFLmight incur indemnification and repurchase obligations that exceed its projections, in which case it may not have sufficient capital to meet its indemnification and repurchase obligations.
PFL believes its
fee incomeavailable liquidity will be sufficient to meet its reasonably anticipated indemnification and repurchase obligations. In determining its expected
capitalliquidity needs with respect to indemnification and repurchase obligations, PFL considers the history of such
obligations incurred by it and PMI. Nonetheless, there can be no assurance that if PFL is obligated to repurchase a Note or indemnify a Note holder, that it will be able to meet its repurchase or indemnification obligations. If PFL is unable to meet its indemnification and repurchase obligations with respect to a Note, the investor in such Note may lose all of such investor’s investment in the Note.
Ourmarketplace allows a borrower to prepay a Borrower Loan at any time without penalty. Borrower Loan prepayments will extinguish or limit an investor’s ability to receive additional interest payments on a Note. Borrower Loan prepayment occurs when a borrower decides to pay some or all of the principal amount on a Borrower Loan earlier than originally scheduled. Borrowers may decide to prepay all or a portion of the remaining principal amount due under a Borrower Loan at any time without penalty. In the event of a prepayment of the entire remaining unpaid principal amount of a Borrower Loan, each of the holders of the Notes corresponding to the Borrower Loan will receive his or her share of such prepayment but further interest will not accrue on such Borrower Loan or on such Note after the date on which the payment is made. If the borrower prepays a portion of the remaining unpaid principal balance, the term of the Borrower Loan will not change, but interest will cease to accrue on the prepaid portion. If a borrower prepays a Borrower Loan in whole or in part, an investor will not receive all of the interest payments that such investor originally expected to receive on the Note corresponding to such Borrower Loan. In addition, such investor may not be able to find a similar rate of return on another investment at the time at which the Borrower Loan is prepaid. Prepayments are subject to PFL’s servicing fee, even if the prepayment occurs immediately after issuance of a Note.
Prevailing interest rates may change during the term of the Notes. If this occurs, investors may receive less value from the purchase of Notes in comparison to other ways they may invest their money. Additionally, borrowers may prepay their Borrower Loans due to changes in interest rates, and investors may not be able to redeploy the amounts received from prepayments in a way that offers the return expected from the Notes. The Borrower Loans on which the Notes are dependent for payment bear fixed, not floating, rates of interest. If prevailing interest rates increase, the interest rates on Notes investors purchase might be less than the rate of return they could earn if they had invested the purchase price in a different investment.
Wemay not set appropriate interest rates for Borrower Loans. We set interest rates for all Borrower Loans based on Prosper Ratings, as well as additional factors such as Borrower Loan terms, the economic environment and competitive conditions. If we set interest rates for Borrower Loans too low, investors may not be compensated appropriately for the level of risk that they are assuming in purchasing Notes, while setting the interest rate too high may increase the risk of non-payment. In either case, a failure by us to set rates appropriately may adversely impact the ability of investors to receive returns on their Notes that are commensurate with the risks they have assumed in acquiring such Notes.
The Notes will not be listed on any securities exchange, will not be transferable except through the Foliofn Note Trader platform, and can be held only by our registered investors. Investors should be prepared to hold the Notes they purchase until they mature.
The Notes will not be listed on any securities exchange and may onlycan be held only by our registeredPFL’s investors. TheFurther, no trading platform for the transfer of Notes will not be transferable except through the Note Trader platform operated and maintained by FOLIOfn Investments, Inc. (the “Foliofn Note Trader platform”),currently exists and there can be no assurance that a markettrading platform for the transfer of Notes will continue to develop onin the Foliofn Note Trader platform, or that the Foliofn Note Trader platform will continue in operation.future. Therefore, investors should be prepared to hold the Notes they purchase until maturity.
The Notes and PMI Management Rights will not be listed on any securities exchange and all Notes and PMI Management Rights must be held by PFL's investors. Further, in connection with Prosper’s termination of its relationship with FOLIOfn Investments, Inc. on October 31, 2016, as of 5:30 p.m. (PST) on October 27, 2016, a trading platform for the transfer of Notes and PMI Management Rights no longer exists. While we may, in our sole discretion, permit the establishment of another platform on which a secondary market may be made with respect to the Notes, there can be no assurance a trading platform for the Notes and PMI Management Rights will develop in the future. Therefore, note purchasers must be prepared to hold their Notes and PMI Management Rights to maturity.
If an investor chooses to post a Note for sale on the Foliofn Note Trader platform, he or she may not realize the expected return on his or her investment in the Note.
The ability to sell a Note on the Foliofn Note Trader platform does not guarantee that an investor will be able to find another investor willing to buy the Note at a price acceptable to the selling investor, or at all. If the borrower becomes delinquent in payments under the corresponding Borrower Loan upon which an investor’s Note is dependent for payment, such investor’s ability to sell the Note on the Foliofn Note Trader platform will be substantially impaired. The investor may have to offer the Note for sale at a substantial discount, and there is no guarantee that such investor will receive the expected value of the Note or any value at all. In addition, a Note offered for sale on the Foliofn Note Trader platform must be purchased in its entirety by a single investor, and Notes with a high outstanding principal balance may be more difficult to sell with or without a discount due to the smaller number of investors with the ability to purchase such Notes. Also, investors may be less willing to bid for and purchase a Note if prevailing interest rates have changed or other investing activities have proven more attractive while the selling investor has held the Note.
The U.S.
federal income tax consequences of an investment in the Notes are uncertain.
There are no statutory provisions, regulations, published rulings or judicial decisions that directly address the characterization of the Notes or instruments similar to the Notes for U.S. federal income tax purposes. However, although the matter is not free from doubt because payments on the Notes are dependent on payments on the corresponding Borrower Loan, PFL treats the Notes as debt instruments that have original issue discount (“OID”) for U.S. federal income tax purposes. Where required, PFL intends to file information returns with the U.S. Internal Revenue Service (“IRS”) in accordance with such treatment unless there is a change or clarification in the law, by regulation or otherwise, that would require a different characterization of the Notes. Investors should be aware, however, that the IRS is not bound by PFL’s characterization of the Notes and the IRS or a court may take a different position with respect to the Notes’ proper characterization. For example, the IRS could determine that, in substance, each investor owns a proportionate interest in the corresponding Borrower Loan for U.S. federal income tax purposes
or, for example, the IRS could instead treat the Notes as a different financial instrument (including an equity interest or a derivative financial instrument). Any different characterization could significantly affect the amount, timing, and character of income, gain or loss recognized in respect of a Note. For example, if the Notes are treated as PFL’s equity, (i) PFL would be subject to U.S. federal income tax on income, including interest, accrued on the corresponding Borrower Loans but would not be entitled to deduct interest or OID on the Notes, and (ii) payments on the Notes would be treated by the Note holder for U.S. federal income tax purposes as dividends (that may be ineligible for reduced rates of U.S. federal income taxation or the dividends-received deduction) to the extent of PFL’s earnings and profits as computed for U.S. federal income tax purposes. A different characterization may significantly reduce the amount available to pay interest on the Notes. Investors are strongly advised to consult their own tax advisor regarding the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership, and disposition of the Notes (including any possible differing treatments of the Notes).
PFL’s ability to pay an investor principal and interest on a Note may be affected by its ability to match the timing of its income and deductions for U.S. federal income tax purposes. Investors should be aware that PFL’s ability to pay principal and interest on a Note may be affected by its ability, for U.S. federal income tax purposes, to match the timing of income it receives from a corresponding Borrower Loan that it holds and the timing of deductions that it may be entitled to in respect of payments made on the Notes that it issues. For example, if the Notes are treated as contingent payment debt instruments for U.S. federal income tax purposes but the corresponding Borrower Loans are not, there could be a potential mismatch in the timing of PFL’s income and deductions for U.S. federal income tax purposes, and PFL’s resulting tax liabilities could affect its ability to make payments on the Notes.
Our participation in the funding of Borrower Loans could be viewed as creating a conflict of interest.
As is the practice with other marketplace lending companies, from time to time, we may fund portions of qualified loan requests in our marketplace and hold any Notes purchased as a result of such funding for our own individual accounts. Even though we will participate in funding Borrower Loans listed in our marketplace under the same terms and conditions and through the use of the same information that is made available to other potential investors in our marketplace, such participation may be perceived as involving a conflict of interest. For example, our funding of a Borrower Loan may cause the loan to fund, and in some cases, fund faster, than it would fund in the absence of our participation, which could benefit us to the extent that it ensures that
one or the other of usProsper generates the revenue associated with the loan.
During the year ended December 31,
2015,2017, we purchased
$787,000$297,000 in Notes for investment.
RISKS RELATED TO PFL AND PMI, OUR MARKETPLACE AND OUR ABILITY TO SERVICE THE NOTES
Our systems and marketplace utilize complex programs, algorithms and inputs, and if they contain errors, our business could be adversely affected.
Our marketplace utilizes complex programs, algorithms and inputs. We depend on these programs, algorithms and inputs to store, retrieve, process and manage data, as well as to provide marketplace features such as the Prosper Rating, estimated loss rates, estimated returns, and individual note, note portfolio and platform wide performance data. Errors or other design defects within these programs, algorithms and inputs may result in a negative experience for borrowers and investors, delay introductions of new features or enhancements, impact the information displayed on our website, or result in negative publicity and unfavorable media coverage, harm to our reputation, litigation, regulatory inquiries or proceedings, loss of or damage to our relationships with borrowers or investors or loss of revenue or liability for damages, any of which could adversely affect our business and financial results. In April 2017, we became aware of an error in the manner in which we calculated the annualized net return and seasoned annualized net return numbers provided to note investors. The error did not affect any other part of note investors’ accounts, nor did it affect any other aspects of the platform, including the receipt and distribution of loan payments, deposits, monthly statements or tax documentation, or the note and loan level information provided to investors.
Arrangements for back-up servicing are limited. If PMI fails to maintain operations or the Administration Agreement is rejectedor terminated (in bankruptcy or otherwise), investors may experience a delay and increased cost in respect of their expected principal and interest payments on Notes, and PFL may be unable to collect and process repayments from borrowers.
If the Administration Agreement (or the loan servicing provisions thereof) are terminated for any reason (whether as a result of PMI’s bankruptcy, non-performance or otherwise), PFL would attempt to transfer the loan servicing obligations on the Borrower Loans and Notes to a third party pursuant to its contractual agreements with investors.
PFL has entered into a back-up servicing agreement with a loan servicing company that is willing and able to transition servicing responsibilities from PMI. There can be no assurance, however, that this back-up servicer will be able to adequately perform the servicing of the outstanding Borrower Loans and Notes. If this back-up servicer assumes the servicing of the Borrower Loans and Notes, the back-up servicer may impose additional servicing fees (up to the maximums we have negotiated), reducing the amounts available for payments on the Notes. Additionally, transferring these servicing obligations to the back-up servicer may result in delays in the processing of collections on Borrower Loans and information with respect to amounts owed on Borrower Loans. If the back-up servicer is not able to service the Borrower Loans and Notes effectively, investors’ ability to receive principal and interest payments on their Notes may be substantially impaired, even if their portfolio of Notes is well diversified and the corresponding Borrower Loans are paying on schedule.
In addition, it is unlikely that the back-up servicer would be able to perform functions other than servicing the outstanding Borrower Loans and Notes, such as facilitating the creation of new Borrower Loans through our marketplace,
or managing PFL’s marketing
efforts or maintaining the relationship with FOLIOfn Investments, Inc. necessary to ensure continued operation of the Foliofn Note Trader platform.efforts. PFL believes that it could find one or more other parties who could perform these and any other functions necessary to fully operate our marketplace in the absence of PMI. However, this process, and any related onboarding of such party or parties,
maywill take
some time.
Any such delay or impairment that did not affect existing Note holders, because PFL or its back-up servicer proves able to continue servicing outstanding Borrower Loans and Notes, could nonetheless delay PFL’s ability to facilitate the origination of new Borrower Loans and issue new Notes through our marketplace, which could adversely affect PFL’s finances and user relationships.
A decline in economic conditions may adversely affect our customers, which may negatively impact our business and results of operations. As a lending marketplace, we believe our customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
In the past, a
A relatively small number of investors
have providedprovide the funding for a large percentage of all Borrower Loans
fundedoriginated through our marketplace.
In the past, a
A relatively small number of investors have providedprovide the funding for a large percentage of all Borrower Loans fundedoriginated through our marketplace. If these investors cease or significantly decrease their funding ofinvestment in Borrower Loans through our marketplace and PFL has beenis unable to attract sufficient investor purchase commitments from new and existing investors, then our business and results of operations may be adversely affected.
Our business could be adversely affected by a weakening market for securities backed by consumer assets.
PFL is involved in the securitization market through its business of selling loans to investors who, in turn, sell asset backed securities based on accumulated loan portfolios. If the market for asset backed securities based on consumer assets weakens, investors may cease or significantly decrease their funding of Borrower Loans through our marketplace and if PFL has been unable to attract sufficient investor purchase commitments from new and existing investors, then our business and results of operations may be adversely affected.
The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.
The consumer lending market is competitive and rapidly changing. With the introduction of new technologies and the influx of new entrants, we expect competition to persist and intensify in the future, which could harm our ability to increase volume in our marketplace.
Prosper’s principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other marketplace lending platforms. Competition could result in reduced volumes, reduced fees or the failure of our marketplace to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, in the future Prosper may experience new competition, including from companies possessing large, existing customer bases, substantial financial resources and established distribution channels. If any of these companies or any major financial institution decided to compete with our marketplace lending business, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to achieve the same results would be challenged and our operating results could be harmed.
Most of our current or potential competitors may have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their marketplaces and distribution channels. Our potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and broader customer relationships than we have. These competitors may be better able to develop new products, to respond quickly to new technologies and to undertake more extensive marketing campaigns. Our industry is driven by constant innovation. If we are unable to compete with such companies and meet the need for innovation, the use of our marketplace could stagnate or substantially decline.
Although PFL has been organized in a manner that is intended to minimize the likelihood that it will become subject to a bankruptcy proceeding, if this were to occur, the rights of the Note holders could be uncertain, and payments on the Notes may be limited,suspended or stopped. The recovery, if any, of a holder of a Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Although PFL has been organized and is operated in a manner that is intended to minimize the likelihood that it will become subject to a bankruptcy or similar proceeding, if this were to occur, the recovery, if any, of a holder of a Note may be substantially delayed in time (for example, due to the imposition of a stay on payments by the bankruptcy court) and may be substantially less in amount than the principal and interest due and to become due on the Note even if a Note holder’s portfolio of Notes is well diversified and the Borrower Loans are paying on schedule. Further, although PFL has granted the indenture trustee, for the benefit of the Note holders, a security interest in all of the Borrower Loans, in all payments and proceeds it receives on the corresponding Borrower Loans and in the bank account in which the Borrower Loan payments are deposited, the holders of the Notes would still be subject to risks associated with PFL’s insolvency, bankruptcy or a similar proceeding. The commencement of the bankruptcy or similar proceeding may, as a matter of law, prevent PFL from making regular payments on the Notes, even if the funds to make such payments are available. Because the indenture trustee would be required to enforce its security interest in the Borrower Loans in a bankruptcy or similar proceeding, the indenture trustee’s ability to make payments under the Notes would be delayed, which may effectively reduce the value of any recovery that a holder of a Note may receive (and no such recovery can be assured) by the time any recovery is available.
If PFL becomes subject to a bankruptcy or similar proceeding, borrowers may delay payments or cease making payments at all. Borrowers may delay or suspend making payments to PFL because of the uncertainties occasioned by its becoming subject to a bankruptcy or similar proceeding, even if the borrowers have no legal right to do so, and such delay would reduce, at least for a time, the funds that might otherwise be available to pay the Notes corresponding to those Borrower Loans.
If PFL becomes subject to a bankruptcy or similar proceeding, interest accruing on the Notes upon and following such bankruptcy or similar proceeding may not be paid. In a bankruptcy or similar proceeding for PFL, interest accruing on the Notes during the proceedings may not be part of the allowed claim of a holder of a Note. If the Note holder receives a recovery on the Note (and no such recovery can be assured), any such recovery may be based on, and limited to, the Note holder’s claim for principal and for interest accrued up to the date of the bankruptcy or similar proceeding, but not thereafter. Because a bankruptcy or similar proceeding may take months or years to complete, a claim based on principal and on interest only up to the start of the bankruptcy or similar proceeding may be substantially less than a claim based on principal and on interest through the end of the bankruptcy or similar proceeding.
If PFL becomes subject to a bankruptcy or similar proceeding, a holder of a Note may not have any priority right to payment fromthe corresponding Borrower Loan, may not have any right to payment from funds in the deposit account, and may not have any ability to access funds in the investors’ funding accounts (the “FBO Funding accounts”).
If PFL failed to perfect the security interest properly, investors may be required to share the proceeds of the Borrower Loans upon which their Notes are dependent for payment with PFL’s other creditors, including holders of other Notes or Borrower Loans. To the extent that proceeds of the Borrower Loans would be shared with PFL’s other creditors, any secured or priority rights of such other creditors may cause the proceeds to be distributed to such other creditors before any distribution is made to investors on the corresponding Notes.
If a payment is made on a Borrower Loan corresponding to a Note before PFL’s bankruptcy or similar proceeding is commenced, and those funds are held in the deposit account PFL maintains with Wells Fargo to collect borrower payments and have not been used by PFL to make payments on the Note as of the date the bankruptcy or similar proceeding is commenced, there can be no assurance that PFL will or will be able to use such funds to make payments on such Note. Other creditors of PFL (including
holders of other Notes or Borrower Loans) may be deemed to have rights to such funds or interests in the deposit account and monies credited thereto that are equal to or greater than the rights of the holder of such Note.
Although PFL believes that amounts funded by investors into the FBO Funding accounts should not be subject to claims of its creditors other than the investors for whose benefit the funds are held, the legal title to the FBO Funding accounts, and the attendant right to administer the FBO Funding accounts, would be property of PFL’s bankruptcy estate. As a result, if PFL were to file for bankruptcy protection, the legal right to administer the funds in the FBO Funding accounts would vest with the bankruptcy trustee or debtor in possession. In that case, while neither PFL nor its creditors should be able to reach those funds, the indenture trustee or the investors may have to seek a bankruptcy court order lifting the automatic stay and permitting them to withdraw their funds. Investors may suffer delays in accessing their funds in the FBO Funding accounts as a result. Moreover, U.S. Bankruptcy Courts have broad powers at law and in equity and, if PFL has failed to properly segregate or handle investors’ funds, a bankruptcy court could determine that some or all of such funds were beneficially owned by PFL and should therefore be made available to PFL’s creditors generally.
In a bankruptcy or similar proceeding of PFL, a holder of a Note may be delayed or prevented from enforcing PFL’s repurchase obligations with respect to such Note. In a bankruptcy or similar proceeding of PFL, any right of a Note holder to require PFL to repurchase the Note or indemnify such Note holder under the circumstances set forth in the investor registration agreement or the Note might not be enforceable, and such holder’s claim for such repurchase may be treated less favorably than a general unsecured obligation of PFL.
Although PFL has been organized in a manner that is intended to prevent it from being substantively consolidated with PMI in the event of PMI’s bankruptcy, if PFL were substantively consolidated in this manner, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped. The recovery, if any, of a holder on a Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Although PFL has been organized and is operated in a manner that is intended to prevent it from being substantively consolidated with PMI in the event of PMI’s bankruptcy, if PMI became subject to a bankruptcy or similar proceeding and PFL were substantively consolidated with PMI, the risks described in the immediately preceding risk factors regarding (i) payment delays, (ii) uncollectability of interest accrued during the bankruptcy proceeding, (iii) being subordinated to the interests of PFL’s other creditors, and (iv) the indenture trustee’s inability to access funds in the deposit account or the FBO Funding accounts, would all be present and, in addition, the same considerations would apply in relation to the claims of creditors of PMI, including that such creditors of PMI may be determined to have perfected security interests or unsecured claims that take precedence over or are at least equal in priority to those of creditors of PFL (including holders of Notes).
In the event of a bankruptcy or similar proceeding of PMI, the ability of PFL or its back-up servicer to collect on Borrower Loans and operate our marketplace may be impaired to the detriment of the Note holders. In the event of a bankruptcy or similar proceeding of PMI, (i) the implementation of back-up servicing arrangements may be delayed or prevented, and (ii) PMI’s ability to transfer its servicing obligations to a back-up servicer, or to transfer its other corporate and marketplace administration and marketing services to third parties may be limited and subject to the approval of the bankruptcy court or other presiding authority. The bankruptcy process may delay or prevent the implementation of back-up servicing, which may impair the collection on Borrower Loans to the detriment of holders of the Notes.
PMI owns and did not transfer to PFL the computer hardware that it uses to host and maintain the website or agreements with third parties relating to the hosting and maintenance of the website. Although PMI’s retention of such hardware and agreements should not bear on a bankruptcy court’s analysis of the legal separateness of PMI and PFL (or their respective assets and liabilities), the cessation of or substantial reduction of the day-to-day operations of PMI (because of or during its bankruptcy or otherwise) would materially impair and delay the ability of PFL or a back-up service provider to retrieve data and information in the possession of PMI and to operate our marketplace or elements thereof relevant to Borrower Loan and Note servicing.
PMI, in its capacity as servicer, has the authority to waive or modify the terms of a Borrower Loan without the consent of the Note holders.
Pursuant to the Administration Agreement, PMI is obligated to use commercially reasonable efforts to service and collect on the Borrower Loans in accordance with industry standards. Subject to that obligation, the Administration Agreement grants PMI the authority to (i) waive or modify any non-material term of a Borrower Loan, (ii) consent to the postponement of strict compliance with any such term, and (iii) in any manner grant a non-material indulgence to any borrower. In addition, if a Borrower Loan is in default,
or PMI determines a default is reasonably foreseeable or that such action is consistent with its servicing obligation, the Administration Agreement grants PMI the authority to waive or modify a material term of a Borrower Loan, to accept payment of an amount less than the principal balance in final satisfaction of a Borrower Loan and to grant any indulgence to a borrower, providedthat PMI has reasonably and prudently determined that such action will not be materially adverse to the interests of the relevant Note holders. If PMI approves a modification to the terms of any Borrower Loan, it must promptly notify the corresponding Note holders by e-mail of the material terms of such modification and the effect such modification will have on their Notes.
PMI has incurred operating losses since inception and may continue to incur net losses in the future, which could adversely affect PFL’s ability to make payments on the Notes. PMI has incurred operating losses since its inception and it may continue to incur net losses in the future. For the twelve months ended December 31,
20152017 and
2014,2016, PMI had cash
flowsinflows from operations of
$5.4$1.1 million and
negative $4.7cash outflows from operations of $62.7 million, respectively. Additionally, from its inception through December 31,
2015,2017, PMI had an accumulated deficit of
$147$380.8 million.
PMI has financed its operations to date primarily with proceeds from the sale of equity securities. At December 31,
2015,2017, Prosper had approximately
$66.3$45.8 million unrestricted cash and cash equivalents and
$73.2$53.1 million available for sale investments at fair value. PMI is dependent upon raising additional capital or debt financing to fund its
current operating
plan.plan if it cannot generate sufficient positive cash flows from operations. PMI’s failure
to obtain sufficient debt and equity financing and, ultimately, to achieve profitable operations,
and positive cash flow from operations
and obtain sufficient debt or equity financing could adversely affect its ability to perform its obligations under the Administration Agreement and, in such event, PFL’s ability to continue to make payments on the Notes could be materially impaired.
Although our business has grown, we may be unable to manage our growth effectively and meet the demands that such growth places on our facilities, employees and infrastructure. As the number of borrowers, investors and Borrower Loans originated through our marketplace increases, PMI will need to increase its facilities, personnel and infrastructure in order to continue performing effectively its obligations under the Administration Agreement and to accommodate the effects that such growth will have on our servicing and marketplace needs. PMI must constantly add new hardware and update its software and our marketplace, expand customer support services, and add new employees to maintain the operations of our marketplace as well as to satisfy its servicing obligations on the Borrower Loans and the Notes and its other obligations under the Administration Agreement. If PMI is unable to increase the capacity of our marketplace and maintain the necessary infrastructure to perform its duties under the Administration Agreement, PFL, or one or more other third-party service providers engaged by PFL, will have to perform the duties otherwise performed by PMI, and investors may experience delays in receipt of payments on their Notes and periodic downtime of our marketplace.
PFL hasa limited operating history. PFL is a recently formed limited purpose vehicle with a limited operating history. Under the Administration Agreement, PFL receives a license fee from PMI for granting PMI a non-exclusive, worldwide license to access and use our marketplace. In addition,
PFL earns servicing fees in relation to the servicing of the Borrower Loans and Notes that it retains from collections on the Borrower Loans. PFL believes this fee income is sufficient to cover its reasonably anticipated obligations. While PFL believes that it is adequately capitalized to meet its foreseeable obligations, and that its fee income is sufficient to meet its ongoing operating costs, its financial resources are limited and could prove to be insufficient. In addition, PFL has no employees and relies on PMI, as servicer, or other third-party service providers, to perform most of its day-to-day operations. The lack of PFL’s own employees, its limited operating history, and capitalization that is less than that of PMI could make it difficult for PFL to operate at a level that will be sustainable.
The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.
The consumer lending market is competitive and rapidly changing. With the introduction of new technologies and the influx of new entrants, we expect competition to persist and intensify in the future, which could harm our ability to increase volume in our marketplace.
Prosper’s principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other marketplace lending platforms, including LendingClub. Competition could result in reduced volumes, reduced fees or the failure of our marketplace to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, in the future Prosper may experience new competition, including from companies possessing large, existing customer bases, substantial financial resources and established distribution channels.
If any of these companies or any major financial institution decided to compete with our marketplace lending business, acquire one of our existing competitors or form
a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.
Most of our current or potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their marketplaces and distribution channels. Our potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and broader customer relationships than we have. These competitors may be better able to develop new products, to respond quickly to new technologies and to undertake more extensive marketing campaigns. Our industry is driven by constant innovation. If we are unable to compete with such companies and meet the need for innovation, the use of our marketplace could stagnate or substantially decline.
If
PFL fails to promote and maintain its brand in a cost-effective manner, it may lose market share and its revenue may decrease. If PFL fails to successfully promote and maintain its brand, it may lose its existing users to competitors or be unable to attract new users, which would cause its revenue to decrease and may impair its ability to maintain our marketplace. To succeed, PFL must increase transaction volumes in our marketplace by attracting a large number of borrowers and investors in a cost-effective manner, many of whom have not previously participated in marketplace lending. If PFL is not able to attract qualified borrowers or sufficient investor purchase commitments, it will not be able to increase its transaction volumes. PFL believes that developing and maintaining awareness of its brand in a cost-effective manner is critical to achieving widespread acceptance of our marketplace and attracting new borrowers and investors. Furthermore, it believes that the importance of brand recognition will increase as competition in the marketplace lending industry increases. Successful promotion of PFL’s brand will depend largely on the effectiveness of marketing efforts and the user experience on our marketplace. There can be no guarantee, however, that PFL’s brand promotion activities will yield increased revenues or prevent PFL’s revenues from decreasing.
The proprietary technology that makes operation of our marketplace possible is not protected by any patents. It may be difficult and costly for PFL to protect its intellectual property rights in relation thereto, or to continue to develop or obtain new technologies, which could adversely affect its ability to operate competitively. On February 1, 2013, PMI transferred ownership of the marketplace, including the proprietary technology and all of the rights related to the operation of the marketplace, to PFL. PFL’s ability to maintain our marketplace depends, in part, upon this proprietary technology. We intend to vigorously protect our proprietary interests in such technology. Despite our best efforts, however, we may not protect the proprietary technology effectively, which would allow competitors to duplicate our products and adversely affect our ability to compete. A third party may attempt to reverse engineer or otherwise obtain and use the proprietary technology without PFL’s consent. In addition, our marketplace may infringe upon claims of third-party patents and PFL or PMI may face intellectual property challenges from such other parties. PFL or PMI may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes. Furthermore, the technology may become obsolete, and there is no guarantee that PFL will be able to successfully develop, obtain or use new technologies to adapt our marketplace to compete with other marketplace lending companies. If PFL cannot protect the proprietary technology embodied in and used by our marketplace from intellectual property challenges, or if our marketplace becomes obsolete, PFL’s ability to maintain our marketplace and perform its servicing obligations could be adversely affected and, in such event, its ability to continue to make payments on the Notes could be materially impaired.
PFL relies on a third-party commercial bank to process transactions. If PFL is unable to continue utilizing these services, its business and ability to service the Notes may be adversely affected. Because PFL is not a bank, it cannot belong to or directly access the Automated Clearing House (ACH) payment network. As a result, it currently relies on an FDIC-insured depository institution to process its transactions. If PFL cannot continue to obtain such services from this institution or elsewhere, or if it cannot transition to another processor quickly, its ability to process payments will suffer and investors’ ability to receive principal and interest payments on the Notes will be delayed or impaired.
If our systems are breached or otherwise subjected to unauthorized access, PFL’s users’ secure information may be stolen, our reputations may be harmed, and we may be exposed to liability.
As with any entity with a significant Internet presence, we and the third party we use for website hosting occasionally have experienced cyber-attacks, attempts to breach our systems and other similar incidents, none of which have been successful. Our marketplace stores PFL’s users’ bank information and other personally-identifiable sensitive data. Any accidental or willful security breaches or other unauthorized access could cause users’ secure information to be stolen and used for criminal purposes. Security breaches or unauthorized access to secure information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee
error, malfeasance or otherwise, or if design flaws in the relevant software are exposed and exploited,
and, as a result, a third party or disaffected employee obtains unauthorized access to any investor or borrowers’ data, PFL’s relationships with users will be severely damaged, and it (or PMI) could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause users to lose confidence in the effectiveness of PFL’s and PMI’s data security measures. Any security breach, whether actual or perceived, would harm our reputations, and PFL could lose users.
Any significant disruption in service in our marketplace or in PMI’s computer systems could adversely affect PMI’s ability to perform its obligations under the Administration Agreement. PMI’s system hardware is hosted in three hosting facilities in the western United States. The hosting and colocation providers do not guarantee that access to our marketplace or to PMI’s own systems will be uninterrupted, error-free or secure. The operation of our marketplace and PMI’s operation of its own systems depend on the hosting and colocation providers' ability to protect the relevant systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity or other environmental concerns, computer viruses or other attempts to do harm, criminal acts and similar events. If PMI’s arrangement with the hosting and colocation providers are terminated, or there is a lapse of service or damage to their facilities, PMI could experience interruptions in providing its services under the Administration Agreement, PFL could experience interruptions in the operations of our marketplace, and both could experience delays and additional expense in arranging new facilities. Any interruptions or delays in PMI’s performance of its services or in the functioning and accessibility of our marketplace, whether as a result of a hosting and colocation provider or other third-party error, PMI’s error, natural disasters or security breaches, whether accidental or willful, could harm PFL’s relationships with its users and its reputation. Additionally, in the event of damage or interruption, PMI’s insurance policies may not be sufficient for PMI to adequately compensate PFL for any losses that it may incur.
Our marketplace may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Our marketplace may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. If a “hacker” were able to infiltrate our marketplace, users would be subject to the increased risk of fraud or borrower identity theft and may experience losses on, or delays in the recoupment of amounts owed on, a fraudulently induced purchase of a Note. Additionally, if a hacker were able to access our secure files, he or she might be able to gain access to users’ personal information. While we have taken steps to prevent such activity from affecting our marketplace, if these measures are unsuccessful, the value of investors’ investment in the Notes could be adversely affected.
Competition for PMI’s employees is intense, and PMI may not be able to attract and retain the highly skilled employees it needs to perform under the Administration Agreement. Competition for highly skilled technical and financial personnel is extremely intense. PMI may not be able to hire and retain these personnel at compensation levels consistent with its existing compensation and salary structure. Many of the companies with which PMI competes for experienced employees have greater resources than PMI has and may be able to offer more attractive terms of employment.
In addition, PMI invests significant time and expense in training its employees, which increases their value to competitors who may seek to recruit them. If PMI fails to retain its employees, it could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to serve borrower and investors could diminish, resulting in a material adverse effect on PMI’s ability to perform its obligations under the Administration Agreement and, in such event, PFL’s ability to continue to make payments on the Notes could be materially impaired.
PMI’s growth could strain its personnel resources and infrastructure, and if PMI is unable to implement appropriate controls and procedures to manage its growth, this may adversely affect its ability to perform under the Administration Agreement. PMI’s growth in headcount and operations since its inception has placed, and will continue to place, to the extent that PMI is able to sustain such growth, a significant strain on its management and its administrative, operational and financial reporting infrastructure.
PMI’s success will depend in part on the ability of its senior management to effectively manage the growth it achieves. To do so, PMI must continue to hire, train and manage new employees as needed. If PMI’s new hires perform poorly, or if PMI is unsuccessful in hiring, training, managing and integrating new employees, or if PMI is not successful in retaining its existing employees, PMI’s ability to perform under the Administration Agreement may be impaired. To manage the expected growth of PMI’s operations and personnel, PMI will need to continue to improve its operational and financial controls and update its reporting procedures and systems. The addition of new employees and the system development that PMI anticipates will be necessary to manage its growth will increase PMI’s cost base, which will make it more difficult for PMI to offset any future revenue shortfalls by reducing expenses in the short term. If PMI fails to successfully manage its growth, it will be unable to execute its business plan and its ability to perform under the Administration Agreement may be impaired.
InvestorsInvestors in Notes will have no control over us and will not be able to influence our corporate matters.
PFL is not offering and will not offer its equity interests. Investors who purchase Notes offered through our marketplace will have no equity interest in either of PMI and PFL and no ability to vote on or influence our decisions. As a result, PMI, which owns all of PFL’s outstanding equity interests, will continue to have sole control over PFL’s governance matters, subject to the presence of PFL’s independent directors, whose consent will be required before PFL can take certain extraordinary actions, and subject to the limitations specified in PFL’s organizational documents and the Amended and Restated Indenture.
Events beyond our control may damage our ability to maintain adequate records, maintain our marketplace or perform the servicing obligations. If such events result in a system failure, investors’ ability to receive principal and interest payments on the Notes would be substantially harmed. If a catastrophic event resulted in a marketplace outage and physical data loss and/or affected our electronic data storage and back-up storage systems, PFL’s ability (and PMI’s ability as servicer under the Administration Agreement) to perform its servicing obligations would be materially and adversely affected. Such events include, but are not limited to, fires, earthquakes, terrorist attacks, natural disasters, computer viruses and telecommunications failures. In the event of any marketplace outage or physical data loss described in this paragraph, PFL cannot guarantee that investors would be able to recoup their investment in the Notes.
PMI recently completed its first two acquisitions in 2015, and in the future PMI may continue to enter into acquisitions that may be difficult to integrate, fail to achieve their strategic objectives, disrupt our business or divert management attention. PMI
recently completed its first two acquisitions
in 2015, and in the future PMI may continue to enter into acquisitions of businesses, technologies and products that it intends to complement its existing business, solutions, services and technologies. PMI cannot provide assurance that the acquisitions it has made or will make in the future will provide it with the benefits or achieve the results anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of risks, including: difficulties assimilating and retaining the management and other personnel, culture and operations of the acquired businesses; potential disruption of ongoing business and distraction of management; difficulties in maintaining acceptable standards, controls, procedures and policies, including integrating financial reporting and operating systems, particularly with respect to foreign and/or public subsidiaries; potential loss of existing or acquired strategic operating partners, users and customers following an acquisition; difficulties in integrating acquired technologies and products into our solutions and services; and unexpected costs and expenses resulting from the acquisition, and potential unknown liabilities associated with acquired businesses.
In addition, acquisitions may result in the incurrence of debt, acquisition-related costs and expenses, restructuring charges and write-offs. Acquisitions may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.
In October 2015, PMI acquired all of the outstanding shares of BillGuard, a company with Israeli operations. Because of PMI’s acquisition of a company that has a foreign subsidiary, PMI faces additional risks, including the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with the country. In January 2015, PMI acquired all of the limited liability company interests of American HealthCare Lending. The purchases of BillGuard and American HealthCare Lending have required and will continue to require significant time and attention during the acquisition and integration process. In addition, both of the acquired businesses will require significant cash investment from us to support their current growth targets.
PMI may enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If PMI fails to evaluate and execute acquisitions successfully, PMI may not be able to achieve its anticipated level of growth and its business and operating results could be adversely affected.
RISKS RELATING TO COMPLIANCE AND REGULATION
Our marketplace represents a novel program that must comply with regulatory regimes applicable to consumer credit transactions as well as with regulatory regimes applicable to securities transactions. The novelty of our marketplace means
compliance with various aspects of such laws is untested. Certain state laws generally regulate interest rates and other charges and require certain disclosures, and also require licensing for certain activities. In addition, other state laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of Borrower Loans in our marketplace. Our marketplace
ismay also
be subject to other laws, such as:
×
| the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans;
|
×
| the federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act;
|
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans;×
| the federal Fair Credit Reporting Act, which regulates the use, reporting and disclosure of information related to each applicant’s credit history;
|
the federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act;×
| the federal Fair Debt Collection Practices Act, which regulates debt collection practices by “debt collectors” and prohibits debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans;
|
the federal Fair Credit Reporting Act, which regulates the use, reporting and disclosure of information related to each applicant’s credit history;×
| state counterparts to the above consumer protection laws;
|
the federal Fair Debt Collection Practices Act, which regulates debt collection practices by “debt collectors” and prohibits debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans;×
| state and federal securities laws, which require that any non-exempt offers and sales of the Notes be registered;
|
state counterparts to the above consumer protection laws;×
| Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service;
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state and federal securities laws, which require that any non-exempt offers and sales of the Notes be registered;×
| the federal Gramm-Leach-Bliley Act, which includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;
|
Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service;×
| the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;
|
the federal Gramm-Leach-Bliley Act, which includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;×
| the federal Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties;
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the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;×
| the federal Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts;
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the federal Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties;×
| the federal Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures; and
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the federal Military Lending Act, which provides specific protections for active duty service members and their dependents (or covered borrowers) in consumer credit transactions;×
| the federal Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures.
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the federal Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts;
the federal Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures; and
the federal Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures.
We may not always be in compliance with these laws. Borrowers may make counterclaims regarding the enforceability of their obligations under borrower or consumer protection laws after collection actions have commenced, or otherwise seek damages under these laws. Investors may attempt to rescind their Note purchases under securities laws, and PFL or PMI’s failure to comply
with such laws could also result in civil or criminal liability. Compliance with these requirements is also costly, time-consuming and limits operational flexibility. See “Item 1. Business – Government Regulation” for more information.
If our marketplace
werewas found to violate a
state’sstate's usury laws, we
mightmay have to alter our business model and our business could be harmed.
The interest rates that are charged to borrowers and that form the basis of payments to investors through our marketplace are based upon the ability under federal law of the issuing bank that originates the loan to export the interest rates of the state where it is located. WebBank, the bank that issues loans through our marketplace, exports the interest rates of Utah, which allows parties to generally agree by contract to any interest rate. The interest rates offered by WebBank through our marketplace for Borrower Loans as of December 31,
20152017 range from
5.32%5.31% to
31.25%31.82%, which equate to interest rates for Note investors that range from
4.32%4.31% to
30.25%30.82%. Some states where borrowers are located, including Utah, have no statutory interest rate limitations on personal loans, while other jurisdictions have a maximum rate less than the current maximum rate offered by WebBank through our marketplace. If a borrower were to successfully bring claims against us for state usury law violations, and the rate on that borrower's loan was greater than that allowed under applicable state law, we could be subject to fines and penalties. Further, if the current structure under which WebBank makes loans through our marketplace were successfully challenged, we may have to substantially modify our business operations and may be required to maintain state-specific licenses and only provide a limited range of interest rates for Borrower Loans, all of which may substantially reduce our operating efficiency and attractiveness to investors and possibly result in a decline in our operating results.
In addition, it is possible that state usury laws may impose liability that could affect an assignee’sassignee's (i.e., PFL's and/or an investor who purchases Borrower Loans from PFL) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their Borrower Loans. In particular, one recent judicial decision by
As discussed in “Part I - Item 1 - Business - Government Regulation - State Usury Laws” above, in Madden v. Midland Funding, LLC, the Court of Appeals for the Second Circuit Madden v. Midland Funding, LLC (786 F.3d 246 (2d Cir. 2015)), concluded that the debt buyer of a charged off credit card account could not rely on the National Bank Act's preemption of state interest rate limits for interest at rates imposed by the debt buyer after chargeoff. The decision, which is binding on federal courts in Connecticut, New York and Vermont, has created some uncertainty as to whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of state usury laws, and the decision may create an increased risk of litigation by plaintiffs challenging our ability to collect interest in accordance with the terms of Borrower Loans. AlthoughWhile the Madden decision specifically addressed preemption under the National Bank Act, such decisionit could support future challenges to federal preemption for other institutions, including an FDIC-insured, state chartered industrial bank like WebBank. AlthoughHowever, although there can be no assurances as to the outcome of any potential litigation, or the possible impact of the litigation on our marketplace, we believe the Madden case addressed facts that are not presented by our marketplace lending platform and thus would not apply to Borrower Loans. Nevertheless, we
More recently, in January 2017, the Administrator of the Colorado Uniform Consumer Credit Code filed suits against online loan platforms Marlette Funding, LLC and Avant, Inc. The Administrator claims that loans to Colorado residents facilitated through these platforms were required to comply with Colorado laws regarding interest rates and fees, and that such laws were not preempted by the federal laws that apply to loans originated by Cross River Bank and WebBank, the federally regulated issuing banks that originate loans through the platforms operated by Marlette and Avant, respectively. In response to the Colorado regulator's lawsuits, Cross River Bank and WebBank have each filed its own lawsuit against the Administrator seeking declaratory relief that the loans originated by the bank are subject to federal requirements that pre-empt Colorado state requirements. We are currently in discussions with Colorado Department of Law regarding the terms of the loans offered to Colorado residents. However, no assurance can be provided as to the timing or outcome of these matters.
We and our counsel are monitoring
the casethese matters closely and, as developments warrant, we
of course, will consider any necessary changes to our marketplace required to avoid the impact of
this casethese cases on our business model.
A petition toBecause of investor demand, the
United States Supreme Court to review the decision was filed on November 10, 2015 and is currently pending. maximum APRs offered through our marketplace may be lower in some states than others.
The Consumer Financial Protection Bureau is a new agency, and there continues to be uncertainty as to how the agency’s actions or the actions of any other new agency could impact our business or that of our issuing bank. The Consumer Financial Protection Bureau (“CFPB”), which commenced operations in July 2011, has broad authority over the businesses in which we engage. This includes authority to write regulations under federal consumer financial protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act, and to enforce those laws against and examine large financial institutions for compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. To assist in its enforcement, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including our business and the loan products we facilitate. This system could inform future CFPB decisions with respect to its regulatory, enforcement or examination focus. On March 7, 2016, the CFPB issued a bulletin that provides an overview of marketplace lending, outlines tips for consumers and announces that it is accepting complaints from consumers.
We are subject to the CFPB’s jurisdiction, including its enforcement authority, as a servicer and acquirer of consumer credit. The CFPB may request reports concerning our organization, business conduct, markets and activities. The CFPB may also conduct on-site examinations of our business on a periodic basis if the CFPB were to determine, through its complaint system or otherwise that we were engaging in activities that pose risks to consumers.
There continues to be uncertainty as to how the CFPB’s strategies and priorities, including in both its examination and enforcement processes, will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements to alter or cease offering affected loan products and services, making them less attractive and restricting our ability to offer them.
Although we have committed resources to enhancing our compliance programs, actions by the CFPB or other regulators against us, our issuing bank or our competitors that discourage the use of the marketplace model or suggest to consumers the desirability of other loan products or services could result in reputational harm and a loss of borrowers or investors. Our compliance costs and litigation exposure could increase materially if the CFPB or other regulators enact new regulations, change regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing regulations in a manner different or stricter than have been previously interpreted.
NoncomplianceNoncompliance with laws and regulations may impair our ability to facilitate the origination of or service Borrower Loans.
Generally, failure to comply with applicable laws and regulatory requirements may, among other things, limit our or a third party collection agency’s ability to collect all or part of the principal amount of or interest on the Borrower Loans on which the Notes are dependent for payment. In addition, non-compliance could subject us to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm PFL’s business and ability to maintain our marketplace and may result in borrowers rescinding their Borrower Loans.
Where applicable, we seek to comply with state lending, servicing and similar statutes. We are continually evaluating the need for licensing in various
jurisdictionjurisdictions and there is a risk that, at any given time, we will not have necessary licenses required to operate in all U.S. jurisdictions. If we are found to not comply with applicable laws, we could lose one or more of our licenses or face other sanctions, which may have an adverse effect on our ability to continue to facilitate the origination of Borrower Loans through our marketplace, and on our ability to perform servicing obligations or make our marketplace available to borrowers in particular states, which may impair investors’ ability to receive the payments of principal and interest on the Notes that they expect to receive. For more information about the laws and regulations applicable to us and our marketplace, see “Item 1. Business – Government Regulation.”
We rely on WebBank to originate loans to qualified borrowers throughout the United States and sell and assign those loans to PFL. If our relationships with WebBank were to end, we may need to rely on individual state lending licenses to originate Borrower Loans. Borrower Loan requests take the form of an application to WebBank submitted through our marketplace. WebBank currently makes all loans to borrowers through our marketplace, which allows our marketplace to be available to borrowers on a uniform basis throughout the United States. If our relationships with WebBank were to end or if WebBank were to cease operations, one or both of PMI and PFL may need to rely on individual state lending licenses to originate Borrower Loans. Because neither of us currently possesses state lendingall required licenses to lend in every state, we might be forced to limit the rates of interest
charged on Borrower Loans in some states and we might not be able to originate loans in some states altogether. We also may face increased costs and compliance burdens if the agreements with WebBank are terminated.
Several lawsuits have sought to recharacterize certain loan marketers and other originators as lenders. If litigation or a regulatory enforcement action on similar theories were successful against one or both of PMI and PFL, Borrower Loans originated through our marketplace could be subject to state consumer protection laws and licensing requirements in a greater number of states. Several lawsuits in the lending industry
primarily involving high-interest “payday loan” marketers have brought under scrutiny the association between
high-interest “payday loan” marketersthose firms and out-of-state banks. These lawsuits assert
that paydaythe loan marketers use out-of-state lenders in order to evade the consumer protection laws imposed by the states where they do business. Such litigation has sought to re-characterize the loan marketer as the lender for purposes of state consumer protection law and usury restrictions. Similar civil actions have been brought in the context of gift cards and retail purchase finance. Although we believe that our activities are generally distinguishable from the activities involved in these cases, a court or regulatory authority could disagree.
Additional state consumer protection laws would be applicable to the Borrower Loans facilitated through our marketplace if we were re-characterized as a lender, and the Borrower Loans could be voidable or unenforceable. In addition, we could be subject to claims by borrowers, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial cost on us.
As Internet commerce develops, federal and state governments may draft and propose new laws to regulate Internet commerce, which may negatively affect our businesses.
As Internet commerce continues to evolve, increasing regulation by federal and state governments becomes more likely. Our businesses could be negatively affected by the application of existing laws and regulations or the enactment of new laws applicable to
marketplace lending. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to PFL’s users in the form of increased fees. In addition, federal and state governmental or regulatory agencies may decide to impose taxes on services provided over the Internet. These taxes could discourage the use of the Internet as a means of consumer lending, which would adversely affect the viability of our marketplace.
If one or both of PMI and PFL is required to register under the Investment Company Act, either of our ability to conduct business could be materially adversely affected. The Investment Company Act of 1940, or the “Investment Company Act,” contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. PFL and PMI believe each has conducted its business in a manner that does not result in being characterized as an investment company. If, however, PFL is deemed to be an investment company under the Investment Company Act, it may be required to institute burdensome compliance requirements and its activities may be restricted, which would materially adversely affect its business, financial condition and results of operations. Any determination that PMI is an investment company under the Investment Company Act similarly could impair its ability to perform its obligations under the Administration Agreement and thereby impair PFL’s ability to make payments on the Notes. If PFL or PMI were deemed to be an investment company, PFL or PMI may also attempt to seek exemptive relief from the SEC, which could impose significant costs and delays on their businesses.
If one or both of PMI and PFL is required to register under the Investment Advisers Act, either of our ability to conduct business could be materially adversely affected. The Investment Advisers Act of 1940, or the “Investment Advisers Act,” contains substantive legal requirements that regulate the manner in which “investment advisers” are permitted to conduct their business activities. PFL believes that its business consists of providing a platform for marketplace lending for which investment adviser registration and regulation do not apply under applicable federal or state law, and does not believe that it is required to register as an investment adviser with either the SEC or any of the various states. The SEC or a state securities regulator could reach a different conclusion, however. Registration as an investment adviser could adversely affect PFL’s method of operation and revenues. For example, the Investment Advisers Act requires that an investment adviser act in a fiduciary capacity for its clients. Among other things, this fiduciary obligation requires that an investment adviser manage a client’s portfolio in the best interests of the client, have a reasonable basis for its
recommendations, fully disclose to its client any material conflicts of interest that may affect its conduct and seek best execution for transactions undertaken on behalf of its client. It could be difficult for PFL to comply with these obligations without meaningful changes to its business operations, and there is no guarantee that it could do so successfully. If PFL were ever deemed to be in non-compliance with applicable investment adviser regulations, it could be subject to various penalties, including administrative or judicial proceedings that might result in censure, fine, civil penalties (including treble damages in the case of insider trading violations), the issuance of cease-and-desist orders or other adverse consequences. Similarly, any determination by regulators that PMI must register as an investment adviser could materially adversely affect PMI and impair its ability to continue to administer our marketplace on PFL’s behalf.
PMI’s previous administration of an automated bidding plan system and the
PMI's administration of Quick Invest
by PMI under its previous offering and
by PFLPFL’s administration of Quick Invest, Recurring Investment, and Auto Invest under its current offering, could create additional liability for
one or both of PMI and PFL and such liability could be material.
PMI’s former automated plan system
Quick Invest was a loan search tool that allowed investors to
create their own automated bidding plans. By creating such a plan, an investor could have bids placed automatically on his or her behalf on loan listings that met loan criteria selected by him or her. In creating an automated bidding plan, the investor could design those criteria himself or herself, use a group of model criteria selected by PMI, or customize one of those groups of model criteria as he or she saw fit. Each automated bidding plan consisted of a group of loan criteria, such as loan amount, minimum yield percentage, Prosper Rating, income and employment characteristics, and debt-to-income ratio. That group of criteria was divided into sub-groups, each of which were referred to as a “slice.” The specific Borrower Loans on which the investor bid through his or her automated bidding plan were determined by the criteria in each of his or her plan slices. If a loan listing was posted that satisfied all of the criteria in any one of his or her plan slices, a bid would automatically be placed on the listing on his or her behalf.On July 6, 2011, PMI replaced the former automated plan system with a new loan search tool called Quick Invest. Under Quick Invest, investors are no longer able to create automated plans and instead must identify Notes that meetmet their investment criteria. An investor using Quick Invest was asked to indicate (i) the Prosper Rating or Ratings he or she wished to use as search criteria, (ii) the total amount he or she wished to invest, and (iii) the amount he or she wished to invest per Note. Quick Invest then compiled a basket of Notes for his or her consideration that met his or her search criteria.
Recurring Investment (formerly known as Auto Quick Invest) is an automated loan search tool that allows investors to easily invest in Notes that meet their specific investment criteria by automatically bidding any available funds in their account on Notes that match their selected parameters, in accordance with their specified instructions. An investor using Recurring Investment is asked to indicate (i) the Prosper Rating or Ratings he or she wishes to use as search criteria, (ii) the total amount he or she wishes to invest, and (iii)(ii) the amount he or she wishes to invest per Note. Quick Invest then compiles a basket of Notes forIf he or she wishes, the investor can further customize his or her considerationinvestment criteria by applying one or more of several dozen additional search criteria, such as loan amount, debt-to-income ratio and credit score. The investor can also set aside a specific amount of his or her funds as a cash reserve that will not be invested by the Recurring Investment tool. After the investor has entered and saved the parameters of his or her search, Recurring Investment automatically (i) runs searches on their designated criteria as new listings are posted on the marketplace, and (ii) places bids on any Notes identified by each such search. "
Auto Invest is an automated loan search tool that makes it easier for investors to build their desired portfolio of Notes by automatically investing any available funds in an investor’s account in Notes that match the investor’s specified investment criteria and allocation targets. An investor using Auto Invest is asked to select (i) a loan allocation target, or a target mix of loans based on Prosper Ratings, and (ii) the amount he or she wishes to invest per Note. The investor has the option of selecting a target from Prosper’s series of preset loan allocations based on the recent historical loan inventory on the marketplace, any of which may be customized by changing the individual allocation targets for each Prosper Rating, or he or she can create a custom loan allocation target across Prosper Ratings based on his or her specific risk tolerance. If he or she wishes, the investor can further customize his or her investment criteria by applying additional filters, such as loan term and employment status. The investor can also set aside a percentage of his or her portfolio as a cash reserve that will not be invested by Auto Invest. Investors may update their target allocations, cash reserve and other investment criteria, and pause and restart Auto Invest, at any time. Once the investor turns on Auto Invest, the tool may immediately begin placing orders for Notes in accordance with the investor’s current and target allocations and other criteria. The mix of Notes in any particular order may not match the investor’s individual loan allocation targets, but over time Auto Invest will place orders so that the aggregate holdings in the investor’s portfolio will approximate, to the extent possible,
meetthe allocation specified in his or her
searchinvestment criteria.
For more information about the Auto Invest tool and how it works, see "About the Marketplace-How to Bid to Purchase Notes-Auto Invest."
Since the Notes purchased through
Recurring Investment, Auto Invest and Quick Invest are the same as Notes purchased manually, they present the same risks of non-payment as all Notes that may be purchased through our marketplace. For example, there is a risk that a Borrower Loan identified
through an automated planRecurring Investment, Auto Invest or Quick Invest may become delinquent or default, and the estimated return and estimated loss for that loan individually, or the estimated loss or return for the planallocation target or the order or basket of Notes selected by Recurring Investment, Auto Invest or Quick Invest as a whole, may not accurately reflect the actual return or loss on such loan. If this were to occur, an investor who purchasespurchased a Note from PFL through Recurring Investment, Auto Invest or Quick Invest could pursue a claim against PFL in connection with its representations regarding the performance of the Borrower Loans bid upon through Recurring Investment, Auto Invest or Quick Invest.Invest, respectively. An investor could pursue such a claim under various antifraudanti-fraud theories under federal and state securities law. In addition, the SEC or an investor may take the position that the plans created pursuant to PMI’s former automated bidding plan model involved the offer and sale of a separate security. Since
PMI did not register the automated bidding plans as separate securities, such a claim, if successful, could give investors who invested in Notes through such plans a rescission right under state or federal law and possibly subject PMI to civil fines or criminal penalties under federal or state law. If such a theory were sustained, PMI could be liable for sales through automated bidding plans that took place prior to July 6, 2011. To date, no actions have been taken or threatened against Prosper on this theory. However, such actions could have a material adverse effect on Prosper’s business.PMI
and PFL’s activities in connection with the offer and sale of securities on our marketplace could result in potential violations of federal securities law and result in material liability to PFL and PMI.
PFL and PMI’s respective businesses are subject to federal and state securities laws that may limit the kinds of activities in which PFL and PMI may engage and the manner in which they engage in such activities. For example, changes to the manner in which PFL offers and sells Notes or other securities through our marketplace could be viewed by the SEC or a state securities regulator as involving the creation or sale of new, unregistered securities. In such circumstances, the failure to register such securities could subject PFL to liability and the amount of such liability could be meaningful. In addition, PMI previously entered into a settlement with the SEC and consented to the entry of a Cease and Desist order that requires PMI to cease and desist from committing or causing any violations or any future violations of the securities laws. Failure to comply with that order could result in material civil or criminal liability, which could materially adversely affect PMI’s business and PFL’s offering of Notes.
Item
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| Item 1B. | Unresolved Staff Comments |
Our corporate headquarters, including our principal administrative, marketing, technical support and engineering functions, is located in San Francisco, California, where we lease approximately
75,00050,000 square feet of office space under leases that will expire February 28, 2023. We also have entered into leases for approximately
170,00099,000 square feet of office space located in Arizona, Utah
Delaware and
Israel.Delaware. We believe that our facilities are adequate to meet our current needs and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.
Neither PMI nor PFL is not currently subject to any material legal proceedings.
PFL is not awareand PMI (collectively, "Prosper") and Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which Prosper agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of any litigation mattersthe Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis. On November 17, 2016, Prosper and Colchis entered into a Settlement and Release Agreement, pursuant to which have had, or are expectedColchis agreed to have,terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a material adverse effect$9 million cash payment by Prosper and the issuance of a warrant to purchase shares of Series E-1 Preferred Stock representing 7% of Prosper’s capitalization on it. a fully diluted basis as of the date of the issuance of the warrant for $0.01 per share.
On April 21, 2009, PMI and the North American Securities Administrators Association (“NASAA”) reached agreement on the terms of a model consent order between PMI and the states in which PMI, under its initial platform structure, offered promissory notes for sale directly to investor members prior to November 2008. The consent order involves payment by PMI of up to an aggregate of $1 million in penalties, which have been allocated among the states based on PMI’s promissory note sale transaction volume in each state prior to November 2008. A state that enters into a consent order receives its portion of the $1 million in exchange for its agreement to terminate, or refrain from initiating, any investigation of PMI’s promissory note sale activities prior to November 2008. Penalties are paid promptly after a state enters into a consent order. NASAA has recommended that each state enter into a consent order; however, no state is obliged to do so, and there is no deadline by which a state must make its decision. PMI is not required to pay any portion of the penalty to those states that do not elect to enter into a consent order. If a state does not enter into a consent order, it is free to pursue its own remedies against PMI, subject to any applicable statute of limitations. As of December 31, 2015,2017, PMI has entered into consent orders with 34 states and the District of the Columbia and has paid an aggregate of $0.5$0.78 million in penalties to those states.
in connection therewith.
On November 26, 2008, plaintiffs filed a class action lawsuit against PMI and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California (the “Superior Court”). The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that PMI offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. The lawsuit sought rescission damages against PMI and the other named defendants, as well as treble damages against PMI and the award of attorneys’ fees, experts’ fees and costs, and pre-judgment and post-judgment interest. On July 19, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation pending before the Superior Court, entered into a Stipulation and Agreement of Compromise, Settlement, and Release (the “Settlement”) setting forth an agreement to settle all claims related thereto. In connection with the Settlement, PMI agreed to pay the plaintiffs an aggregate amount of $10 million, payable in four lump sum payments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017.2017. On April 16, 2014, the Superior Court granted final approval of the Settlement. Subject to satisfaction of the conditions set forth in the Settlement, the defendants will be released by the plaintiffs from all claims concerning or arising out of the offering of promissory notes on the platform from January 1, 2006 through October 14, 2008. TheAs of December 31, 2017, PMI has paid the entire aggregate amount of $10 million under the Settlement and the reserve for the class action settlement liability is $5.9 million$0 on PMI’s consolidated balance sheet as of December 31, 2015. 2017.
Item
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| Item 4. | Mine Safety Disclosures |
Part II
Part IIItem
| |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Market Information; Holders of Record
PMI does not have publicly traded equity securities. At
There is no established public trading market for PMI's or PFL's common equity. As of December 31, 2015,2017, there were approximately 274328 holders of record of PMI’s common stock. As of December 31, 2017, PMI owns 100% of PFL's membership interests.
Dividend Policy
PMI has not paid cash dividends since inception, and does not anticipate paying cash dividends in the foreseeable future.
On May 1, 2014,
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 in Part III of this Annual Report for information about securities authorized for issuance under our equity compensation plans.
Recent Sales of Unregistered Securities
In September 2017, PMI issued and sold 24,404,77037,249,497 shares of PMI's Series CG convertible preferred stock, par value $0.01 per share,stock. Please see PMI's Form 8-K filed on September 22, 2017 for aggregate gross proceeds of $70 million pursuant to Section 4(a)(2) ofdetails regarding the Securities Act. In connection with our private placement of Series C convertible preferred stock, we incurred transaction expenses of $0.1 million that were recorded as an offset to the gross proceeds.In April 2015, PMI issued and sold 23,888,640 shares of new Series D (“New Series D”) convertible preferred stock in a private placement at a purchase price of $6.91 per share for proceeds of approximately $164.8 million, net of issuance costs. The New Series D convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering. The purpose of the New Series D private placement was to raise funds for general corporate needs and for share repurchases.
On June 18, 2014, PMI issued a Tender Offer Statement to purchase up to 6,963,785 shares, in the aggregate, of its Series A Preferred Stock and Series B Preferred Stock, at a price equal to $2.87 per share. Upon closure of the tender offer on July 16, 2014, 782,540 shares of Series A Preferred Stock and 5,667,790 share of Series B Preferred Stock were purchased for a total price of $18.5 million.
During 2015, PMI repurchased 4,225,490 shares of common stock at a price equal to $6.91 per share for an aggregate purchase price of $29.2 million.
sale.
During the year ended December 31,
2014,2017, PMI issued
584,61543,736 shares of common stock upon the exercise of warrants for an aggregate exercise price per share of
$0.39. During the year ended December 31, 2015, PMI issued 207,065 shares of common stock upon the exercise of warrants for an aggregate exercise price per share of $0.61.$0.34. These securities were sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder relative to sales by an issuer not involving a public offering.
New Securities Resulting from the Modification of Outstanding Securities
On February 16, 2016, PMI amended and restated its certificate of incorporation to, among other things, effect a 5-for-1 forward stock split.
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Average Price Paid Per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Approximate Dollar Value of Shares that May Yet by Purchased Under the Plans or Programs |
| October 1 to October 31 | | — |
| | $ | — |
| | — |
| | $ | — |
|
| November 1 to November 31 | | — |
| | — |
| | — |
| | — |
|
| December 1 to December 31 | | — |
| | — |
| | — |
| | — |
|
| Total | | — |
| | $ | — |
| | — |
| | $ | — |
|
The above share and per share amounts reflect
athe 5-for-1 forward stock split that PMI effected on February 16, 2016.
Item
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| Item 6. | Selected Financial Data |
Prosper Marketplace, Inc.
Not applicable.
The following selected historical consolidated financial data of Prosper Marketplace Inc. should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our consolidated financial statements, and the related notes under Item 15 “Exhibits, Financial Statements Schedules” of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. The consolidated statements of operations data for the years ended December 31, 2017, 2016 and 2015, and the consolidated balance sheet data as of December 31, 2017 and 2016, are derived from our audited consolidated financial statements appearing under Item 15 “Exhibits, Financial Statements Schedules” of this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2014 and 2013, the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from audited consolidated financial statements not included in this report. Our historical results are not necessarily indicative of future results.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | 2016 | 2015 | 2014 | 2013 |
| | (dollar amounts in thousands, except per share information) |
| Revenues | | | | | |
| Operating Revenues | | | | | |
| Transaction Fees, Net | $ | 130,174 |
| $ | 95,130 |
| $ | 161,708 |
| $ | 68,229 |
| $ | 15,330 |
|
| Servicing Fees, Net | 27,206 |
| 28,903 |
| 17,238 |
| 4,552 |
| 259 |
|
| Gain (Loss) on Sale of Borrower Loans | 11,431 |
| 3,637 |
| 14,151 |
| 3,227 |
| (193 | ) |
Fair Value of Warrants Vested on Sale of Borrower Loans
| (60,122 | ) | — |
| — |
| — |
| — |
|
| Other Revenues | 4,806 |
| 5,245 |
| 7,687 |
| 1,828 |
| 1,130 |
|
| Total Operating Revenues | 113,495 |
| 132,915 |
| 200,784 |
| 77,836 |
| 16,526 |
|
| Interest Income | | | | | |
| Interest Income on Borrower Loans | 47,208 |
| 44,649 |
| 41,606 |
| 42,087 |
| 34,995 |
|
| Interest Expense on Notes | (43,954 | ) | (41,187 | ) | (38,174 | ) | (38,734 | ) | (33,321 | ) |
| Net Interest Income | 3,254 |
| 3,462 |
| 3,432 |
| 3,353 |
| 1,674 |
|
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | (514 | ) | (372 | ) | 59 |
| 128 |
| 181 |
|
| Total Net Revenues | 116,235 |
| 136,005 |
| 204,275 |
| 81,317 |
| 18,381 |
|
| Expenses | | | | | |
| Origination and Servicing | 34,881 |
| 33,944 |
| 31,139 |
| 14,098 |
| 6,384 |
|
| Sales and Marketing | 83,462 |
| 70,146 |
| 112,284 |
| 41,971 |
| 16,731 |
|
| General and Administrative | 75,686 |
| 102,735 |
| 86,480 |
| 27,917 |
| 22,273 |
|
| Restructuring Charges | 1,340 |
| 17,027 |
| — |
| — |
| — |
|
Change in Fair Value of Convertible Preferred Stock Warrants
| 29,140 |
| 7 |
| — |
| — |
| — |
|
| Other Expenses, Net | 7,392 |
| 30,341 |
| — |
| — |
| — |
|
| Total Expenses | 231,901 |
| 254,200 |
| 229,903 |
| 83,986 |
| 45,388 |
|
| Net Loss Before Taxes | (115,666 | ) | (118,195 | ) | (25,628 | ) | (2,669 | ) | (27,007 | ) |
| Income Tax Expense | (508 | ) | 546 |
| 340 |
| — |
|
|
| Net Loss | (115,158 | ) | (118,741 | ) | (25,968 | ) | (2,669 | ) | (27,007 | ) |
| Excess Return to Preferred Shareholders on Repurchase | — |
| — |
| — |
| (14,892 | ) | — |
|
| Net Loss Applicable to Common Shareholders | $ | (115,158 | ) | $ | (118,741 | ) | $ | (25,968 | ) | $ | (17,561 | ) | $ | (27,007 | ) |
| Net Loss Per Share – Basic and Diluted | $ | (1.65 | ) | $ | (1.85 | ) | $ | (0.47 | ) | $ | (0.39 | ) | $ | (0.82 | ) |
| Weighted-Average Shares - Basic and Diluted | 69,687,836 |
| 64,196.537 |
| 55,547,408 |
| 44,484,005 |
| 32,984,135 |
|
Stock-based compensation included in the consolidated statements of operations data above was as follows (dollar amounts are in thousands):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | 2016 | 2015 | 2014 | 2013 |
| | | | | | |
| Origination and Servicing | $ | 996 |
| $ | 2,004 |
| $ | 1,231 |
| $ | 104 |
| $ | 16 |
|
| Sales and Marketing | 553 |
| 2,914 |
| 2,561 |
| 767 |
| 24 |
|
| General and Administrative | 10,689 |
| 14,824 |
| 9,219 |
| 1,150 |
| 182 |
|
| Restructuring | — |
| 45 |
| — |
| — |
| — |
|
| Total stock based compensation | $ | 12,238 |
| $ | 19,742 |
| $ | 13,011 |
| $ | 2,021 |
| $ | 222 |
|
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2017 | 2016 | 2015 | 2014 | 2013 |
| | | | | | |
| Consolidated Balance Sheet Data: | | | | | |
| Cash and cash equivalents | $ | 45,795 |
| $ | 22,337 |
| $ | 66,295 |
| $ | 50,557 |
| $ | 18,339 |
|
| Restricted cash | 152,668 |
| 163,907 |
| 151,223 |
| 81,300 |
| 49,824 |
|
| Available for sale investments, at fair value | 53,147 |
| 32,769 |
| 73,187 |
| — |
| — |
|
| Borrower loans, at fair value | 293,005 |
| 315,627 |
| 297,273 |
| 273,243 |
| 233,105 |
|
| Total assets | 623,735 |
| 623,846 |
| 685,624 |
| 440,158 |
| 310,259 |
|
| Notes at fair value | 293,948 |
| 316,236 |
| 297,405 |
| 273,783 |
| 234,218 |
|
| Total liabilities | 567,357 |
| 512,781 |
| 477,056 |
| 364,387 |
| 285,929 |
|
| Total convertible preferred stock and stockholders' deficit | 56,378 |
| 111,065 |
| 208,568 |
| 75,771 |
| 24,330 |
|
Prosper Funding LLC
The following selected historical consolidated financial data of Prosper Funding LLC should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our consolidated financial statements, and the related notes under Item 15 “Exhibits, Financial Statements Schedules” of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. The consolidated statements of operations data for the years ended December 31, 2017, 2016 and 2015, and the consolidated balance sheet data as of December 31, 2017 and 2016, are derived from our audited consolidated financial statements appearing under Item 15 “Exhibits, Financial Statements Schedules” of this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2014 and 2013, the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from audited consolidated financial statements not included in this report. Our historical results are not necessarily indicative of future results.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | 2016 | 2015 | 2014 | 2013 |
| | (dollar amounts in thousands, except per share information) |
| Revenues | | | | | |
| Operating Revenues | | | | | |
| Administration Fee Revenue – Related Party | $ | 101,500 |
| $ | 36,630 |
| $ | 57,919 |
| $ | 28,519 |
| $ | 7,632 |
|
| Servicing Fees, Net | 25,963 |
| 28,604 |
| 16,218 |
| 4,168 |
| 372 |
|
| Gain on Sale of Borrower Loans | (48,691 | ) | 3,637 |
| 14,151 |
| — |
| — |
|
| Other Revenues | 170 |
| 478 |
| 1,500 |
| 3,733 |
| 233 |
|
| Total Operating Revenues | 78,942 |
| 69,349 |
| 89,788 |
| 36,420 |
| 8,237 |
|
| Interest Income on Borrower Loans | 47,208 |
| 44,649 |
| 41,380 |
| 42,370 |
| 32,605 |
|
| Interest Expense on Notes | (43,954 | ) | (41,187 | ) | (38,174 | ) | (38,734 | ) | (30,756 | ) |
| Net Interest Income | 3,254 |
| 3,462 |
| 3,206 |
| 3,636 |
| 1,849 |
|
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | (514 | ) | (372 | ) | 59 |
| 209 |
| 849 |
|
| Total Net Revenues | 81,682 |
| 72,439 |
| 93,053 |
| 40,265 |
| 10,935 |
|
| Expenses | |
| |
| |
| | |
| Administration Fee – Related Party | 70,359 |
| 62,203 |
| 62,786 |
| 24,966 |
| 6,331 |
|
| Servicing | 6,103 |
| 5,395 |
| 3,705 |
| 1,509 |
| 744 |
|
| General and Administrative | 379 |
| 1,321 |
| 1,227 |
| 506 |
| 267 |
|
| Other Expenses, Net | — |
| 30,704 |
| — |
| — |
| — |
|
| Total Expenses | 76,841 |
| 99,623 |
| 67,718 |
| 26,981 |
| 7,342 |
|
| Total Net Income (Loss) | $ | 4,841 |
| $ | (27,184 | ) | $ | 25,335 |
| $ | 13,284 |
| $ | 3,593 |
|
|
| | | | | | | | | | |
| | As of December 31, |
| | 2017 | 2016 | 2015 | 2014 | 2013 |
| | | | | | |
| Consolidated Balance Sheet Data: | | | | | |
| Cash and cash equivalents | 8,223 |
| 6,929 |
| 15,026 |
| 23,777 |
| 5,789 |
|
| Restricted cash | 140,092 |
| 147,983 |
| 139,937 |
| 73,103 |
| 46,650 |
|
Borrower Loans Receivable at Fair Value
| 293,005 |
| 315,627 |
| 297,273 |
| 273,243 |
| 233,105 |
|
| Total assets | 464,045 |
| 495,185 |
| 475,691 |
| 385,240 |
| 292,074 |
|
| Notes at fair value | 293,948 |
| 316,236 |
| 297,405 |
| 273,783 |
| 234,218 |
|
| Total liabilities | 433,679 |
| 463,860 |
| 439,386 |
| 338,949 |
| 272,850 |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
PROSPER MARKETPLACE, INC.
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Annual Report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper’s historical financial statements and related notes thereto and the other disclosures contained
elsewhere in this Annual Report on Form 10-K. Management’s Discussion and Analysis has been revised to include the effects of the restatement. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper’s actual results may differ materially from those discussed in the forward-looking statements as a result of
various factors, including but not limited to those included in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K.
Prosper is a pioneer of online marketplace lending that connects borrowers and investors. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return.
We believe our online marketplace model has key advantages relative to traditional bank lending, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology driven automation that increases efficiency and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure; instead, we use data and technology to drive automation and efficiency in our operation. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.
During the year ended December 31,
2015,2017, our marketplace facilitated
$3.7$2.9 billion in Borrower Loan originations, of which
$3.5$2.7 billion were
fundedoriginated through our Whole Loan Channel, representing
95%93% of the total Borrower Loans originated through our marketplace during this period. During the quarter ended December 31, 2017, our marketplace facilitated $694 million in Borrower Loan originations, of which $652 million were originated through our Whole Loan Channel, representing 94% of the total Borrower Loans originated through our marketplace during this period. From inception through December 31,
2015,2017 our marketplace
has facilitated
$6.1$11.2 billion in Borrower Loan originations, of which
$5.1$9.8 billion were
fundedoriginated through our Whole Loan Channel, representing
84%87% of the total Borrower Loans originated through our marketplace during this period.
As a credit marketplace, we believe our customers are
more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
Key Operating and Financial Metrics (in thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Loan Originations | $ | 2,876,055 |
| | $ | 2,187,600 |
| | $ | 3,722,887 |
|
| Transaction Fees, Net | 130,174 |
| | 95,130 |
| | 161,708 |
|
Whole Loans Outstanding (1) | 3,717,825 |
| | 3,543,522 |
| | 3,804,268 |
|
| Servicing Fees, Net | 27,206 |
| | 28,903 |
| | 17,238 |
|
| Net Loss | (115,158 | ) | | (118,741 | ) | | (25,968 | ) |
Adjusted EBITDA (2) | 5,460 |
| | (37,991 | ) | | (5,145 | ) |
| Net Cash Provided by (Used in) Operating Activities | 1,081 |
| | (62,667 | ) | | 5,444 |
|
(1) Balance as of December 31.
(2) Adjusted EBITDA is a non-GAAP Financial measure. For more information regarding this measure and a reconciliation of this measure to the most comparable GAAP measure, see “Non-GAAP Financial Measures”
The following table summarizes our net loss for the years ended December 31,
2017, 2016 and 2015
and December 31, 2014 (in(dollar amounts in thousands):
| | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | |
| | 2015 | | | 2014 | | | $ Change | | | % Change | |
Total Revenue | | $ | 204,275 | | | $ | 81,317 | | | | 122,958 | | | | 151 | % |
Total Expenses | | | 229,903 | | | | 83,986 | | | | 145,917 | | | | 174 | % |
Net Loss Before Taxes | | | (25,628 | ) | | | (2,669 | ) | | | (22,959 | ) | | | 860 | % |
Income Tax Expense | | | 340 | | | | - | | | | 340 | | | | 100 | % |
Net Loss | | $ | (25,968 | ) | | $ | (2,669 | ) | | | (23,299 | ) | | | 873 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
| Total Net Revenues | $ | 116,235 |
| | $ | 136,005 |
| | (15 | )% | | $ | 136,005 |
| | $ | 204,275 |
| | (33 | )% |
| Total Expenses | 231,901 |
| | 254,200 |
| | (9 | )% | | 254,200 |
| | 229,903 |
| | 11 | % |
| Net Loss Before Taxes | (115,666 | ) | | (118,195 | ) | | (2 | )% | | (118,195 | ) | | (25,628 | ) | | 361 | % |
| Income Tax Expense | (508 | ) | | 546 |
| | (193 | )% | | 546 |
| | 340 |
| | 100 | % |
| Net Loss | $ | (115,158 | ) | | $ | (118,741 | ) | | (3 | )% | | $ | (118,741 | ) | | (25,968 | ) | | 357 | % |
Total loan originations on the platform increased 31% in 2017 over 2016, which resulted in an increase in transactions fees of 37% or $35.0 million. Total net revenues for the year ended December 31, 2015 increased2017 decreased approximately $123$19.8 million, a 151% increase15% decrease from the year ended December 31, 2014,2016. This was primarily due to increased loan volume which increased 133%the $60.1 million of rebates that were provided to members of the Consortium via the issuance of Convertible Preferred Stock Warrants that vested during the year ended December 31, 2017. Total expenses for the year ended December 31, 2015 increased $1462017 decreased $22.3 million, a 174% increase9% decrease from the year ended December 31, 2014,2016, primarily due to higher variable marketinga decrease in general and business development which increasedadministrative expenses of $27.0 million, restructuring charges of $15.7 million and other expenses of $23.0 million as Prosper continued to realize the cost savings from the year ended December 31, 2014restructuring that took place in 2016. These decreases in expenses were offset by approximately $32a $29.1 million and $25 million, respectively. Other expense increases included higher compensation costs as we added more staff to support our business growth, additional facilities-related expenses we incurredincrease in connection with our move into our new headquarters and expansion into Phoenix and Utah, and higher marketing and origination expenses to support our higher origination volume. Additionally, we incurred $6.2 million in additional compensation costs as a result of purchasing common stock from certain employees at a price above the fair market value of such common stock. the preferred stock warrant liability and an $13.3 million increase in sales and marketing expenses in 2017. Net loss for the year ended December 31, 2015 increased $23.32017 decreased $3.6 million, an 873% increasea 3% decrease from the year ended December 31, 2015,2016, primarily due to the decreased expenses experienced in 2017.
Total net revenues for the year ended December 31, 2016 decreased approximately $68.3 million, a 33% decrease from the year ended December 31, 2015, primarily due to reduced loan originations on the platform, which decreased 42%. Total expenses for the year ended December 31, 2016increased expenses.$24.3 million, a 11% increase from the year ended
December 31, 2015, primarily due to restructuring changes of $17.0 million and a $30.7 million expense resulting from the termination of a contract with Colchis Capital Management, L.P. These expenses were partially offset by cost reductions made in the second half of 2016. Net loss for the year ended December 31, 2016 increased $92.8 million, a 357% increase from the year ended December 31, 2015, primarily due to the lower revenues and increased expenses experienced in 2016. From inception through December 31,
2015,2017, a total of
500,389885,662 Borrower Loans, totaling
$6.1$11.2 billion, were originated through our marketplace.
During the fourth quarteryear ended December 31, 2015, 86,7672017, 223,002 Borrower Loans totaling $1.1 billion were originated through the marketplace, compared to 40,652 Borrower Loans totaling $540 million during the fourth quarter of 2014. This represented a “unit” or loan, increase of 113% and a dollar increase of 112%. During 2015, 275,789 Borrower Loans totaling $3.7$2.9 billion were originated through our marketplace as compared to 123,208161,297 Borrower Loans totaling $1.6$2.2 billion originated during 2014,the year ended December 31, 2016, which represented a unit increase of 124%38% and a dollar increase of 133%31%.
The graph below shows quarterly dollarincrease in originations Prosper experienced during the year ended December 31, 2017 were primarily driven by the actions Prosper took to increase the amount of capital available to make purchases through its marketplace. On February 27, 2017, Prosper signed an agreement with a consortium of investors for the purchase of up to $5.0 billion of loans over two years (for more details please see Note 15 to our marketplace dating backcondensed consolidated financial statements).
Loan origination volume by Prosper Rating was as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Amount | | % | | Amount | | % | | Amount | | % |
| AA | $ | 197 |
| | 7 | % | | $ | 240 |
| | 11 | % | | $ | 327 |
| | 9 | % |
| A | 365 |
| | 13 | % | | 459 |
| | 21 | % | | 815 |
| | 22 | % |
| B | 641 |
| | 22 | % | | 528 |
| | 24 | % | | 988 |
| | 27 | % |
| C | 872 |
| | 30 | % | | 575 |
| | 26 | % | | 988 |
| | 27 | % |
| D | 501 |
| | 17 | % | | 259 |
| | 12 | % | | 421 |
| | 11 | % |
| E | 236 |
| | 8 | % | | 96 |
| | 4 | % | | 149 |
| | 4 | % |
| HR | 64 |
| | 2 | % | | 31 |
| | 1 | % | | 36 |
| | 1 | % |
| Total | $ | 2,876 |
| | | | $ | 2,188 |
| | | | $ | 3,724 |
| | |
During 2017, the mix of originations on the Prosper platform was relatively higher risk when compared to
2016, this was a result of two primary drivers. First, Prosper raised its loss expectations for some applicant profiles, which caused some borrowers that would previously have received one rating (such as an A rating) to receive a lower rating (such as a B rating). Second, demand for higher risk assets on the Prosper platform was greater in the first
quarterhalf of
2014:
2017 compared with the general demand seen in 2016. In the second half of 2017, Prosper increased the proportion of lower risk originations on its platform as it tightened credit to reduce borrower defaults.
The following table summarizes our revenue for the years ended December 31,
2017, 2016 and 2015
and 2014 (in(dollar amounts in thousands):
| | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | |
| | 2015 | | | 2014 | | | $ Change | | | % Change | |
Operating Revenues | | | | | | | | | | | | | | | | |
Transaction Fees, Net | | $ | 161,708 | | | $ | 68,229 | | | | 93,479 | | | | 137 | % |
Servicing Fees, Net | | | 17,238 | | | | 4,552 | | | | 12,686 | | | | 279 | % |
Gain on Sale of Borrower Loans | | | 14,151 | | | | 3,227 | | | | 10,924 | | | | 339 | % |
Other Revenues | | | 7,687 | | | | 1,828 | | | | 5,859 | | | | 321 | % |
Total Operating Revenues | | | 200,784 | | | | 77,836 | | | | 122,948 | | | | 158 | % |
Interest Income | | | | | | | | | | | | | | | | |
Interest Income on Borrower Loans | | | 41,606 | | | | 42,087 | | | | (481 | ) | | | -1 | % |
Interest Expense on Notes | | | (38,174 | ) | | | (38,734 | ) | | | 560 | | | | -1 | % |
Net Interest Income | | | 3,432 | | | | 3,353 | | | | 79 | | | | 2 | % |
Change in Fair Value of Borrower Loans, Loans Held for Investment and Notes, Net | | | 59 | | | | 128 | | | | (69 | ) | | | (54 | )% |
Total Revenues | | | 204,275 | | | | 81,317 | | | | 122,958 | | | | 151 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
| Operating Revenues | |
| | |
| | |
| | | | | | |
| Transaction Fees, Net | $ | 130,174 |
| | $ | 95,130 |
| | 37 | % | | $ | 95,130 |
| | 161,708 |
| | (41 | )% |
| Servicing Fees, Net | 27,206 |
| | 28,903 |
| | (6 | )% | | 28,903 |
| | 17,238 |
| | 68 | % |
| Gain on Sale of Borrower Loans | 11,431 |
| | 3,637 |
| | 214 | % | | 3,637 |
| | 14,151 |
| | (74 | )% |
Fair Value of Warrants Vested on Sale of Borrower Loans
| (60,122 | ) | | — |
| | 100 | % | | — |
| | — |
| | — | % |
| Other Revenues | 4,806 |
| | 5,245 |
| | (8 | )% | | 5,245 |
| | 7,687 |
| | (32 | )% |
| Total Operating Revenues | 113,495 |
| | 132,915 |
| | (15 | )% | | 132,915 |
| | 200,784 |
| | (34 | )% |
| Interest Income | |
| | |
| |
|
| |
|
| | |
| | |
| Interest Income on Borrower Loans | 47,208 |
| | 44,649 |
| | 6 | % | | 44,649 |
| | 41,606 |
| | 7 | % |
| Interest Expense on Notes | (43,954 | ) | | (41,187 | ) | | 7 | % | | (41,187 | ) | | (38,174 | ) | | 8 | % |
| Net Interest Income | 3,254 |
| | 3,462 |
| | (6 | )% | | 3,462 |
| | 3,432 |
| | 1 | % |
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | (514 | ) | | (372 | ) | | 38 | % | | (372 | ) | | 59 |
| | (731 | )% |
| Total Net Revenues | 116,235 |
| | 136,005 |
| | (15 | )% | | 136,005 |
| | 204,275 |
| | (33 | )% |
Prosper earns a transaction fee upon the successful origination of all Borrower Loans facilitated through Prosper’s marketplace. Prosper receives payments from WebBank as compensation for the activities Prosper performs on behalf of WebBank. Prosper’s fee is determined by the term and credit grade of the Borrower Loans that Prosper facilitates on its marketplace and WebBank originates. We record the transaction fee revenue net of any fees paid by us to WebBank.
Transaction fees increased by 137%37% for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to higher origination volume through our marketplace, during 2015.as described above. The average transaction fee (gross of fees paid to WebBank) was 4.54% for the year ended December 31, 2015 which increased slightly2017 was 4.53%, an increase from 4.43%4.35% for the year ended December 31, 2014.
2016. This increase was due to marketing fee increases implemented in the second quarter of 2016 for certain Prosper Ratings. The marketing fee increases were partially offset by the fair value of the loan trailing fee on loans originated on the platform during the period.
Transaction fees decreased by 41% for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to lower origination volume through our marketplace, as described above. The average transaction fee for the year ended December 31, 2016 was 4.35%, a slight increase from 4.34% for the year ended December 31, 2015.
We earn a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates us for the costs we incur in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. The servicing fee is generally set at 1% to 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment.
The decrease in servicing fees for 2017 was due to the decrease in the average unpaid balance of Borrower Loans being serviced. The increase in servicing fees
for 2016 was due to the increase in Borrower Loans being serviced as a result of the
increasecumulative growth in sales of Borrower Loans
sold through the Whole Loan
Channel. Channel prior to 2016.
Gain on Sale of Borrower Loans Gain on Sale of Borrower Loans consists of net gains on Borrower Loans sold through the Whole Loan Channel. The increase
in 2017 compared to 2016 was due to an increase in
the volume of such
sales.sales during 2017 due to an increase in loans originated through the platform as described above and $1.9 million less of rebates that were issued in 2017 when compared to 2016.
The decrease in 2016 compared to 2015 was due to the reduced volume of loans originated through the platform, as described above, and the related sales and rebates in the amount of $5.9 million that were given to investors in 2016 to encourage whole loan purchases. No rebates were given to investors in 2015.
Fair Value of Warrants Vested on the Sale of Borrower Loans
Fair Value of Warrants Vested on the Sale of Borrower Loans relates to warrants to purchase Series F Convertible Preferred Stock issued to the Consortium that vest when the Consortium purchases whole loans under the Consortium Purchase Agreement that was signed in February 2017.
Other revenues consistsconsist primarily of securitization fees and credit referral fees. Credit referral fees are where partner companies pay us an agreed upon amount for referrals of customers from our website.platform. Securitization fees represent fees Prosper earns to facilitate securitizations for purchasers of borrower loans. The increasedecrease from 2016 to 2017 was not material.
The decrease in other
revenuesrevenue for 2016 compared to 2015 was
due toprimarily the
additionresult of
new credit referral partners, as well as increaseddecreased traffic to existing partners.
As described below, Prosper decreased its sales and marketing efforts during the year, which resulted in less traffic to the marketplace and, as a result, less referrals to our existing partners.
Interest Income on Borrower Loans and Interest Expense on NotesWe recognize
Prosper recognizes interest income on Borrower Loans
fundedoriginated through the Note Channel using the accrual method based on the stated interest rate to the extent we believe it to be
collectable.collectible. We record interest expense on the corresponding Notes based on the contractual interest
rates to the extent we believe they will be collectable.rates. The interest rate charged on the Borrower Loans is generally 1% higher than the corresponding interest rate on the Note to compensate us for servicing the Borrower Loans.
Overall,
the decrease in net interest income
did not change significantly asfor 2017 compared to 2016 was primarily driven by the
underlyingdecrease in volume of Borrower Loans
and Notes balances did notoriginated through the Note Channel. Overall, the increase
significantly andin net interest income for 2016 compared to 2015 was primarily driven by the
average interest rate on theincrease in volume of Borrower Loans
and Notes held on Prosper’s Balance Sheet decreased due to a change inoriginated through the
composition of these Borrower Loans and Notes. Note Channel.
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net The
Fair Valuefair value of Borrower Loans,
Loans Heldloans held for
Salesale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans,
Loans Heldloans held for
Salesale and Notes include prepayment rates derived 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
Heldheld for
Salesale are primarily comprised of Borrower Loans held for short durations and are
recordedvalued using the same approach as the Borrower
Loans.Loans held at fair value.
The following table summarizes the fair value adjustments for the years ended December 31,
2017, 2016 and 2015,
and 2014, respectively
(in(dollar amounts in thousands):
| | Year ended December 31, | |
| | 2015 | | | 2014 | |
Borrower Loans | | $ | (21,594 | ) | | $ | (15,868 | ) |
Loans Held for Sale | | | (121 | ) | | | 73 | |
Notes | | | 21,774 | | | | 16,391 | |
Total | | $ | 59 | | | $ | 596 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Borrower Loans | $ | (25,552 | ) | | $ | (25,934 | ) | | $ | (21,594 | ) |
| Loans Held for Sale | 7 |
| | (7 | ) | | (121 | ) |
| Notes | 25,031 |
| | 25,569 |
| | 21,774 |
|
| Total | $ | (514 | ) | | $ | (372 | ) | | $ | 59 |
|
The following table summarizes our expenses for the years ended December 31,
2017, 2016 and 2015
and 2014 (in(dollar amounts in thousands):
| | Year ended December 31, | | | | | | | | | |
| | 2015 | | | 2014 | | | $ Change | | | % Change | |
Expenses | | | | | | | | | | | | | | | | |
Origination and Servicing | | $ | 31,139 | | | $ | 14,098 | | | | 17,041 | | | | 121 | % |
Sales and Marketing | | | 112,284 | | | | 41,971 | | | | 70,313 | | | | 168 | % |
General and Administrative - Research and Development | | | 18,014 | | | | 5,981 | | | | 12,033 | | | | 201 | % |
General and Administrative - Other | | | 68,466 | | | | 21,935 | | | | 46,531 | | | | 212 | % |
Total Expenses | | $ | 229,903 | | | $ | 83,985 | | | | 145,918 | | | | 174 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
| Expenses | |
| | |
| | |
| | | | | | |
| Origination and Servicing | $ | 34,881 |
| | $ | 33,944 |
| | 3 | % | | 33,944 |
| | 31,139 |
| | 9 | % |
| Sales and Marketing | 83,462 |
| | 70,146 |
| | 19 | % | | 70,146 |
| | 112,284 |
| | (38 | )% |
| General and Administrative - Research and Development | 16,383 |
| | 26,214 |
| | (38 | )% | | 26,214 |
| | 18,014 |
| | 46 | % |
| General and Administrative - Other | 59,303 |
| | 76,521 |
| | (23 | )% | | 76,521 |
| | 68,466 |
| | 12 | % |
Change in Fair Value of Convertible Preferred Stock Warrants
| 29,140 |
| | 7 |
| | 100 | % | | 7 |
| | — |
| | 100 | % |
| Restructuring Charges | 1,340 |
| | 17,027 |
| | (92 | )% | | 17,027 |
| | — |
| | 100 | % |
Other Expenses
| 7,392 |
| | 30,341 |
| | (76 | )% | | 30,341 |
| | — |
| | 100 | % |
| Total Expenses | $ | 231,901 |
| | $ | 254,200 |
| | (9 | )% | | 254,200 |
| | 229,903 |
| | 11 | % |
As of December 31,
2017, 2016 and 2015, we had
377, 355 and 619 full-time employees,
compared to 229 full-time employees as of December 31, 2014.respectively. The following table reflects full-time employees as of December 31,
20152017, 2016 and
20142015 by department.
| | December 31, | |
| | 2015 | | | 2014 | |
Origination and Servicing | | | 221 | | | | 99 | |
Sales and Marketing | | | 115 | | | | 15 | |
General and Administrative - Research and Development | | | 133 | | | | 65 | |
General and Administrative - Other | | | 150 | | | | 50 | |
Total Headcount | | | 619 | | | | 229 | |
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
| Origination and Servicing | 163 |
| | 151 |
| | 221 |
|
| Sales and Marketing | 13 |
| | 28 |
| | 115 |
|
| General and Administrative - Research and Development | 81 |
| | 78 |
| | 133 |
|
| General and Administrative - Other | 120 |
| | 98 |
| | 150 |
|
| Total Headcount | 377 |
| | 355 |
| | 619 |
|
Origination and Servicing
Origination and servicingServicing costs consist primarily of salaries, benefits and stock-based compensation expense related to our credit, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans. The increase in 2017 compared to 2016 of 3% was primarily due to $1.8 million in increased amortization costs for internal use software and $1.9 million due to increased use of outsourced services. The increase was offset by a decrease in compensation costs of $2.9 million.
The increase in 2016 compared to 2015 of 9%was primarily due to an increase in personnel related expenses of $2.0 million, as wein the first half of the period Prosper expanded ourits verification and customer support teams to support the increasedlarger number of loans that were serviced and to support an anticipated future increase in loan application and processing volumevolumes. Additionally, Prosper incurred an additional $1.0 million in costs relating to data services for the Prosper Daily application and an increase$0.9 million in consumer reporting agency and loan processingincreased amortization costs which was also drivenfor internal use software. These increases were offset by higher loan volumes.a $1.8 million decrease in outsourced customer support costs during the period.
Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations, and direct mail marketing, includingas well as the compensation costsexpenses such as wages, benefits and stock based compensation for the employees towho support these activities. For the year ended December 31, 2015, this2017 compared to the year ended December 31, 2016, the increase of 19% was largely due to increased variable costs relatedas Prosper increased its marketing efforts to generatingincrease demand from Borrowers given the continuing growth in originations through our marketplace includinggreater availability of funding from investors. These
increases included a $22$17.1 million or 156% increase in affiliate marketing costs as we increased the number and volume of partners, a $29 million or 145%41% increase in direct mailing costs as weProsper increased the volume of ourits direct mail campaigns, a $4.3$3.7 million or 438%38% increase in partnership costs as Prosper significantly increased partnership activities and a $3.9 million or 107% increase in online marketing costs. These increases were offset by a $7.8 million or 72% decrease in compensation costs as Prosper significantly reduced its sales and marketing headcount in 2016.
For the year ended December 31, 2016 compared to the year ended December 31, 2015, the decrease of 38% in expenses was largely due to decreased variable costs and a decrease in personnel as Prosper slowed its marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium due to decreases in investor demand through the Whole Loan Channel. These decreases included a $9.2 million or 18% decrease in direct mailing costs as Prosper reduced the volume of its direct mail campaigns, a $25.8 million or 75% decrease in partnership costs as Prosper significantly reduced partnership activities and a $2.2 million or 42% decrease in online marketing costs as
weProsper significantly
expanded ourreduced its efforts in this
area and a $9.7area. Compensation costs decreased during the year ended December 31, 2016 by $1.2 million or
435% increase10%. These reductions are not as large as the decrease in
compensation costs due toactivity-based spending as Prosper increased sales and marketing headcount during the
hiringfirst four months of
one hundred additional employees2016 before making significant reductions in
this department. such headcount during the restructuring in May 2016.
General and Administrative – Research and Development
Research and development costs consist primarily of salaries, benefits and stock-based compensation expense related to our engineering and product development employees and related vendor costs. The decrease in 2017 compared to 2016 of 38% was primarily due to a decrease in compensation costs of $8.0 million and a decrease of $1.5 million due to lower contractor and consultant usage. Compensation costs decreased as a result of the decrease in headcount.
The increase in 2016 compared to 2015 of 46% was primarily due to an increase in personnel-related expenses as we expanded our engineering and product development teams to support our continued investment in our marketplace. The increase for stock based compensation costs by $4.0 million or 156% was due to large grants to new employees who were granted options in late 2015 and due to additional expense as a result of the stock option reprice that occurred in May 2016. Salaries and wages for these employees increased 25% or $3.3 million as a result of increased employee levels for the first four months of 2016 before the restructuring that occurred in May of 2016 that significantly lowered the employee levels.
General and Administrative – Other General and administrative other expenses consist primarily of salaries, benefits and stock-based compensation expense related to our accounting and finance, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expenses. The decrease in 2017 compared to 2016 of 23% was primarily the result of a decrease in compensation expense of $11.3 million, a decrease in professional services of $4.4 million and a decrease in rent and occupancy expenses of $3.1 million. The decrease in compensation expenses is the result of the reduction in headcount since the restructuring in May 2016. Rent and occupancy related expenses have decreased as Prosper has ceased the use of, subleased or terminated a number of leases for office space.
The increase in 2016 compared to 2015 of 12% was primarily due to an increase in personnel-relatedpersonnel related expenses as we increased ourProsper had higher headcount to support our growthlevels in 2016 before the restructuring took place on May 3, 2016 and increasedan increase in facilities expenses as weProsper obtained additional space to support the increased headcount. These headcount levels were subsequently reduced as part of the restructuring that occurred in May 2016.
Changes in the Fair Value of Convertible Preferred Stock Warrants
Changes in the Fair Value of Convertible Preferred Stock warrants increased $29.1 million in 2017 over 2016. The convertible preferred stock warrants were issued in late 2016 and over the course of 2017 and as a result there was limited change in fair value in 2016.
Restructuring Charges
Restructuring costs consist of personnel and facilities related costs related to the strategic restructuring of the business that Prosper announced on May 3, 2016. For 2017, the expenses relate to adjustments to fair value of the existing liabilities and accretion expense on the remaining liability. The 2016 restructuring included the termination of certain employees in our increase in headcount.Phoenix, Arizona and San Francisco, California locations and the closing of our Salt Lake City, Utah location. Personnel
costs include employee severance and benefits for the termination of 167 employees. Facilities charges include estimated losses on the sublease and lease termination costs for properties in Phoenix, Salt Lake City and San Francisco. Additionally, in the fourth quarter of 2016, Prosper incurred additional restructuring expenses when it closed its office in Tel Aviv, Israel and ceased the use of leased office space in Delaware. The closure of the Tel Aviv office included the termination of 31 employees. Prosper did not incur restructuring costs in 2015.
Other
Other expenses consist of interest income, contract termination costs and impairment charges on assets held for sale. In 2017, management recorded an impairment charge of $6.4 million related to the intangible assets associated with the Prosper Daily application and Prosper settled certain rebates related to the purchase of whole loans by members of the Consortium prior to the closing of the Consortium transaction via the issuance of Convertible Preferred Stock Warrants at a loss of $1.5 million over the cash settlement amount. In 2016, Prosper negotiated the termination of a contract with Colchis Capital Management, L.P. ("Colchis"). In exchange for termination of the contract Prosper agreed to pay Colchis $9 million and issue a warrant to purchase shares of a new series of preferred stock representing 7% of Prosper's capitalization as of the date of issuance for $0.01 per share. The fair value of the warrants at the time of contract termination was $21.7 million. In 2015, no similar charges were incurred.
Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure that we define as Net Loss adjusted for interest income on available for sale securities and cash and cash equivalents, income tax expense, depreciation and amortization, impairment of intangible assets, stock based compensation expense, fair value of warrants vested on the sale of borrower loans, restructuring charges, and fair value adjustments for warrant liabilities. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.
We consider Adjusted EBITDA to be a helpful indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Management uses Adjusted EBITDA to, among other things, understand and compare operating results across accounting periods, evaluate our operations and financial performance, and for internal planning and forecasting purposes. Inclusion of Adjusted EBITDA is intended to provide investors insight into the manner in which management views the performance of the Company, enhance investors’ evaluation of our operating results, and to facilitate meaningful comparisons of our results between periods. These non-GAAP financial measures should not be considered an alternative to, or more meaningful than, the GAAP financial information provided herein.
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA does not consider the potentially dilutive impact of equity-based charges;
Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
The major non-GAAP adjustments, and our basis for excluding them, are outlined below:
Fair value of warrants vested on the sale of borrower loans and change in the fair value of convertible preferred stock warrants liability. We exclude these charges primarily because they are non-cash charges and the fair value varies based
on the fair value of the underlying preferred stock, varying valuation methodologies and subjective assumptions. This makes the comparison of our current financial results to previous and future periods difficult to evaluate.
Stock-based compensation expense. This consists of expenses for equity awards under our equity incentive plans. Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to evaluate; therefore, we believe it is useful to exclude stock-based compensation. We also excluded these expenses because they are non-cash.
Amortization or impairment of acquired intangible assets and impairment of goodwill. We incur amortization or impairment of acquired intangible assets and goodwill in connection with acquisitions and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.
Restructuring charges - We have incurred restructuring charges that are included in our GAAP financial statements, related to workforce reductions and estimated costs of exiting facility lease commitments due to our May 2016 restructuring. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or historical operations of our business.
Contract termination charges - We have incurred contract termination charges that are included in our GAAP financial statements, related to a material contract termination. We exclude this item from our non-GAAP financial measures when evaluating our continuing business performance as such items do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or historical operations of our business.
The following table presents a reconciliation of Net Loss to Adjusted EBITDA for each of the periods indicated (in thousands):
|
| | | | | | | | | | | |
| | Year Ended
December 31, |
| | 2017 | | 2016 | | 2015 |
| Net Loss | $ | (115,158 | ) | | $ | (118,741 | ) | | $ | (25,968 | ) |
| Fair Value of Warrants Vested on Sale of Borrower Loans | 60,122 |
| | — |
| | — |
|
| Depreciation expense: | | | | | |
| Servicing and Origination | 5,853 |
| | 4,083 |
| | 3,161 |
|
| General & Administration - Other | 5,110 |
| | 5,298 |
| | 2,919 |
|
| Amortization of Intangibles | 1,385 |
| | 3,838 |
| | 1,569 |
|
| Impairment of Intangibles | 6,399 |
| | — |
| | — |
|
| Stock-based Compensation | 12,238 |
| | 19,787 |
| | 13,011 |
|
| Restructuring Charges | 1,340 |
| | 17,027 |
| | — |
|
| Change in the Fair Value of Warrants | 29,140 |
| | 7 |
| | — |
|
| Interest Income on Available for Sale Securities, Cash and Cash Equivalents | (461 | ) | | (547 | ) | | (177 | ) |
| Contract Termination | — |
| | 30,711 |
| | — |
|
| Income Tax Expense | (508 | ) | | 546 |
| | 340 |
|
| Adjusted EBITDA | $ | 5,460 |
| | $ | (37,991 | ) | | $ | (5,145 | ) |
Expenses on the Consolidated Statement of Operations include the following amount of stock based compensation for the periods presented (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Origination and servicing | $ | 996 |
| | $ | 2,004 |
| | $ | 1,231 |
|
| Sales and marketing | 553 |
| | 2,914 |
| | 2,561 |
|
| General and administrative | 10,689 |
| | 14,824 |
| | 9,219 |
|
| Restructuring | — |
| | 45 |
| | — |
|
| Total stock based compensation | $ | 12,238 |
| | $ | 19,787 |
| | $ | 13,011 |
|
Quarterly Results of Operations
The following table sets forth our unaudited consolidated statement of operations data for each of the eight quarters ended December 31, 2017. The unaudited quarterly statement of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited quarterly statement of operations data. Our historical results are not necessarily indicative of our future operating results. The following quarterly consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K (dollar amounts in thousands, except per share information):
|
| | | | | | | | | | | | |
| Quarters Ended | December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 |
| Revenues | | | | |
| Operating Revenues | | | | |
| Transaction Fees, Net | $ | 30,632 |
| $ | 37,250 |
| $ | 35,423 |
| $ | 26,869 |
|
| Servicing Fees, Net | 7,284 |
| 6,976 |
| 6,793 |
| 6,154 |
|
| Gain (Loss) on Sale of Borrower Loans | 3,574 |
| 4,373 |
| 3,803 |
| (318 | ) |
Fair Value of Warrants Vested on Sale of Borrower Loans
| (18,157 | ) | (21,772 | ) | (16,887 | ) | (3,307 | ) |
| Other Revenues | 1,280 |
| 1,390 |
| 1,415 |
| 720 |
|
| Total Operating Revenues | 24,613 |
| 28,217 |
| 30,547 |
| 30,118 |
|
| Interest Income | | | | |
| Interest Income on Borrower Loans | 11,636 |
| 12,065 |
| 12,007 |
| 11,499 |
|
| Interest Expense on Notes | (10,851 | ) | (11,247 | ) | (11,177 | ) | (10,678 | ) |
| Net Interest Income | 785 |
| 818 |
| 830 |
| 821 |
|
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | (317 | ) | (173 | ) | 70 |
| (94 | ) |
| Total Net Revenues | 25,081 |
| 28,862 |
| 31,447 |
| 30,845 |
|
| Expenses | | | | |
| Origination and Servicing | 8,341 |
| 9,263 |
| 8,873 |
| 8,404 |
|
| Sales and Marketing | 21,829 |
| 21,947 |
| 20,131 |
| 19,555 |
|
| General and Administrative | 18,088 |
| 18,123 |
| 18,758 |
| 20,717 |
|
| Restructuring Charges, Net | 682 |
| 86 |
| 647 |
| (75 | ) |
Change in Fair Value of Convertible Preferred Stock Warrants
| — |
| 6,323 |
| 22,416 |
| 401 |
|
| Other Expenses, Net | (213 | ) | (25 | ) | 1,930 |
| 5,700 |
|
| Total Expenses | 48,727 |
| 55,717 |
| 72,755 |
| 54,702 |
|
| Net Loss Before Taxes | (23,646 | ) | (26,855 | ) | (41,308 | ) | (23,857 | ) |
| Income Tax Expense | (854 | ) | 85 |
| 97 |
| 164 |
|
| Net Loss Applicable to Common Shareholders | $ | (22,792 | ) | $ | (26,940 | ) | $ | (41,405 | ) | $ | (24,021 | ) |
| Net Loss Per Share – Basic and Diluted | $ | (0.33 | ) | $ | (0.39 | ) | $ | (0.59 | ) | $ | (0.35 | ) |
| Weighted-Average Shares - Basic and Diluted | 70,058,880 |
| 69,811,534 |
| 69,691,841 |
| 69,178,049 |
|
|
| | | | | | | | | | | | |
| Quarters Ended | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 |
| Revenues | | | | |
| Operating Revenues | | | | |
| Transaction Fees, Net | $ | 19,944 |
| $ | 14,086 |
| $ | 19,276 |
| $ | 41,824 |
|
| Servicing Fees, Net | 7,004 |
| 7,079 |
| 7,676 |
| 7,144 |
|
| Gain on Sale of Borrower Loans | (228 | ) | 761 |
| (687 | ) | 3,791 |
|
| Other Revenues | 683 |
| 973 |
| 816 |
| 2,773 |
|
| Total Operating Revenues | 27,403 |
| 22,899 |
| 27,081 |
| 55,532 |
|
| Interest Income | | | | |
| Interest Income on Borrower Loans | 10,939 |
| 11,735 |
| 11,192 |
| 10,783 |
|
| Interest Expense on Notes | (10,731 | ) | (10,636 | ) | (10,098 | ) | (9,722 | ) |
| Net Interest Income | 208 |
| 1,099 |
| 1,094 |
| 1,061 |
|
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | (245 | ) | (47 | ) | (2 | ) | (78 | ) |
| Total Net Revenues | 27,366 |
| 23,951 |
| 28,173 |
| 56,515 |
|
| Expenses | | | | |
| Origination and Servicing | 7,029 |
| 7,633 |
| 8,833 |
| 10,449 |
|
| Sales and Marketing | 15,732 |
| 9,391 |
| 12,303 |
| 32,720 |
|
| General and Administrative | 18,851 |
| 24,740 |
| 28,499 |
| 30,645 |
|
Restructuring Charges, Net
| 3,436 |
| (470 | ) | 14,061 |
| — |
|
| Other Expenses, Net | 30,348 |
| — |
| — |
| — |
|
| Total Expenses | 75,396 |
| 41,294 |
| 63,696 |
| 73,814 |
|
| Net Loss Before Taxes | (48,030 | ) | (17,343 | ) | (35,523 | ) | (17,299 | ) |
| Income Tax Expense | 202 |
| 74 |
| 105 |
| 165 |
|
| Net Loss Applicable to Common Shareholders | $ | (48,232 | ) | $ | (17,417 | ) | $ | (35,628 | ) | $ | (17,464 | ) |
| Net Loss Per Share – Basic and Diluted | $ | (0.71 | ) | $ | (0.27 | ) | $ | (0.56 | ) | $ | (0.29 | ) |
| Weighted-Average Shares - Basic and Diluted | 67,713,630 |
| 65,393,175 |
| 63,270,058 |
| 60,357,488 |
|
Liquidity and Capital Resources
(in(in thousands): | | For the Year Ended | |
| | December 31, | |
| | 2015 | | | 2014 | |
Net Loss | | $ | (25,968 | ) | | $ | (2,669 | ) |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | 5,444 | | | | (4,651 | ) |
Net cash used in investing activities | | | (174,213 | ) | | | (71,606 | ) |
Net cash provided by financing activities | | | 184,507 | | | | 108,475 | |
| | | | | | | | |
Net Increase (decrease) in cash and cash equivalents | | | 15,738 | | | | 32,218 | |
Cash and cash equivalents at the beginning of the period | | | 50,557 | | | | 18,339 | |
Cash and cash equivalents at the end of the period | | $ | 66,295 | | | $ | 50,557 | |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net Loss | $ | (115,158 | ) | | $ | (118,741 | ) | | $ | (25,968 | ) |
| Net cash provided by (used in) operating activities | 1,081 |
| | (62,667 | ) | | 5,444 |
|
| Net cash used in investing activities | (28,085 | ) | | (21,542 | ) | | (174,213 | ) |
| Net cash provided by financing activities | 50,462 |
| | 40,251 |
| | 184,507 |
|
| Net Increase (decrease) in cash and cash equivalents | 23,458 |
| | (43,958 | ) | | 15,738 |
|
| Cash and cash equivalents at the beginning of the period | 22,337 |
| | 66,295 |
| | 50,557 |
|
| Cash and cash equivalents at the end of the period | $ | 45,795 |
| | $ | 22,337 |
| | $ | 66,295 |
|
Net cash and cash equivalents increased for the year ended December 31, 20152017, primarily due to the $165$50 million ($47.9 million net of fees) raised through the issuancesale of New Series D convertible preferred shares, whichG Convertible Preferred Stock and $7.1 million of net income, net of non-cash items. This was offset by the $19 million paid net of cash acquired to purchase American HealthCare Lending, $19 million paid net of cash acquired to purchase BillGuard, $77.5 million in purchases of available for sale securities of $20.4 million, $2.3 million reduction in Accounts Payable and $29.2Accrued Liabilities, $3.2 million paidincrease in prepaid expenses and a $3.0 million scheduled payment to repurchase common stock from certain employees. We used the $165 million raised for general corporate needs andreduce our settlement liability.
Net cash decreased for the common stock repurchase described previously. Netyear ended December 31, 2016, primarily due to the $54.4 million loss, net of non-cash items, $10.0 million for purchase of Property and Equipment, an additional $7.2 million for investing activity restricted cash provided by operating activities primarily represents an increasewhich includes $5.5 million in funds payableadditional collateral for WebBank, a $5 million payment for the BillGuard contingent liability and a $3 million scheduled payment to marketplace investors,reduce our settlement liability. These decreases are offset by the net lossproceeds from available for the period and increases in restrictedsale securities being converted to cash due to additional dedicated funding from investors.of $40.3 million. Net cash used in investing primarily represents the acquisition of American HealthCare Lending, the acquisition of BillGuard, purchases of available for sale securities and acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties, which is included in cash flow from operations along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans.Loans and $40.3 million of available for sale securities that have been converted into cash. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes. In the year ended December 31, 2015 cash provided by financing activities consisted primarily of $165 million ($164.8 million net of fees) raised through the issuance of Series D preferred convertible shares, which was offset by $29.2 million paid to repurchase common stock from certain employees.
Prosper also has available for sale securities that are available for its liquidity needs. The fair value of securities available for sale as of December 31, 2017 was $53.1 million. As a result the total cash, cash equivalents and available for sale investments available to Prosper at December 31, 2017 for its liquidity needs was $98.9 million. At December 31, 2017, the available for sale securities included Treasury Bills and US Treasury securities. All securities were rated investment grade (defined as a rating equivalent to a Moody’s rating of “Baa3” or higher, or a Standard & Poor’s rating of “BBB-” or higher) and there were no significant unrealized losses. These securities continue to be available to meet liquidity needs.
We believe
thatour cash and equivalents, together with available for sale investments and cash flows from
our financing and operating activities,operations, will be sufficient to meet our
working capitaloperating and
other cash needsliquidity requirements for
at least the next
12twelve months.
However, if the financial results anticipated are not achieved, our current cash and equivalents and available for sale investments may not be sufficient to meet our operating and liquidity requirements for at least the next twelve months without obtaining additional sources of liquidity which may not be available on favorable terms or at all. Our future operating and liquidity requirements will depend on numerous factors, including without limitation, future results of operations, and our continued ability to attract investors to our platform. If we are unable to generate positive cash flow from operations or to obtain funds from additional sources, this could have a material adverse effect on our business and financial condition.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets. Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, we have provided a full valuation allowance against our net deferred tax assets.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are required to make subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are required to make subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.
Given our history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for our net operating loss carry-forwards. Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, we have provided a full valuation allowance against our net deferred tax assets.
Off-Balance Sheet Arrangements
Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain special
purposespurpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as we are not the primary beneficiary. Other than these special purpose entities we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Contractual Obligations
As of December 31, 2017, the following table summarizes our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
|
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | Less Than 1 Year | 1 - 3 Years | 3 - 5 Years | More Than 5 Years |
| Operating lease obligations, net of minimum sublease rentals | $ | 31,580 |
| $ | 4,529 |
| $ | 10,580 |
| $ | 10,869 |
| $ | 5,602 |
|
| WebBank purchase obligations | 29,322 |
| 29,322 |
| — |
| — |
| — |
|
| Total contractual obligations | $ | 60,902 |
| $ | 33,851 |
| $ | 10,580 |
| $ | 10,869 |
| $ | 5,602 |
|
WebBank Purchase Obligations
Under our loan account program with WebBank, a Utah-charted industrial bank that serves as our primary issuing bank, WebBank retains ownership of loans facilitated through our marketplace for two business days after origination. As part of this arrangement, we have committed to purchase the loans at the conclusion of the two business days.
Critical Accounting Policies
The accounting policies discussed below reflect our most significant judgments, assumptions and estimates which we believe are critical in understanding and evaluating our reported financial results including: (i) fair value measurement of Borrower Loans and Notes; (ii) stock-based compensation expense; (iii) loan servicing assets and liabilities; (iv) consolidation of variable interest entities; (v) valuation of goodwill and intangible
assets andassets; (vi) impairment of goodwill and intangible
assets.assets and (vii) convertible preferred stock warrant liability. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material. For a full description of all accounting policies adopted by us, please see Note 2 to our consolidated financial statements.
Through the Note Channel, we issue Notes and purchase Borrower Loans from WebBank, and hold the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is conditioned upon the repayment of the associated Borrower Loan.
We have elected fair value accounting for Borrower Loans fundedoriginated through the Note Channel and the related Notes. The fair value election for these Borrower Loans and Notes allows for the use of the same measurement approach for both Borrower Loans and the related Notes, consistent with the borrower payment dependent design of such Notes. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans
fundedoriginated through the Note Channel and the related Notes to be valued using the same methodology. A specific allowance account is not recorded relating to the Borrower Loans in which we have elected the fair value option, but rather we estimate the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for the expected payment, loss and recovery rates.
We estimate the fair values of Borrower Loans
fundedoriginated through the Note Channel and the related Notes using a discounted cash flow valuation methodology. The valuation methodology considers projected prepayments and uses the historical defaults, losses and recoveries on Borrower Loans to project future losses and net cash flows on such Borrower Loans.
We include in earnings the estimated unrealized fair value gains or losses during the period of Borrower Loans, and the offsetting estimated fair value gains or losses on the related Notes in the period in which such changes in fair value occurs.
Stock-Based
Fair Value of Warrants Vested on the Sale of Borrower Loans
Fair Value of Warrants Vested on the Sale of Borrower Loans on the Consolidated Statement of Operations includes the fair of Series F Convertible Preferred Stock warrants that have vested during the period. These warrants relate to warrants to purchase Series F Convertible Preferred Stock issued to the Consortium that vest when the Consortium purchases whole loans under the Consortium Purchase Agreement that was signed in February 2017. On vesting of the Series F warrants, Prosper records a liability as "Convertible Preferred Stock Warrant Liability" on the Consolidated Balance Sheet at fair value and a corresponding amount as "Fair Value of Warrants Vested on Sale of Borrower Loans" on the Consolidated Statement of Operations as contra-revenue.
We estimate the fair value of the Series F Convertible Preferred Stock warrants using valuation methods appropriate for the circumstances at the time of vesting. Generally, this includes determining the business enterprise value of the Company using methods that may include recent transactions in the Company's stock and market indicators. Once the business enterprise value has been estimated, an option pricing model is used to allocate the value to the various classes of Prosper's equity. The concluded per share value for the Series F convertible preferred stock warrant is then determined using a Black-Scholes option pricing model.
Stock-based compensation includes expense associated with stock option grants and restricted stock units (“RSUs”). Stock-based compensation for stock options is measured at the grant date based on the fair value of the award and is
recognizedrecognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. As a result, we estimate the amount of stock-based compensation we expect to be forfeited based on our historical experience. If actual forfeitures differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially impacted.
Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by our assumptions regarding a number of variables including the fair value of our common stock, our expected common stock price volatility over the expected life of the options, expected term of the stock option, risk-free interest rates and expected dividends.
Loan Servicing Asset and Liability We record loan servicing assets and liabilities at their estimated fair values when we sell Borrower Loans to unrelated third-party buyers. The gain or loss on a loan sale is recorded in “Gain on Sale of Borrower Loans” on the consolidated statement of operations while the fair value of the servicing rights, which is based on the degree to which the contractual loan servicing fee is above or below an estimated market loan servicing fee is recorded in servicing assets or liabilities. Servicing assets and liabilities are recorded in “Servicing Assets” and “Other Liabilities,” respectively, on the consolidated balance sheet.
On January 1, 2015, we elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition. Prior to January 1, 2015, we measured the servicing assets and liabilities using the amortized cost method.
We use a discounted cash flow model to estimate the fair value of the loan servicing assets or liabilities which considers the contractual projected servicing fee revenue that we earn on the Borrower Loans, estimated market servicing fees to service such loans, prepayment rates, default rates and the current principal balances of the loans.
Consolidation of Variable Interest Entities The determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment whether we are the primary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support or (ii) when a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting
rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity.
As a result of the nature of the retained servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain special purposes entities that purchase these Borrower Loans. For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a potentially significant economic interest in the VIE. In no case are we the primary beneficiary and as a result none of these entities are consolidated on our consolidated financial statements.
Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.
Valuation of Goodwill and Intangible Assets When we acquire businesses, we allocate the purchase price to the tangible assets, liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies, market participant data, and historical experience. These estimates can include, but are not limited to:
| |
| |
•
| the time and expenses that would be necessary to recreate the asset; |
| |
•
| the profit margin a market participant would receive;
|
| |
•
| cash flows that an asset is expected to generate in the future; and
|
| |
•
| discount rates.
|
the profit margin a market participant would receive;
cash flows that an asset is expected to generate in the future; and
discount rates.
These estimates are inherently uncertain and unpredictable. A change in these estimates could impact our allocation of purchase price to the acquired assets and assumed liabilities. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill based on updated estimate information or facts and circumstances existing as of the acquisition date. Following the earlier of (1) receipt of all necessary information to determine the fair value of assets acquired and liabilities assumed, or (2) the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Impairment of Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill is evaluated for impairment annually in the third quarter, and whenever events or changes in
circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows.
During the periods presented no reporting units were at risk of failing step one of the impairment analysis.
Intangible assets consist of identifiable intangible assets, primarily developed technology and customer lists, resulting from our acquisitions. Acquired intangible assets are recorded at cost, net of accumulated amortization. Intangible assets are amortized on a straight-line or accelerated basis over their estimated useful lives. Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Annual Report
on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper Funding’s historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report on Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper Funding’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K.
Prosper Funding was formed in the state of Delaware in February 2012 as a limited liability company with its sole equity member being PMI. Prosper Funding was formed by PMI to hold Borrower Loans originated through the Note Channel and issue related Notes. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI.
PFL formed PAH in November 2013 as a limited liability company with the sole equity member being PFL. PAH was formed to purchase certain Borrower Loans from PFL and sell them to certain participants in the Whole Loan Channel.
The following table summarizes Prosper Funding’s net income for the years ended December 31,
20152017 , December 31, 2016 and December 31,
2014 (in2015(in thousands):
| | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | |
| | 2015 | | | 2014 | | | $ Change | | | % Change | |
Total Net Revenue | | $ | 93,053 | | | $ | 40,265 | | | | 52,788 | | | | 131 | % |
Total Expenses | | | 67,718 | | | | 26,981 | | | | 40,737 | | | | 151 | % |
Net Income | | $ | 25,335 | | | $ | 13,284 | | | | 12,051 | | | | 91 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | |
| | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
| Total Net Revenue | $ | 81,682 |
| | $ | 72,439 |
| | 13 | % | | 72,439 |
| | 93,053 |
| | (22 | )% |
| Total Expenses | 76,841 |
| | 99,623 |
| | (23 | )% | | 99,623 |
| | 67,718 |
| | 47 | % |
| Net Income (Loss) | $ | 4,841 |
| | $ | (27,184 | ) | | (118 | )% | | (27,184 | ) | | 25,335 |
| | (207 | )% |
Total revenues for the year ended December 31, 20152017 increased $53$9.2 million, a 131%13% increase from the year ended December 31, 2014,2016, primarily due to the increased number of loan listings on the marketplace during 2017, which resulted in increased administration fee revenue for the listing driven portion of the administration fee. Total expenses for the year ended December 31, 2017 decreased $22.8 million, a 23% decrease from the year ended December 31, 2016, primarily due to the non-recurring $30.7 million Colchis contract termination charge incurred in 2016 described in other expenses below. Net income for the year ended December 31, 2017 increased $32.0 million, a 118% increase from the year ended December 31, 2016, primarily due to the contract termination charge not recurring in 2017 and higher loan listings on the marketplace.
Total revenues for the year ended December 31, 2016 decreased $20.6 million, a 22% decrease from the year ended December 31, 2015, primarily due to decreased loan listings which increaseddecreased the administrative fee revenue –related party. Total expenses for the year ended December 31, 20152016 increased $41$31.9 million, a 151%47% increase from the year ended December 31, 2014,2015, primarily due to higher administrativethe $30.7 million non-recurring Colchis contract termination charge described in other expenses and depreciation charges.below. Net income for the year ended December 31, 2015 increased $122016 decreased $52.5 million, a 91% increase207% decrease from the year ended December 31, 2014,2015, primarily due to increased loan listings.the decrease in revenues and the non-recurring contract termination charge.
The following table summarizes Prosper Funding’s revenue for the years ended December 31,
20152017, December 31, 2016 and
2014December 31, 2015 (in thousands):
| | Year ended December 31, | | | | | | | | | |
| | 2015 | | | 2014 | | | $ Change | | | % Change | |
Revenues | | | | | | | | | | | | | | | | |
Operating Revenues | | | | | | | | | | | | | | | | |
Administration Fee Revenue - Related Party | | $ | 57,919 | | | $ | 28,519 | | | | 29,400 | | | | 103 | % |
Servicing Fees, Net | | | 16,218 | | | | 4,168 | | | | 12,050 | | | | 289 | % |
Gain on Sale of Borrower Loans | | | 14,151 | | | | 3,733 | | | | 10,418 | | | | 279 | % |
Other Revenues | | | 1,500 | | | | - | | | | 1,500 | | | N/A | |
Total Operating Revenues | | | 89,788 | | | | 36,420 | | | | 53,368 | | | | 147 | % |
Interest Income on Borrower Loans | | $ | 41,380 | | | $ | 42,370 | | | | (990 | ) | | | -2 | % |
Interest Expense on Notes | | $ | (38,174 | ) | | $ | (38,734 | ) | | | 560 | | | | -1 | % |
Net Interest Income | | | 3,206 | | | | 3,636 | | | | (430 | ) | | | -12 | % |
Change in Fair Value on Borrower Loans, Loans Held for Investment and Notes, Net | | | 59 | | | | 209 | | | | (150 | ) | | | (72 | )% |
Total Revenues | | $ | 93,053 | | | $ | 40,265 | | | | 52,788 | | | | 131 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | | | | |
| | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
| Revenues | |
| | |
| | |
| | |
| | | | |
|
| Operating Revenues | |
| | |
| | |
| | |
| | | | |
|
| Administration Fee Revenue - Related Party | $ | 101,500 |
| | $ | 36,630 |
| | 177 | % | | $ | 36,630 |
| | 57,919 |
| | (37 | )% |
| Servicing Fees, Net | 25,963 |
| | 28,604 |
| | (9 | )% | | $ | 28,604 |
| | 16,218 |
| | 76 | % |
| Gain on Sale of Borrower Loans | (48,691 | ) | | 3,637 |
| | (1,439 | )% | | $ | 3,637 |
| | 14,151 |
| | (74 | )% |
| Other Revenues | 170 |
| | 478 |
| | (64 | )% | | $ | 478 |
| | 1,500 |
| | (68 | )% |
| Total Operating Revenues | 78,942 |
| | 69,349 |
| | 14 | % | | $ | 69,349 |
| | 89,788 |
| | (23 | )% |
| Interest Income on Borrower Loans | $ | 47,208 |
| | $ | 44,649 |
| | 6 | % | | $ | 44,649 |
| | 41,380 |
| | 8 | % |
| Interest Expense on Notes | $ | (43,954 | ) | | $ | (41,187 | ) | | 7 | % | | $ | (41,187 | ) | | (38,174 | ) | | 8 | % |
| Net Interest Income | 3,254 |
| | 3,462 |
| | (6 | )% | | $ | 3,462 |
| | 3,206 |
| | 8 | % |
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | (514 | ) | | (372 | ) | | 38 | % | | $ | (372 | ) | | 59 |
| | (731 | )% |
| Total Revenues | $ | 81,682 |
| | $ | 72,439 |
| | 13 | % | | $ | 72,439 |
| | 93,053 |
| | (22 | )% |
Administration Fee Revenue - Related Party
Prosper Funding primarily generates
revenuesrevenue through license fees it earns under its Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the marketplace for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement.
Effective July 1, 2016 the Administration Agreement was amended. The
increasesamendments included amending the License Fee to include a fixed monthly fee alongside a reduced variable fee and the introduction of a Rebates Fee related to rebates given to investors. The increase in 2017 was the result of an increase in the listing driven portion of administration fees as a result of higher listings in 2017 and the above changes in the Administration Agreement, which was designed to compensate Prosper Funding for any rebates offered to whole loan investors. The decrease in the administration fee revenue
werein 2016 was the result of
higherlower listing volume during
2015. 2016. The decrease in listings was the result of Prosper reducing marketing spend to reduce demand and maintain marketplace equilibrium.
Prosper Funding earns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates Prosper Funding for the costs it incurs in servicing these Borrower Loans, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios.
TheHistorically, the servicing fee
ishas been generally set at 1% per annum of the outstanding principal balance of the
corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has been set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The
decrease in servicing fees in 2017 compared to 2016 was due to the decrease in Borrower Loans being serviced as a result of the decrease in loan originations in 2016. The increase in servicing fees
in 2016 was due to the increase in Borrower Loans being serviced as a result of the
increasegrowth in
loan originations.sales of Borrower Loans through the Whole Loan Channel in 2015
Gain (Loss) on Sale of Borrower Loans Gain on Sale of Borrower Loans consists of net gains on Borrower Loans sold through the Whole Loan Channel. The increaseloss in 2017 was due to an increase in rebates offered to certain whole loan investors to facilitate the sale of large volumes of Borrower Loans through the Whole Loan Channel. The increase in rebates of $52.3 million is primarily due to warrants issued by PMI in relation to the agreement with the Consortium that was reached in 2017 that results in warrants for convertible preferred stock vesting as loans are purchased by the Consortium.
The decrease in 2016 was due to a decrease in volume
originated through the platform as described previously and the related sales and rebates given to investors of
such sales.$5.9 million in 2016 to encourage whole loan purchases. This compares to no rebates given to investors on purchase in 2015.
Other revenues consists primarily of fees earned from
assistingfacilitating securitizations for whole loan purchasers. The change in 2017 is not significant. The decrease in 2016 was due to less instances of whole loan purchasers
with securitizations of their holdings. The increase was duesecuritizing loans in 2016 compared to
2015 being the first time that such securitizations occurred. 2015.
Interest Income on Borrower Loans and Interest Expense on Notes Prosper Funding recognizes interest income on Borrower Loans fundedoriginated through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes it to be collectable. Prosper Funding records interest expense on the corresponding Notes based on the contractual interest rates to the extent Prosper Funding believes they will be collectable. The interest rate charged on the Borrower Loans is generally 1% higher than the interest rate on the corresponding Note to compensate Prosper Funding for servicing the Borrower Loans.
Overall, the decrease in net interest income did not change significantly asfor 2017 compared to 2016 was primarily driven by the underlyingdecrease in volume of Borrower Loans and Notes balances did notoriginated through the Note Channel. The increase significantly andin net interest income in 2016 was primarily driven by the average interest rate on theincrease in volume of Borrower Loans and Notes held on Prosper’s Balance Sheet decreased due to a change inoriginated through the composition of these Borrower Loans and Notes. Note Channel.ChangeChange in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net
Net
The fair value of Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include prepayment rates derived 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 using the same approach as the Borrower Loans.
The following table summarizes the fair value adjustments for the years ended December 31,
20152017, 2016, and
2014,2015 respectively (in thousands):
| | Year ended December 31, | |
| | 2015 | | | 2014 | |
Borrower Loans | | $ | (21,594 | ) | | $ | (15,868 | ) |
Notes | | | 21,774 | | | | 16,391 | |
Loans Held for Sale | | | (121 | ) | | | 73 | |
Total | | $ | 59 | | | $ | 596 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Borrower Loans | $ | (25,552 | ) | | $ | (25,934 | ) | | $ | (21,594 | ) |
| Notes | 25,031 |
| | 25,569 |
| | 21,774 |
|
| Loans Held for Sale | 7 |
| | (7 | ) | | (121 | ) |
| Total | $ | (514 | ) | | $ | (372 | ) | | $ | 59 |
|
The following table summarizes Prosper Funding’s expenses for the years ended December 31,
20152017, 2016, and
20142015 (in thousands):
| | Year ended December 31, | | | | | | | | | |
| | 2015 | | | 2014 | | | $ Change | | | % Change | |
Expenses | | | | | | | | | | | | | | | | |
Administration Fee Expense – Related Party | | | 62,786 | | | | 24,966 | | | | 37,820 | | | | 151 | % |
Servicing | | $ | 3,705 | | | $ | 1,509 | | | | 2,196 | | | | 146 | % |
General and Administrative | | | 1,227 | | | | 506 | | | | 721 | | | | 142 | % |
Total Expenses | | | 67,718 | | | | 26,981 | | | | 40,737 | | | | 151 | % |
Servicing
Servicing costs consist primarily of vendor costs and depreciation of internal use software costs associated with servicing Borrower Loans. The increase was primarily due to an increase loan processing costs which was driven by higher loan volumes.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | | | | |
| | 2017 | | 2016 | | % Change | | 2016 | | 2015 | | % Change |
| Expenses | | | | | | | | | | | |
| Administration Fee Expense – Related Party | $ | 70,359 |
| | $ | 62,203 |
| | 13 | % | | $ | 62,203 |
| | $ | 62,786 |
| | (1 | )% |
| Servicing | 6,103 |
| | 5,395 |
| | 13 | % | | 5,395 |
| | 3,705 |
| | 46 | % |
| General and Administrative | 379 |
| | 1,321 |
| | (71 | )% | | 1,321 |
| | 1,227 |
| | 8 | % |
| Other | — |
| | 30,704 |
| | (100 | )% | | 30,704 |
| | — |
| | 100 | % |
| Total Expenses | $ | 76,841 |
| | $ | 99,623 |
| | (23 | )% | | $ | 99,623 |
| | $ | 67,718 |
| | 47 | % |
Administration Fee Expense - Related Party
Pursuant to an Administration Agreement between Prosper Funding and PMI, PMI manages the marketplace on behalf of Prosper Funding. Accordingly, each month, Prosper Funding is required to pay PMI (a)
an amount equal to one-twelfth (1/12)a corporate administration fee of
the specified annual Corporate Administration Fees equal to 50% of finance and legal personnel costs,$500,000 per month, (b) a fee for each Borrower Loan originated through the marketplace, (c)
90%62.5% of all servicing fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of Prosper Funding.
In addition, under a second Administration Agreement between PMI and PAH, a wholly owned subsidiaryThe increase in 2017 was due to higher fees paid on the origination of
Prosper Funding, PAH is requiredborrower loans due to
pay PMI an annual fee of $0.2 million, payable on a monthly basis, for PMI being the
administrator of PAH’s operations.increase in origination volume. The
increasedecrease in 2016 in the administration fee expense was primarily due to
the growth ofless loans being originated on the marketplace
in 2016, resulting in
increaseddecreased fees owed to PMI by Prosper Funding.
Servicing
Servicing costs consist primarily of vendor costs and depreciation of internal use software costs associated with servicing Borrower Loans. The increase for 2017 was primarily due to an increase in amortization of internal use software. The increase in 2016 was primarily due to an increase in loan processing costs which was driven by higher loan volumes being serviced.
General and Administrative
General and administrative costs consist primarily of bank service charges and professional fees. The decrease in 2017 was primarily due to a decrease in outsourced costs. The increase in 2016 was primarily due to an increase in bank charges that were incurred with the increased transaction volume.
Other
Other expenses consist of contract termination costs. In November 2016, PMI and Prosper Funding, negotiated the termination of a contract with Colchis Capital Management, L.P. ("Colchis"). In exchange for termination of the contract, PMI, on behalf of Prosper Funding, agreed to pay Colchis $9 million and issue a warrant to purchase shares of a new series of preferred stock representing 7% of PMI's capitalization as of the date of issuance for $0.01 per share. The fair value of the warrants at the time of contract termination was $21.7 million. The total of the cash payment and the fair value of the warrants that PMI issued was recorded in Other expenses. Prosper Funding does not expect to incur similar contract termination charges in the future.
Quarterly Results of Operations
The following table sets forth our unaudited consolidated statement of operations data for each of the eight quarters ended December 31, 2017. The unaudited quarterly statement of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited quarterly statement of operations data. Our historical results are not necessarily indicative of our future operating results. The following quarterly consolidated financial data should be
read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K (dollar amounts in thousands, except per share information):
|
| | | | | | | | |
| Quarters Ended | December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 |
| Revenues | | | | |
| Operating Revenues | | | | |
| Administration Fee Revenue – Related Party | 26,840 |
| 32,198 |
| 27,309 |
| 15,153 |
|
| Servicing Fees, Net | 6,937 |
| 6,626 |
| 6,520 |
| 5,879 |
|
| Gain (Loss) on Sale of Borrower Loans | (14,583 | ) | (17,399 | ) | (13,084 | ) | (3,625 | ) |
| Other Revenues | 60 |
| 45 |
| 34 |
| 32 |
|
| Total Operating Revenues | 19,254 |
| 21,470 |
| 20,779 |
| 17,439 |
|
| Interest Income on Borrower Loans | 11,637 |
| 12,066 |
| 12,007 |
| 11,499 |
|
| Interest Expense on Notes | (10,853 | ) | (11,247 | ) | (11,177 | ) | (10,678 | ) |
| Net Interest Income | 784 |
| 819 |
| 830 |
| 821 |
|
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | (317 | ) | (173 | ) | 70 |
| (94 | ) |
| Total Net Revenues | 19,721 |
| 22,116 |
| 21,679 |
| 18,166 |
|
| Expenses | | | | |
| Administration Fee – Related Party | 17,000 |
| 19,078 |
| 18,466 |
| 15,815 |
|
| Servicing | 1,296 |
| 1,553 |
| 1,524 |
| 1,730 |
|
| General and Administrative | (125 | ) | 186 |
| 145 |
| 173 |
|
| Total Expenses | 18,171 |
| 20,817 |
| 20,135 |
| 17,718 |
|
| Total Net Income | 1,550 |
| 1,299 |
| 1,544 |
| 448 |
|
|
| | | | | | | | |
| Quarters Ended | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 |
| Revenues | | | | |
| Operating Revenues | | | | |
| Administration Fee Revenue – Related Party | 8,753 |
| 5,530 |
| 6,930 |
| 15,417 |
|
| Servicing Fees, Net | 6,955 |
| 7,026 |
| 7,589 |
| 7,034 |
|
| Gain on Sale of Borrower Loans | (228 | ) | 761 |
| (687 | ) | 3,791 |
|
| Other Revenues | 30 |
| 30 |
| 26 |
| 392 |
|
| Total Operating Revenues | 15,510 |
| 13,347 |
| 13,858 |
| 26,634 |
|
| Interest Income on Borrower Loans | 11,588 |
| 11,566 |
| 10,988 |
| 10,507 |
|
| Interest Expense on Notes | (10,731 | ) | (10,636 | ) | (10,098 | ) | (9,722 | ) |
| Net Interest Income | 857 |
| 930 |
| 890 |
| 785 |
|
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | (245 | ) | (47 | ) | (2 | ) | (78 | ) |
| Total Net Revenues | 16,122 |
| 14,230 |
| 14,746 |
| 27,341 |
|
| Expenses | | | | |
| Administration Fee – Related Party | 13,701 |
| 12,243 |
| 15,652 |
| 20,607 |
|
| Servicing | 1,258 |
| 1,374 |
| 1,536 |
| 1,227 |
|
| General and Administrative | 245 |
| 342 |
| 380 |
| 357 |
|
| Other | 30,701 |
| | | |
| Total Expenses | 45,905 |
| 13,959 |
| 17,568 |
| 22,191 |
|
| Total Net Income | (29,783 | ) | 271 |
| (2,822 | ) | 5,150 |
|
Liquidity and Capital Resources
(in(in thousands): | | December 31, | |
| | 2015 | | | 2014 | |
Net Income | | $ | 25,335 | | | $ | 13,284 | |
Net cash provided in operating activities | | | 34,174 | | | | 2,216 | |
Net cash used in investing activities | | | (52,815 | ) | | | (55,184 | ) |
Net cash provided by financing activities | | | 9,890 | | | | 70,956 | |
Net increase (decrease) in cash and cash equivalents | | | (8,751 | ) | | | 17,988 | |
Cash and cash equivalents at the beginning of the period | | | 23,777 | | | | 5,789 | |
Cash and cash equivalents at the end of the period | | $ | 15,026 | | | $ | 23,777 | |
|
| | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
| Net Income | $ | 4,841 |
| | $ | (27,184 | ) | | $ | 25,335 |
|
| Net cash provided in operating activities | 14,508 |
| | 8,836 |
| | 34,174 |
|
| Net cash used in investing activities | (9,977 | ) | | (52,242 | ) | | (52,815 | ) |
| Net cash (used in) provided by financing activities | (3,237 | ) | | 35,309 |
| | 9,890 |
|
| Net increase (decrease) in cash and cash equivalents | 1,294 |
| | (8,097 | ) | | (8,751 | ) |
| Cash and cash equivalents at the beginning of the period | 6,929 |
| | 15,026 |
| | 23,777 |
|
| Cash and cash equivalents at the end of the period | $ | 8,223 |
| | $ | 6,929 |
| | $ | 15,026 |
|
Net cash and cash equivalents decreasedincreased for the year ended December 31, 2015. Operating cash2017. Cash flows were positive primarily due to net operating income of $8.9 million net of non-cash items, this was offset by a $5.8 million distribution to the cash generated from the Loans Held for Sale at fair value and the positive net income for the period of $25 million.PMI. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties which is included in cash flow from operations along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes and distributions to PMI.
Net cash and cash equivalents decreased for the parent.year ended
December 31, 2016. Cash flows were negative primarily due to a cash distribution to PMI of $8.5 million and purchases of property and equipment of $5.6 million, these were offset of net income of $3.5 million when excluding the non-cash loss on contract termination. Prosper Funding incurred no income tax provision for the years ended December 31,
20152017 and
2014.2016. Prosper Funding is a US disregarded entity and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses,
and inability to achieve profitable operations, it is difficult to accurately forecast how Prosper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.
Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, Prosper Funding is a variable interest holder in certain special purposespurpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as Prosper Funding is not the primary beneficiary.
Item
| |
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in financial market prices and interest rates.
Not applicable
Because balances, interest rates and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates before our servicing fee and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for smaller reporting companies.trading purposes.
The fair values of Borrower Loans, Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
Prosper had cash and cash equivalents of $45.8 million as of December 31, 2017, and $22.3 million as of December 31, 2016. These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities consisting primarily of money market funds, commercial paper, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, Prosper believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will moderately increase the interest income earned on these cash balances.
Interest Rate Sensitivity
Prosper also holds available for sale investments. The fair value of Prosper’s available for sale investment portfolio was $53.1 million and $32.8 million as of December 31, 2017 and December 31, 2016, respectively. These investments consisted of corporate debt securities, commercial paper, U.S. agency bonds, U.S. Treasury securities and short term bonds. To mitigate the risk of loss, Prosper’s investment policy and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns. To manage this risk, Prosper limits and monitors maturities, credit ratings, and concentrations within the investment portfolio. Changes in U.S. interest rates affect the interest earned on Prosper’s available for sale investments and the market value of those investments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $0.3 million in the fair value of Prosper’s available for sale investments as of December 31, 2017, and of approximately $0.1 million in the fair value of Prosper’s available for sale investments as of December 31, 2016. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $0.3 million in the fair value of Prosper’s available for sale investments as of December 31, 2017, and of approximately $0.1 million in the fair value of Prosper’s available for sale investments as of December 31, 2016. Any realized gains or losses resulting from such interest rate changes would only be recorded in the consolidated statement of operations if Prosper sold the investments prior to maturity or the investments were not considered other-than-temporarily impaired.
Item
| |
| Item 8. | Financial Statements and Supplementary Data |
Prosper Marketplace, Inc.
Prosper Funding LLC
The supplementary financial statementsinformation required by this Item are8 is included in Item 157 under the caption "Quarterly Results of this Annual Report on Form 10-K and are presented beginning on page F-2.Operations."
Item
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
On October 23, 2014, Burr Pilger Mayer Inc. (“BPM”), the independent registered public accounting firm of Prosper and Prosper Funding was dismissed by each of Prosper and Prosper Funding. Prosper and Prosper Funding engaged Deloitte & Touche L.L.P. (“Deloitte”) as each entity’s independent registered public accounting firm for the third quarter ended September 30, 2014 and fiscal year ended December 31, 2014. Prosper and Prosper Funding’s decision to dismiss BPM and to engage Deloitte was approved by the Audit Committee of PMI on October 23, 2014 and by the Board of Directors of PFL on October 23, 2014. Such change was reported by Prosper and Prosper Funding in a Current Report on Form 8-K dated October 23, 2014, which was filed with the SEC on October 28, 2014 and amended on November 4, 2014.
Item
| |
| Item 9A. | Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, each Registrant’s management, under the supervision and with the participation of such Registrant’s Principal Executive Officer (PEO) and Principal Financial Officer (PFO), evaluated the effectiveness of the design and operation of such Registrant’s disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2015. 2017. Based upon this evaluation, the PEO and the PFO of each Registrant have concluded that these disclosure controls and procedures are effective to provide reasonable assurance that material information relating to each Registrant and its subsidiaries that is required to be disclosed in reports filed with, or submitted to, the SEC under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms, and (ii) is accumulated and communicated to management, including its PEO and PFO, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Under Section 404 of the Sarbanes-Oxley Act of 2002, each Registrant’s management is required to assess the effectiveness of such Registrant’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether such Registrant’s internal control over financial reporting is effective.
Management of each Registrant is responsible for establishing and maintaining adequate internal control over financial reporting. Each Registrant’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of such Registrant’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Registrants’ management has assessed the effectiveness of the Registrants’ internal control over financial reporting as of December 31,
2015.2017. In making this assessment the Registrants used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework
(1992)(2013).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Each Registrant’s assessment included documenting and evaluating the effectiveness of its internal control over financial reporting. Based on this evaluation, the person serving as each Registrant’s principal executive officer and principal financial officer has concluded that such Registrant’s internal controls were effective as of December 31,
2015.Remediation of Previously-Reported Material Weaknesses
Management of the Registrants concluded that the Registrants’ internal control over financial reporting was not effective as of December 31, 2014. For the year ended December 31, 2014, it was concluded that the following material weaknesses existed in the Registrants’ internal control over financial reporting:
| ·
| The Registrants had insufficient appropriate accounting department resources to develop and operate effective internal controls over financial reporting and an insufficient number of personnel appropriately qualified to perform control monitoring activities. The lack of appropriate resources led to control deficiencies in the Registrants’ financial reporting process and contributed significantly to the errors identified that led to the corrections of prior financial information referred to in note 16 and note 9 in the Consolidated Financial Statements of Prosper Marketplace, Inc. and Prosper Funding LLC, respectively.
|
2017. | ·
| Because of an inefficient data system with certain limitations, the reconciliation of data related to cash, Borrower Loans, and Notes to the general ledger required substantial effort from personnel in the Registrants’ financial reporting and business operations groups. As a result, these reconciliations were not completed in a timely manner.
|
During 2015, the Registrants committed to remediating these material weaknesses and as such, implemented changes to their internal control over financial reporting. The Registrants implemented additional procedures to address the underlying causes of the material weaknesses, continued to implement changes and improvements in their internal control over financial reporting with the intent to remediate the control deficiencies that caused the material weaknesses.
During the year ending December 31, 2015, the changes and improvements in the Registrants’ internal control over financial reporting included the following:
| ·
| Hired additional IT and finance personnel with technical accounting expertise to address management-identified gaps in skills base and expertise of staff necessary to meet financial reporting requirements.
|
| ·
| Formalized accounting policies and internal controls documentation and strengthened supervisory reviews by management.
|
| ·
| Conducted a review of the Registrants’ organization structures, reporting relationships and adequacy of staffing levels and made specific staffing changes as a result of this review, which included significantly expanding the number of employees responsible for financial reporting and the development of a business intelligence department, which improved the source data and reports that the Registrants use for financial reporting.
|
| ·
| Performed a comprehensive assessment of the Registrants’ financial reporting risks. Controls were then identified that adequately address these risks and where necessary new controls were implemented.
|
| ·
| Implemented enhanced accounting and reconciliation processes and control procedures, including enhancements to the Registrants’ data system to allow for daily reconciliations of data, earlier identification of reconciling items, improved aggregation and greater automation.
|
Based on the measures taken and implemented, management of the Registrants have assessed the newly implemented control activities and found them to be effective and has concluded that each of the material weaknesses described above has been remediated as of December 31, 2015.
Changes in Internal Control over Financial Reporting
Other than with respect to
During the
remediationfourth quarter of
the material weaknesses identified2017, there were no changes in the
prior year as described above, there has been no change to the Registrants’ internal control over financial reporting
during their most recent fiscal quarter that
has materially affected, or
isare reasonably likely to materially affect, the
Registrants’Registrant's internal control over financial reporting.
The Dodd-Frank Wall Street Reform and Consumer Protection Act exempts any company that is not a “large accelerated filer” or an “accelerated filer” (as defined by SEC rules) from the requirement that such company obtain an external audit of the effectiveness of its internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. As a result, the Registrants are exempt from the requirement that they include in their Annual Report on Form 10-K an attestation report on internal control over financial reporting by an independent registered public accounting firm; however, management’s annual report on internal control over financial reporting, pursuant to Section 404(a) of the Sarbanes-Oxley Act, is still required with respect to the Registrants.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
In connection with the preparation of this December 31,
20152017 Form 10-K, the Registrants’ management, under the supervision and with the participation of each Registrant’s Principal Executive Officer (PEO) and Principal Financial Officer (PFO), evaluated the effectiveness of the design and operation of each Registrant’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31,
2015.2017. Each Registrant’s PEO and PFO have concluded that, as of December 31,
2015,2017, each Registrant’s disclosure controls and procedures were effective.
Item 9B.Other Information | |
| Item 9B. | Other Information |
PART III
PART IIIItem
| |
| Item 10. | Directors, Executive Officers, and Corporate Governance |
Prosper Marketplace, Inc.
Executive Officers, Directors and Key Employees
The following table sets forth information about PMI’s executive officers and directors as of the date of this Annual
Report:Report on Form 10-K:Name
| | Age
| | Position(s)
|
Stephan P. Vermut
| | 69
| | Executive Chairman and Director
|
Aaron Vermut
Name | | 43
Age | | Position(s) |
| David Kimball | | 47 | | Chief Executive Officer and Director |
Ronald Suber
Usama Ashraf | | 51
41 | | President
Chief Financial Officer |
Joshua M. Tonderys
Brad Pennington | | 39
36 | | Chief OperatingRisk Officer |
John Hiestand
Kunal Kaul | | 48
41 | | Executive Vice President, Finance Operations |
Sachin D. Adarkar | | 49
51 | | General Counsel and Secretary |
Christopher M. Bishko
Nasos Topakas | | 46
53 | | Director
Chief Technology Officer |
Rajeev V. Date | | 44
46 | | Director |
Patrick W. Grady | | 33
35 | | Director |
David R. Golob | | 48
50 | | Director |
Claire A. Huang | | 55 | | Director |
| Nigel W. Morris | | 57
59 | | Director |
| Mason D. Haupt | | 62 | | Director |
Stephan P. Vermut
David Kimball has served as PMI’s Executive Chairman since March 2014. Prior to his appointment as Executive Chairman, Mr. Vermut served as Chief Executive Officer from January 2013 until March 2014. Mr. Vermut is alsoand a director of PMI and Executive Chairman and a director of PFL. Priorsince December 2016. From March 2016 to joining PMI,February 2017, Mr. VermutKimball served as Managing Director, co-Head of Prime Services, at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC) from August 2012 until January 2013. Mr. Vermut was one of the founders of Merlin Securities, LLC and servedPMI's Chief Financial Officer. He also currently serves as its Chairman of the Board and Chief Executive Officer and as one of its Managing Partners from 2004 until it was acquired by Wells Fargo Securities in August 2012. Prior to that, Mr. Vermut served as President and Chief Executive Officer of Montgomery/Bank of America Prime Brokerage from 1995 to 2003. Prior to that, Mr. Vermut was a Partner of Furman Selz in New York and Managing Director of the Prime Brokerage Division of Furman Selz. Mr. Vermut received a B.S. in Business Administration from Babson College. PMI believes that Mr. Vermut’s financial and business expertise, including his background of founding, managing and directing financial and technology-enabled service companies, give him the qualifications and skills to serve as a director.Aaron Vermut has served as PMI’s Chief Executive Officer since March 2014. Aaron Vermut is the son of Stephan Vermut. Prior to his appointment as Chief Executive Officer, Mr. Vermut served as President of PMI from April 2013 until March 2014. Mr. Vermut is also a director of PMI and Chief Executive Officer and a director of PFL. Prior to joining PMI, Mr. Vermut servedKimball was Senior Financial Officer of United Services Automobile Association's (USAA) Chief Operating Office, with financial responsibility for the real estate unit, the bank, the P&C and life insurance companies, the investment management company, and the call centers/distribution functions. Before his position as Managing Director, co-HeadSenior Financial Officer of Prime Services,USAA's Chief Operating Office, Mr. Kimball spent eight years in various finance roles at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC) from August 2012 until April 2013. Mr. Vermut was oneUSAA, including Senior Vice President of the foundersCorporate Finance; Corporate Treasurer; Chief Financial Officer of Merlin Securities, LLCUSAA Federal Savings Bank; and served as oneAssistant Vice President of its Managing Partners and directors from 2004 until it was acquired by Wells Fargo Securities in August 2012.Capital Markets. Prior to that,his time at USAA, Mr. Vermut served as PrincipalKimball spent ten years at Ford Motor Company and Ford Motor Credit Company in both the U.S. and U.K., working on their securitization programs, debt issuance, and a variety of New Enterprise Associates from 2000 to 2003. Prior to that,financial planning and analysis positions. Mr. Vermut served as Senior Consultant of Cambridge Technology Partners from 1995 to 1998. Mr. Vermut hasKimball holds an M.B.A. in Finance from The Wharton School, University of Pennsylvania and a B.A. in History and German LiteratureEnglish from Washington University in St. Louis.Brigham Young University. PMI believes that Mr. Vermut’sKimball's financial and business expertise including his background of founding, managing and directing a financial and technology-enabled service company, give him the qualifications and skills to serve as a director.
Ronald Suber
Usama Ashraf has served as PresidentChief Financial Officer of PMI since MarchFebruary 2017. Prior to joining PMI, from February 2016 to February 2017, Mr. Ashraf served as Deputy Chief Financial Officer and Treasurer at Annaly Capital Management, Inc. (“Annaly") with responsibility for treasury, tax, management reporting and financial planning & analysis. Prior to his time at Annaly, Mr. Ashraf worked at United Services Automobile Association (“USAA”), where he served as Corporate Treasurer from November 2014 to February 2016 and Assistant Corporate Treasurer from January 2014 to October 2014. Before joining USAA, Mr. Ashraf spent 13 years at CIT Group, where he held various positions in the Treasury and Corporate M&A departments, most recently serving as Deputy Treasurer with responsibility for the firm’s Treasury activities in the United States. He started his career in the investment banking division of Salomon Smith Barney/Citigroup focused on M&A. Mr. Ashraf received a B.S. in Economics, with concentrations in Finance and Accounting, from The Wharton School of the University of Pennsylvania.
Brad Pennington has served as Chief Risk Officer of PMI since May 2016. Prior to his appointment as President,Chief Risk Officer, Mr. SuberPennington served as PMI’s HeadVice President of Global Institutional SalesRisk Analysis from January 2013 until March 2014.April 2015 to May 2016 and Director of Risk Analysis from February 2012 to April 2015. Before joining PMI, from August 2010 to February 2012, Mr. Suber is alsoPennington was Assistant Director of Risk Management Services with Moody’s Analytics, where he worked with large global and U.S. bank clients focusing on Economic Capital, Basel Compliance and PD, LGD and EAD model development. Prior to his time at Moody’s, Mr. Pennington spent 6 years at First Equity Card, a small-business credit card specialty finance start-up, where he served as Manager of Predictive
Analytics from June 2005 to July 2010. Mr. Pennington received a B.S. in Economics from the Wharton Undergraduate School where he completed a self-directed course of study, obtaining minors in Finance, Statistics, Mathematics, Econometrics and Operations Research.
Kunal Kaul has served as PMI’s Executive Vice President, and a director of PFL.Operations since late December 2015. Prior to joining PMI, Mr. Suber served as Managing DirectorKaul spent more than 13 years at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC) from August 2012 until January 2013. Mr. Suber served as Head of Global Sales and Marketing, Senior Partner and Director of Merlin Securities, LLC from April 2008 until it was acquired by Wells Fargo Securities in August 2012. Mr. Suber served as President of Spectrum Global Fund Administration from 2006 to 2008. Mr. Suber was with Bear Stearns from 1992 to 2006,Capital One, where he served in various positions, including Senior Business Director, Senior Business Manager and Senior Product Manager, across a number of departments. In his most recentlyrecent roles at Capital One, Mr. Kaul served as Senior Managing Director. Mr. Suber received a B.A. in EconomicsBusiness Director - Head of Home Loans Originations Operations Excellence from University of California, Berkeley.
Joshua M. Tonderys has served as Chief Operating Officer of PMI sinceFebruary 2015 to December 2015 and Senior Business Director - Retail Bank Mortgage & Home Equity Lending from January 2014 to February 2015. Mr. Tonderys also serves as PMI’s Chief Risk Officer, a position heKaul has held since September 2012 and Chief Operating Officer of PFL. Prior to joining PMI, Mr. Tonderys served as Senior Director at Barclaycard US (formerly Juniper Bank) from September 2002 to September 2012, with responsibilities that included general management, marketing, analytics, risk management, and operations. Prior to that, Mr. Tonderys served as Risk Analyst at BankOne (now Chase Card Services) from July 1999 to September 2002. Mr. Tonderys holds a B.A. in economics from Hobart College and an M.B.A.MBA from the UniversityIndian Institute of North Carolina at Chapel Hill.Management (Bangalore, India) and a degree in Chemical Engineering from Bombay University.
Sachin D. Adarkarhas served as PMI’s General Counsel and Secretary since August 2009. Mr. Adarkar also serves as Secretary of PFL. Prior to joining PMI, he served as Vice President and Deputy General Counsel of GreenPoint Mortgage Funding, Inc., a wholesale mortgage lender in Novato, CA. Prior to joining GreenPoint, Mr. Adarkar spent several years practicing with the law firm of Howard Rice Nemerovski Canady Falk & Rabkin, in San Francisco (now part of Arnold & Porter LLP), and also served as Vice President and General Counsel of Valley Media, Inc., a music and video distributor. Mr. Adarkar has a J.D. from UCLA, an M.A. from the University of California at Berkeley and a B.A.,cum laude, from Georgetown University. Mr. Adarkar is a member of the California Bar. On March 14, 2018, Sachin Adarkar announced his intention to resign as General Counsel and Secretary of PMI and Secretary of PFL, effective April 13, 2018.John Hiestand
Nasos Topakas has served as PMI’s Vice President of FinanceChief Technology Officer since May 2015. In July 2015, Mr. Hiestand was appointed Treasurer of PFL and designated as the principal financial and accounting officer of both PFL and PMI.April 2017. Prior to joining PMI, from June 2010 to February 2017, Mr. HiestandTopakas served as Director, Chief OperatingTechnology Officer at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC) from August 2012 until April 2015.Art.com, Inc., an online wall art and contemporary decor retailer, where he was head of all technology and product departments, with responsibility for the overall technology vision, strategy, engineering execution, and architectural direction. Prior to his time at Art.com, Inc., Mr. Hiestand was a Senior Partner of Merlin Securities, LLC andTopakas worked at SendMe, Inc., where he served as its Chief FinancialTechnology Officer from 2008 until itNovember 2007 to May 2010. As Chief Technology Officer of SendMe, Inc., Mr. Topakas was acquired by Wells Fargo Securities in August 2012. Prior to that,head of all technology departments, including Engineering, Architecture, Technical Project Office, QA, Technical Ops and Corporate IT. Mr. Hiestand held various financial positions including management positionsTopakas participated at KPMG, Cienathe M.B.A. executive program from Golden Gate University and Merriman Capital. Mr. Hiestand received a B.A. in Accounting from Cal Poly San Luis Obispo and is a Certified Public Accountant and Chartered Financial Analyst.Christopher M. Bishko has served as one of PMI’s directors since May 2013. Mr. Bishko is a Partner at Omidyar Technology Ventures, which he joined in June 2015, and before that, he was an Investment Partner at Omidyar Network Services LLC, which he joined in September 2008. Prior to joining Omidyar, Mr. Bishko worked in investment banking at JPMorgan Securities, Inc. from October 1992 to July 2008. Mr. Bishko holds a B.S. in Biomedical EngineeringComputer Science from DukeSan Francisco State University. PMI believes that Mr. Bishko’s experience as a venture capital investor in financial technology and Internet companies and his background in investment banking give him the qualifications and skills to serve as a director.
Rajeev V. Date has served as one of PMI’s directors since July 2013. Mr. Date previously served as one of PMI’s directors from January 2009 to September 2010. Mr. Date currently serves as the Managing Partner of Fenway Summer LLC, a U.S. consumer financial advisory and investment firm. From January 2012 to January 2013, Mr. Date served as the Deputy Director of the United States Consumer Financial Protection Bureau (“CFPB”). Before being appointed Deputy Director, Mr. Date was appointed the Special Advisor to the Secretary of the Treasury for the CFPB, and, in that capacity, acted as the interim leader of the CFPB. From October 2010 to August 2011, Mr. Date served as Associate Director of Research, Markets, and Regulations of the CFPB. Prior to joining the CFPB, Mr. Date served as Chairman & Executive Director of Cambridge Winter Center for Financial Institutions Policy, a non-profit nonpartisan think tank focused on financial institutions policy, from March 2009 to September 2010. From 2007 to 2009, Mr. Date served as a Managing Director in the Financial Institutions Group at Deutsche Bank Securities, where his key responsibility was acting as a coverage officer for specialty finance firms and regional banks. Before that, Mr. Date was Senior Vice President for Corporate Strategy and Development at Capital One Financial, where he led M&A development efforts across the U.S. banking and specialty finance markets. He began his business career in the financial institutions practice of the consulting firm McKinsey & Company. He has also served as an attorney, in both private practice and government. Mr. Date received a J.D., magna cum laude,
, from Harvard Law School and a B.S. (highest honors) from University of California, Berkeley. PMI believes that Mr. Date’s financial, business and regulatory expertise give him the qualifications and skills to serve as a director. Mr. Date qualifies as an "audit committee financial expert" under SEC guidelines. Patrick W. Gradyhas served as one of PMI’s directors since January 2013. Mr. Grady is a Partner of Sequoia Capital, a private investment partnership, which he joined in 2007. Prior to joining Sequoia Capital, Mr. Grady was an Associate at Summit Partners from 2004 to 2007. Mr. Grady holds a B.S. in Economics and Finance from Boston College. PMI believes that Mr. Grady’s experience as a venture capital investor with a focus on financial technologies and his overall management experience, give him the qualifications and skills to serve as a director. Mr. Grady qualifies as an "audit committee financial expert" under SEC guidelines.
David R. Golobhas served as one of PMI’s directors since May 2014. Mr. Golob has been a Partner at Francisco Partners, a private equity firm, since 2001. Mr. Golob currently serves on the board of directors of Barracuda Networks. Mr. Golob holds an A.B. degree in chemistry from Harvard College and an M.B.A. degree from the Stanford Graduate School of Business. PMI
believes that Mr. Golob’s financial and business expertise, including his experience in the private equity and venture capital industries analyzing,
investing in and serving on the boards of directors of technology companies, give him the qualifications and skills to serve as a director.
Claire A. Huang has served as a director of PMI since December 2017. Ms. Huang has also been a member of the board of directors of: PODS, a leading storage and moving company, since 2018; and Mirador Financial, Inc., a small business lending platform, since June 2017. Ms. Huang previously served on the board of directors of Scotttrade, a leading online brokerage firm, from 2015 to 2017. Ms. Huang has extensive experience in marketing and brand management. She served as the first global Chief Marketing Officer of JP Morgan Chase from 2012 to 2014, where she worked with the marketing teams across all Chase retail and JP Morgan wholesale businesses to build brands and businesses with a customer focus. Before joining JP Morgan Chase, from 2008 to 2012, Ms. Huang held global head of marketing positions at Bank of America Merrill Lynch, where she was responsible for a number of high profile marketing initiatives, including the integration of Merrill Lynch and Bank of America and the launch of Merrill Edge, the company’s brokerage platform. Prior to her time at Bank of America Merrill Lynch, Ms. Huang held marketing leadership positions at Fidelity Investments, American Express Company, Wise Foods, and The Haagen-Dazs Company. Ms. Huang received a B.A. in Economics from De La Salle University in Manilla, Philippines. PMI believes that Ms. Huang’s marketing and brand management expertise, as well as her experience at several leading financial institutions, give her the qualifications and skills to serve as a director.
Nigel W. Morrishas served as one of PMI’s directors since June 2014. Mr. Morris previously served as one of PMI’s directors from December 2009 to January 2013. Mr. Morris is the managing partner of QED Investors, an investment firm he founded in 2008. Mr. Morris was also the co-founder of Capital One Financial Services, where he served as President and Chief Operating Officer and Vice Chairman from 1994 until his retirement in 2004. Mr. Morris has a BSC in Psychology from East London University in London, England and an MBA with distinction from London Business School, where he is also a fellow. PMI believes that Mr. Morris’s financial and business expertise, including his diversified background of managing and directing public companies, his experience with financial services firms, as well as his general operational and management experience, give him the qualifications and skills to serve as a director. Mason D. Haupt has served as one of PMI’s directors since February 2018. He has more than 30 years of experience working in the investment management business. Mr. Haupt served as a Portfolio Manager at Soros Fund Management, LLC, a private investment management firm, from August 2008 to March 2014, and prior to that, from 2006 to 2008, he engaged in private investment activities. From June 2003 to March 2006, Mr. Haupt was a Partner at Five Mile Capital Partners, LLC, an alternative investment and asset management company. During his time at Five Mile Capital Partners, Mr. Haupt served as Portfolio Manager of the company’s Housatonic Fund, a relative value, fixed income hedge fund. Mr. Haupt served as Chairman and Chief Executive Officer of MortgageSight, an electronic platform for mortgage securities, from 2000 to 2001. Previously, he spent more than a decade with Salomon Brothers, culminating in the position of Managing Director of the Mortgage Securities Department. Mr. Haupt received an M.B.A. from Harvard Business School and a B.S. in Economics, with concentrations in Management and Accounting, from The Wharton School of the University of Pennsylvania. PMI believes that Mr. Haupt’s financial and business expertise, including his extensive investment management experience, give him the qualifications and skills to serve as a director.
Board Composition and Election of Directors
PMI’s board of directors currently consists of
seveneight seats, with one vacancy to be filled by a designee of the Series A-1 Holders. All of the current members
all of
whomPMI's board of directors were elected as directors pursuant to the terms of a voting rights agreement entered into among certain of PMI’s stockholders. In selecting the composition of its board of directors, PMI seeks to ensure that its board of directors collectively has a balance of expertise in the following areas: internet based business, consumer financial products and experience directing public and start-up companies. Based on these criteria, PMI believes that its board of directors has been effective in identifying diverse directors. The board of directors’ composition provisions of PMI’s voting rights agreement are still in effect. For more information regarding the terms of the voting rights agreement, see “Item 13. – Certain Relationships and Related Transactions, and Director Independence.” Holders of the Notes offered through our marketplace, and the accompanying PMI Management Rights, will have no ability to elect or influence PMI’s directors or approve significant corporate transactions, such as a merger or other sale of PMI or its assets.
Aaron Vermut, Chief Executive Officer and a director of PMI, is the son of Stephan P. Vermut, Executive Chairman and a director of PMI.
Because PMI’s common stock is not listed on a national exchange, PMI is not required to maintain a board of directors consisting of a majority of independent directors, or to maintain an audit, nominating or compensation committee. PMI does not have a lead independent director.
Code of Ethics
PMI currently does not have a formal, written code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The
Our Board of Directors is committed to a high standard of corporate governance practices and, through its oversight role, believes that it has encouraged and promoted a requisite culture of ethical business conduct among PMI’s officers and employees. To memorialize its commitment to these standards, the Board of Directors of PMI adopted a “Code of Ethics and Business Conduct” that applies to all of PMI's employees, directors and officers, including the Chief Executive Officer, Chief Financial Officer and other executive officers. A copy of the Code of Ethics and Business Conduct is available on our website at
https://www.prosper.com/plp/about/. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, certain provisions of the Code of Ethics and Business Conduct by posting such information on Prosper's website or in public filings. Because PMI’s common stock is not listed on a national securities exchange
or listed in an automated inter-dealer quotation system of a national securities association or to issuers of such securities, PMI is not required to maintain a board of directors consisting of a majority of independent directors or to maintain an audit committee, nominating committee or compensation committee consisting solely of independent directors.
Nevertheless, PMI’s board of directors has
not analyzeddetermined the independence of
PMI’seach director based on the independence criteria set forth in the listing standards of the New York Stock Exchange (“NYSE”). In making its determinations, the Board considered the current and prior relationships that each non-employee director has with Prosper and all other facts and circumstances the board of directors
deemed relevant in determining their independence, including any transactions between each director or any member of his or her family, and Prosper, its senior management or our independent registered public accounting firm. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, the board of directors determined that each of Messrs. Date, Grady, Golob and Morris do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under
any applicable stock exchangethe listing
standards. requirements and rules of the NYSE.
PMI is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act. Therefore, PMI is not required to have a nominating committee comprised of independent directors. PMI currently does not have a standing nominating committee and accordingly, there are no charters for such committee. PMI believes that a nominating committee is not necessary for a company of its size with its type of business. PMI also believes that its directors collectively have the requisite background, experience, and knowledge to fulfill the limited duties and obligations that a nominating committee may have.
Compensation Committee
PMI’s board of directors approved the formation of a Compensation Committee in August 2011.
As of December 31, 2015, theThe current members of the Compensation Committee
wereare Patrick W. Grady (Chair)
, Mason D. Haupt, and
Christopher M. Bishko.Claire A. Huang. The Compensation Committee oversees PMI’s executive officer compensation arrangements, plans, policies and programs maintained by PMI and administers PMI’s equity-based compensation plan for employees generally (including issuance of stock options, RSUs and other equity-based awards granted other than pursuant to a plan). The Compensation Committee meets at such times as determined appropriate by the Chair of the Compensation Committee.
PMI’s board of directors approved the formation of an Audit Committee in January 2010.
As of December 31, 2015, theThe current members of the Audit Committee
wereare Rajeev V. Date (Chair) and Patrick W. Grady. The Audit Committee oversees financial risk exposures, including monitoring the integrity of PMI’s consolidated financial statements, internal controls over financial reporting and the independence of PMI’s Independent Registered Public Accounting Firm. The Audit Committee receives internal control related assessments and reviews and discusses PMI’s annual and quarterly consolidated financial statements with management. In fulfilling its oversight responsibilities with respect to compliance matters, the Audit Committee meets at least quarterly with management, PMI’s Independent Registered Public Accounting firm and PMI’s internal legal counsel to discuss risks related to PMI’s financial reporting function.
The Audit Committee is exempt from independence listing standards because PMI's common stock is not listed on a national securities exchange or listed in an automated inter-dealer quotation system of a national securities association or to issuers of such securities. Nevertheless, the board of directors of PMI has determined that each of the current members of PMI's Audit Committee is independent under the listing requirements and rules of the NYSE, and also satisfies the independence requirements of Section 10(m)(3) of the Exchange Act. Additionally, PMI's board of directors has determined that each of the current members of the Audit Committee is an audit committee financial expert as defined under SEC regulations and the listing requirements and rules of the NYSE.
Limitations on Officers’ and Directors’ Liability and Indemnification Agreements
As permitted by Delaware law, PMI’s amended and restated certificate of incorporation and bylaws contain provisions that limit or eliminate the personal liability of its directors for breaches of duty to the corporation. PMI’s amended and restated certificate of incorporation and bylaws limit the liability of directors to the fullest extent permitted under Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breaches of their fiduciary duties as directors, except liability for:
| ×
| any breach of the director’s duty of loyalty to PMI or PMI’s stockholders;
|
| ×
| any act or omission not in good faith, believed to be contrary to the interests of PMI or its shareholders, involving reckless disregard for the director’s duty, for acts that involve an unexcused pattern of inattention that amounts to an abdication of duty, or that involves intentional misconduct or knowing or culpable violation of law;
|
any breach of the director’s duty of loyalty to PMI or PMI’s stockholders; | ×
| any unlawful payments related to dividends, unlawful stock repurchases, redemptions, loans, guarantees or other distributions; or
|
any act or omission not in good faith, believed to be contrary to the interests of PMI or its shareholders, involving reckless disregard for the director’s duty, for acts that involve an unexcused pattern of inattention that amounts to an abdication of duty, or that involves intentional misconduct or knowing or culpable violation of law; | ×
| any transaction from which the director derived an improper personal benefit.
|
any unlawful payments related to dividends, unlawful stock repurchases, redemptions, loans, guarantees or other distributions; orany transaction from which the director derived an improper personal benefit.
These limitations do not affect the availability of equitable remedies, including injunctive relief or rescission. As permitted by Delaware law, PMI’s amended and restated certificate of incorporation and bylaws also provide that:
| ×
| PMI will indemnify its directors and officers to the fullest extent permitted by law;
|
| ×
| PMI may indemnify its other employees and other agents to the same extent that PMI indemnifies its officers and directors; and
|
PMI will indemnify its directors and officers to the fullest extent permitted by law; | ×
| PMI will advance expenses to its directorsPMI may indemnify its other employees and other agents to the same extent that PMI indemnifies its officers and directors; and officers in connection with a legal proceeding, and may advance expenses to any employee or agent; provided, however, that such advancement of expenses shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person was not entitled to be indemnified.
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PMI will advance expenses to its directors and officers in connection with a legal proceeding, and may advance expenses to any employee or agent; provided, however, that such advancement of expenses shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person was not entitled to be indemnified.
The indemnification provisions contained in PMI’s amended and restated certificate of incorporation and bylaws are not exclusive.
In addition to the indemnification provided for in PMI’s amended and restated certificate of incorporation and bylaws, PMI has entered into indemnification agreements with each of its directors and officers. The indemnification agreements require PMI, among other things, to indemnify such persons for all expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement (if such settlement is approved in advance by PMI) (collectively, “Expenses”), actually and reasonably incurred by such
person in connection with the investigation, defense or appeal of any proceeding to which such person may be made a party, a potential party, a non-party witness, or otherwise by reason of: (i) such person’s service as a director or officer of PMI; (ii) any action or inaction taken by such person or on such person’s part while acting as director, officer, employee or agent of PMI; or (iii) such person’s actions while serving at the request of PMI as a director, officer, employee, trustee, general partner, managing member, agent or fiduciary of PMI or any other entity, in each case, whether or not serving in any such capacity at the time any liability or expense is or was incurred. In addition, PMI is required to indemnify against any Expenses actually and reasonably incurred in connection with any action establishing or enforcing a right to indemnification or advancement of expenses under the indemnification agreement or under any directors’ and officers’ liability insurance policies maintained by PMI to the
extent that such person is successful in such action. The indemnification agreements also provide that PMI agrees to indemnify such persons to the fullest extent permitted by law, even if such indemnification is not specifically authorized by the other provisions of the agreement or PMI’s amended and restated certificate of incorporation or bylaws. Moreover, the indemnification agreements provide that any future changes under Delaware law that expand the ability of a Delaware corporation to indemnify its officers and directors are automatically incorporated into the agreements.
Under the indemnification agreements, PMI is not obligated to provide indemnification on account of any proceeding unless such person acted in good faith and in a manner reasonably believed to be in the best interests of PMI, and with respect to criminal proceedings, such person had no reasonable cause to believe his conduct was unlawful. The termination of a proceeding by judgment, settlement, or conviction or upon a plea ofnolo contendere or its equivalent does not, by itself, create the presumption that such person did not satisfy the above standards. In addition, under the indemnification agreements, PMI is not obligated to provide indemnification for: (i) any proceedings or claims initiated or brought voluntarily by such person and not by way of defense, unless such indemnification is authorized by PMI, other than a proceeding to establish such person’s right to indemnification; (ii) any expenses incurred by such person with respect to any proceeding instituted by such person to enforce and interpret the terms of his indemnification agreement, unless such person is successful in such action; (iii) which payment has actually been made to or on behalf of such person under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid; (iv) an accounting or disgorgement of profits pursuant to Section 16(b) of the Exchange Act, as amended, or similar provisions of federal, state or local statutory law or common law, if such person is held liable therefor (including pursuant to any settlement arrangements); and (v) any reimbursement of PMI by such person of any bonus or other incentive-based or equity-based compensation or of any profits realized by such person from the sale of securities of PMI, as required in each case under the Exchange Act, as amended (including any such reimbursements that arise from an accounting restatement of PMI pursuant to Section 304 of the Sarbanes-Oxley Act, or the payment to PMI of profits arising from the purchase and sale by such person of securities in violation of Section 306 of the Sarbanes-Oxley Act), if such person is held liable therefor (including pursuant to any settlement arrangements). PMI also maintains an insurance policy that covers certain liabilities of its directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers.
PMI believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. To the extent these provisions permit PMI to indemnify its officers and directors for liabilities arising under the Securities Act, however, PMI has been informed by the SEC that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item
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| Item 11. | Executive Compensation |
Prosper Marketplace, Inc.
Compensation Discussion and Analysis
Overview
This section describes PMI's executive compensation objectives, compensation-setting process, executive compensation components and significant 2017 compensation decisions for PMI's named executive officers ("NEOs"). The compensation provided to PMI's NEOs for 2017 is set forth in detail in the Summary Compensation Table and other tables and the accompanying footnotes and narrative that follow this section.
PMI's named executive officers for 2017 are as follows:
David Kimball, our Chief Executive Officer, and our Chief Financial Officer until February 27, 2017;
Usama Ashraf, our Chief Financial Officer as of February 27, 2017;
Brad Pennington, our Chief Risk Officer;
Kunal Kaul, our Executive Vice President, Operations; and
Nasos Topakas, our Chief Technology Officer as of April 17, 2017.
Executive Compensation Objectives
The objectives of PMI's executive compensation are to:
attract, retain and motivate senior management leaders who are capable of advancing PMI's mission and strategy and ultimately, creating and maintaining its long-term equity value;
•align the interests of PMI's executive officers with its stockholders’ long-term interests; and
reward executive officers for their contributions to PMI's overall performance as well as for their individual performance.
Compensation-Setting Process
In 2017 and in prior years, PMI did not have a formal incentive compensation program in place for its executive officers. The Compensation Committee is responsible for evaluating and approving compensation for PMI's executive officers, including the NEOs. In setting 2017 compensation, PMI's Chief Executive Officer worked closely with the Compensation Committee in making recommendations and attending Committee meetings. Because of his daily involvement with PMI's executive team, the Chief Executive Officer was involved in the determination of compensation for all of PMI's executive officers other than himself. The Compensation Committee also delegated to the Chief Executive Officer the authority to make compensation decisions for senior management and executive officers (other than the Chief Executive Officer, Chief Financial Officer, President and Chief Operating Officer), subject to certain compensation limits set by the Compensation Committee.
Executive Compensation Components
PMI's 2017 Named Executive Officer Compensation
packages include: (1) base salary; (2) cash bonuses; and (3) equity-based compensation in the form of stock options and restricted stock units (RSUs). PMI believes that this compensation mix supports its objective of attracting, motivating and retaining a talented and entrepreneurial executive team who will provide leadership for Prosper’s success in dynamic and competitive markets. PMI's compensation program is balanced among all three components in order to attract top talent and maximize retention, while ensuring that an appropriate portion of the executives’ compensation is tied to the Company's and its stockholders’ long-term interests.
Base Salary. Base salary is a fixed amount, and is not tied to any metric relating to the performance of PMI's business as a whole. The base salary of each executive officer is initially established in the executive officer's offer letter, and reviewed annually by the Compensation Committee. In determining base salaries for 2017, PMI's Compensation Committee together with the Chief Executive Officer considered the individual executive officer's scope of responsibilities, contributions, prior salary level and position (in case of a promotion), and financial and market conditions.
The following table summarizes information regarding the base salaries for PMI's named executive officers for 2017:
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| | | | |
| Name | | 2017 Base Salary |
| David Kimball (1) | | $ | 500,000 |
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| Usama Ashraf (2) | | $ | 350,000 |
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| Brad Pennington (3) | | $ | 350,000 |
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| Kunal Kaul (4) | | $ | 315,000 |
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| Nasos Topakas (5) | | $ | 350,000 |
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| (1) | In early 2017, PMI’s Compensation Committee reviewed executive base salaries and decided to keep Mr. Kimball’s annual base salary at $500,000, the same level as the previous year. |
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| (2) | In February of 2017, PMI hired Mr. Ashraf as its new Chief Financial Officer, with an annual base salary of $350,000. |
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| (3) | In early 2017, PMI’s Compensation Committee reviewed executive base salaries and decided to keep Mr. Pennington's annual base salary at $350,000, the same level as the previous year. |
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| (4) | Mr. Kaul’s annual base salary was increased from $300,000 to $315,000 in March of 2017. |
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| (5) | In April of 2017, PMI hired Mr. Topakas as its new Chief Technology Officer, with an annual base salary of $350,000. |
CashBonuses. Generally, discretionary cash bonuses are not formally tied to any specific metrics regarding Company performance, and are determined by the Compensation Committee (in consultation with the Chief Executive Officer) in its sole discretion. In prior years, the Compensation Committee has approved discretionary cash bonuses for PMI's executive officers, including its NEOs, in order to reward PMI's individual executive officers for their contribution toward PMI's growth initiatives and performance toward individual goal achievement.
In 2017, the Company used cash bonuses primarily to attract and retain senior management leaders that were critical to advancing the Company’s short and long term strategic goals. In November 2016, in order to incentivize and encourage the grantees to remain with the Company, the Compensation Committee awarded certain executive officers, including Mr. Kaul and Mr. Pennington, retention bonus awards in lieu of performance bonuses. The retention bonuses replaced the grantees’ 2016 and 2017 performance-based cash bonuses, and were equal to 75% of their respective base salary as of the close of the applicable calendar year. The retention bonuses for 2017 will be paid to Messrs. Kaul and Pennington in March 2018.
The Company also made use of guaranteed cash bonuses in 2017 to help attract and retain critical talent, including NEOs Mr. Ashraf, who joined as Chief Financial Officer in February 2017, and Mr. Topakas, who joined as Chief Technology Officer in April 2017. These bonuses will be paid to Messrs. Ashraf and Topakas in March 2018.
In November 2016, in connection with Mr. Kimball’s promotion to Chief Executive Officer, PMI’s Board of Directors increased his bonus target from 50% to 100% of his base salary, to be paid on a quarterly basis. The performance-based bonus was subject to Mr. Kimball’s achievement of certain Board-approved financial, operational and strategic performance objectives. The Board of Directors reviewed the Company’s performance and progress towards the established objectives at the end of each quarter of 2017 and determined to pay Mr. Kimball 100% of his target bonus for the period, with the fourth quarter’s installment to be paid in March 2018.
Equity Compensation. PMI has used stock options and restricted stock units ("RSUs") as the principal components of its executive equity compensation. Consistent with its compensation objectives, PMI believes this approach aligns the interest of its grantees with the long-term interests of PMI’s stockholders. PMI believes that stock options and RSUs also serve as an effective retention tool due to vesting requirements that are based on continued service with the company. In granting equity awards, PMI has customarily considered, among other things, the executive officer’s cash compensation, the need to retain and motivate executive officers and to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value, PMI's financial results, and each executive officer's individual contributions and responsibilities. In 2017, the Compensation Committee approved the grant of stock options to its NEOs for performance compensation, retention and motivational purposes. The amounts and terms of the awards granted to each of the NEOs in 2017 is disclosed in the 2017 Grants of Plan-Based Awards table and accompanying footnotes of the Outstanding Equity Awards at 2017 Fiscal Year End table.
Employment Agreements
PMI has entered into employment arrangements with each of its NEOs, which are comprised of an offer letter and an At Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement. Each of these arrangements was approved or authorized on PMI’s behalf by the Compensation Committee or, in certain instances, its Board of Directors.
Each of the offer letters provided for "at will" employment and sets forth the initial compensation arrangements for the NEO, generally including an initial base salary, an annual cash bonus opportunity, and an equity award. Certain of the offer letters provide for payments or an acceleration of the executive's equity award grant upon termination of their employment in specified situations, including following a change in control. These arrangements (including potential payments and terms) are discussed in more detail in the “Narrative Discussion of the Summary Compensation Table
and Grants of Plan-Based Awards Table” and the "Potential Payments upon Termination or Change in Control" sections and related tables below.
Other Compensation Information
Benefits Programs
PMI's employee benefit programs, including its 401(k) plan, health and welfare programs, Amended and Restated 2005 Stock Option Plan and 2015 Equity Incentive Plan, are designed to provide a competitive level of benefits to PMI's employees generally, including its executive officers and their families. PMI's executive officers are entitled to participate in the same employee benefit plans, and on the same terms and conditions, as all other full-time employees.
PMI's 401(k) plan covers all employees meeting certain eligibility requirements. The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may defer up to 90% of eligible compensation up to the annual maximum as determined by the Internal Revenue Service. PMI's contributions to the 401(k) plan are discretionary. During the year ended December 31, 2017, PMI contributed $2.2 million to the 401(k) plan.
All full-time employees, including PMI's named executive officers, may participate in its health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.
Perquisites and Other Personal Benefits
Currently, PMI does not view perquisites or other personal benefits as a significant component of its compensation. Accordingly, PMI does not generally provide perquisites, such as company cars and paid parking spaces, to its executive officers. PMI does reimburse its executive officers for certain relocation expenses, subject to the terms and conditions prescribed by the Compensation Committee. In 2017, PMI reimbursed Mr. Ashraf for relocation expenses incurred in connection with his employment. The reimbursement amounts paid to Mr. Ashraf for 2017 is disclosed in the “All Other Compensation” column and accompanying footnotes of the Summary Compensation Table.
In the future, PMI may provide additional perquisites or other personal benefits in limited circumstances, such as where PMI believes it is appropriate to assist an individual executive in the performance of his or her duties and for recruitment, motivation or retention purposes.
Post-Employment Compensation
The Compensation Committee recognizes that a possible, threatened, or pending change of control transaction could result in the departure or distraction of PMI’s executives. To establish a meaningful financial incentive for PMI’s executive officers to work diligently through and beyond a proposed transaction that may involve a change in control of the company, certain of the stock options and restricted stock units granted to PMI’s NEOs will fully vest upon a change in control of PMI, while others will fully vest in the event that such officer is subject to a termination of employment without cause within 12 months after a change in control of PMI.
In addition, during 2016 and 2017, PMI entered into severance arrangements with each of Mr. Kimball, Mr. Pennington and Mr. Topakas as part of their offer letters and amendment to offer letter (with respect to Mr. Pennington). The severance arrangements provide that each of Mr. Kimball, Mr. Pennington and Mr. Topakas would be entitled to a lump sum payment equal to six months’ of annual base salary (less applicable deductions and withholdings) in the event that the respective officer’s employment is terminated by PMI without cause or by Mr. Kimball, Mr. Pennington and Mr. Topakas, as applicable, for good reason (each as defined in the applicable offer letter). Receipt of these severance benefits is conditioned on the officer’s signing a release of claims in favor of PMI.
For additional information regarding these severance and change in control arrangements, see "Potential Payments Upon Termination or Change in Control.”
Compensation Risk Assessment
PMI's management evaluates and mitigates any risk that may exist relating to its compensation plans, practices and policies for all employees, including PMI's NEOs. PMI's management has concluded that PMI's compensation policies and practices do not create or promote inappropriate or excessive risk taking.
Summary Compensation Table
The following table provides information regarding the compensation earned during the
yearyears ended December 31,
20152017, December 31, 2016 and December 31,
20142015 by each of PMI’s named executive officers (in thousands):
Name and Principal Position | | Year | | Salary ($) | | | Bonus ($) | | | Option Awards ($)(1) | | | All Other Compensation ($)(2) | | | Totals ($) | |
Aaron Vermut (3) | | 2015 | | | 360 | | | | 200 | | | | 3,654 | | | | 14 | | | | 4,228 | |
Chief Executive Officer | | 2014 | | | 300 | | | | 140 | | | | 191 | | | | — | | | | 631 | |
Stephan P. Vermut (4) | | 2015 | | | 300 | | | | 150 | | | | 3,654 | | | | 14 | | | | 4,118 | |
Executive Chairman | | 2014 | | | 300 | | | | 128 | | | | 221 | | | | — | | | | 649 | |
Joshua Tonderys (5) | | 2015 | | | 300 | | | | 200 | | | | 4,458 | | | | 14 | | | | 4,972 | |
Chief Operating Officer | | 2014 | | | 300 | | | | 135 | | | | 52 | | | | | | | | 487 | |
Parker Barrile (6) | | 2015 | | | 75 | | | | 85 | | | | 7,280 | | | | 5 | | | | 7,445 | |
Chief Product Officer | | 2014 | | | — | | | | — | | | | — | | | | — | | | | — | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($)(1) | | Option Awards ($)(1) | | All Other Compensation ($)(2) | | Totals ($) |
| David Kimball (3) | | 2017 | | $ | 500 |
| | $ | 542 |
| | $ | — |
| | $ | 2,572 |
| | $ | 14 |
| | $ | 3,628 |
|
| Chief Executive Officer and | | 2016 | | 305 |
| | 383 |
| | 1,510 |
| | 3,351 |
| | 31 |
| | 5,580 |
|
former Chief Financial Officer
| | | | | | | | | | | | | | |
| Usama Ashraf (4) | | 2017 | | 294 |
| | 283 |
| | — |
| | 472 |
| | 64 |
| | 1,113 |
|
| Chief Financial Officer | | | | | | | | | | | | | |
|
|
| Brad Pennington | | 2017 | | 350 |
| | 263 |
| | — |
| | 291 |
| | 14 |
| | 918 |
|
| Chief Risk Officer | | 2016 | | 316 |
| | 263 |
| | — |
| | 2,572 |
| | 11 |
| | 3,162 |
|
| Kunal Kaul (5) | | 2017 | | 313 |
| | 236 |
| | — |
| | 119 |
| | 12 |
| | 680 |
|
| Executive Vice President, | | 2016 | | 300 |
| | 225 |
| | 268 |
| | 1,185 |
| | 31 |
| | 2,009 |
|
| Operations | | | | | | | | | | | | | |
|
|
| Nasos Topakas (6) | | 2017 | | 248 |
| | 197 |
| | — |
| | 943 |
| | 8 |
| | 1,396 |
|
| Chief Technology Officer | | | | | | | |
|
| |
|
| | | |
|
|
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| (1) | CalculatedThe amounts reported represent the grant date fair value of the restricted stock units and stock options granted to the named executive officers as calculated in accordance with the Financial Accounting Board’s Topic ASC 718, Compensation –Stock Compensation (“ASC 718”) using a Black-Scholes model to purchase shares of PMI’s common stock. The key assumptions used in PMI’s ASC 718 calculation are discussed in Note 2 of PMI’s consolidated financial statements, which are incorporated by reference into this Annual Report.
|
| |
| (2) | “All Other Compensation” consists of compensation received from employer matching contributions to PMI’s 401(k) plan and life insurance premiumsrelocation reimbursement paid by PMI for each named executive officer. |
(3)
| |
| (3) | Mr. Aaron VermutKimball joined PMI in March 2016 as its Chief Financial Officer. He was appointed PMI's Chief Executive Officer in December 2016. Mr. Kimball's Total Compensation for 2016 includes relocation expenses of $31,141 and a sign-on bonus of $125,000. |
| |
| (4) | Mr. Ashraf joined PMI in February 2017 as its Chief Financial Officer. Mr. Ashraf's total compensation for 2017 includes relocation expenses of $50,052 and a signing bonus of $20,000. |
| |
| (5) | Mr. Kaul's Total Compensation for 2016 includes relocation expenses of $20,583. |
| |
| (6) | Mr. Topakas joined PMI in April 20132017 as its PresidentChief Technology Officer. |
2017 Grants of Plan-Based Awards (1)(2)
The following table sets forth certain information regarding grants of plan-based awards to PMI's named executive officers during 2017 (dollar amounts in thousands, except per share information):
|
| | | | | | | | | | | | | | | | |
| Name | | Grant Date (2) | | | All Other Option Awards: Number of Securities Underlying Options (#) | | | Exercise or Base Price of Option Awards ($/Sh) | | Grant Date Fair Value of Stock and Option Awards ($)(3) | |
| David Kimball | | 3/17/17 | | | 21,156,579 |
| | | $ | 0.22 |
| | $ | 2,245 |
| |
| | | | | | 3,526,628 |
| (4) | | 0.22 |
| | 326 |
| (5) |
| Usama Ashraf | | 3/17/17 | | | 3,397,242 |
| | | 0.22 |
| | 372 |
| |
| | | 11/7/17 | | | 402,848 |
| | | 0.53 |
| | 100 |
| |
| Brad Pennington | | | | | 3,226,649 |
| (4) | | 0.22 |
| | 291 |
| (5) |
| Kunal Kaul | | | | | 1,293,916 |
| (4) | | 0.22 |
| | 119 |
| (5) |
| Nasos Topakas | | 11/7/17 | | | 3,800,000 |
| | | 0.53 |
| | 943 |
| |
| |
| (1) | The following columns are intentionally omitted from this table: Estimated Future Payouts under Non-Equity Incentive Plan Awards, and was promotedEstimated Future Payouts under Equity Incentive Plan Awards. |
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| (2) | The equity awards granted to Chief Executive Officerthe NEOs in March 2014. Mr. Aaron Vermut received2017 were granted under, and governed by the terms of, PMI's 2015 Incentive Plan and the applicable award agreements. See the footnotes to the Outstanding Equity Awards at 2017 Fiscal Year-End table below for a description of the vesting schedule of the equity awards granted in 2017 and reported in the Table above. |
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| (3) | The amounts reported represent the grant date fair value of 2,940,660the restricted stock units and stock options granted to the named executive officers as calculated in accordance with the year ended December 31, 2014 withFinancial Accounting Board’s Topic ASC 718, Compensation –Stock Compensation (“ASC 718”) using a Black-Scholes model to purchase shares of PMI’s common stock. The key assumptions used in PMI’s ASC 718 calculation are discussed in Note 2 of PMI’s consolidated financial statements, which are incorporated by reference into this Annual Report. |
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| (4) | On March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved the repricing of all outstanding stock options held by employees and directors that had an exercise price above the then current fair market value of $0.11 per share and 1,170,000PMI’s common stock options in(the "Reprice"), effectively reducing the year ended December 31, 2015 with an exercise price of $3.62such options to $0.22 per share, which are subject to the termsshare. These options were granted in prior periods and conditions of the 2005 Plan, as set forth below. |
(4)
| Mr. Stephan P. Vermut joined PMI in January 2013 as its Chief Executive Officer and,repriced in connection with Mr. Aaron Vermut’s appointment as Chief Executive Officer, was appointed PMI’s Executive Chairman in March 2014. Mr. Stephan P. Vermut received awards of 2,940,660 stock options in the year ended December 31, 2014 with an exercise price of $0.11 per share and 1,170,000 stock options in the year ended December 31, 2015 with an exercise price of $3.62 per share, which are subject to the terms and conditionsReprice.
|
| |
| (5) | The incremental fair value of the 2005 Plan,holder's eligible outstanding options as set forth below. |
(5)
| Mr. Joshua Tonderys joined PMI in September 2012 as its Chief Risk Officer and was promoted to Chief Operating Officer in January 2015. Mr. Tonderys received awards of 802,500 stock options in the year ended December 31, 2014 with an exercise price of $0.11 per share and 1,460,070 stock options in the year ended December 31, 2015 with an exercise price of $3.62, which are subject to the terms and conditions of the 2005 Plan,repricing date are as set forth below.
follows: $326,000 for Mr. Kimball; $291,000 for Mr. Pennington; and $119,000 for Mr. Kaul. |
(6)
| Mr. Parker Barrile joined PMI in August 2015 as its Chief Product Officer. Mr. Barrile received awards of 1,596,160 stock options in the year ended December 31, 2015 with an exercise price of $5.52 per share and 532,055 RSUs, which are subject to the terms and conditions of 2015 Plan, as set forth below.
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Narrative Discussion of the Summary Compensation Table
At December 31, 2015, and Grants of Plan-Based Awards Table
Offer Letters and Arrangements
David Kimball. In November 2016, PMI entered into an offer letter with Mr. Aaron Vermut’sKimball in connection with his appointment as its Chief Executive Officer. In addition to his initial base salary, was $360 thousand per yearMr. Kimball's offer letter provided for (i) up to $500,000 in bonus payments, subject to achievement of certain performance targets; (ii) reimbursement of certain relocation expenses; and he is eligible(iii) eligibility to participate in the benefit programs generally available to employees of PMI. PMI also committed to grant Mr. Kimball an equity award of options exercisable into shares of PMI common stock representing up to 7.1% of PMI’s capitalization on a fully diluted basis, subject to the terms and conditions of the offer letter. In addition, the offer letter included certain severance arrangements, the terms of which are described under "Post-Employment Compensation" above.
Mr. Kimball's November 2016 offer letter replaced the offer letter PMI entered into with Mr. Kimball in March 2016 in connection with his appointment as its Chief Financial Officer. In addition to the severance, reimbursement and benefits arrangements included in the November 2016 offer letter, Mr. Kimball's March 2016 offer letter included his initial base salary
and equity grant as CFO and provided for a one-time sign-on bonus of $125,000, subject to certain repayment requirements in the event of Mr. Kimball’s termination from PMI within 12 months of his employment.
Usama Ashraf. In February 2017, PMI entered into an offer letter with Mr. Ashraf in connection with his appointment as its Chief Financial Officer. In addition to his initial base salary and equity grant, Mr. Ashraf's offer letter provided for (i) a one-time sign-on bonus of $20,000, subject to certain repayment requirements in the event of Mr. Ashraf's termination from PMI within 12 months of his employment; (ii) eligibility to receive an annual performance bonus. Thebonus in a target amount of Mr. Aaron Vermut’s bonus, if any, shall be determined by PMI’s Compensation Committee50% of his base salary; (iii) reimbursement of certain relocation expenses; (iv) reimbursement of certain short term housing expenses and (v) eligibility to participate in its sole discretion. Mr. Aaron Vermut is also entitled to receive all customary and usual fringe benefitsthe benefit programs generally available to PMI’s employees.employees of PMI.
AtKunal Kaul. In December 31, 2015, PMI entered into an offer letter with Mr. Stephan P. Vermut’sKaul in connection with his appointment as its Executive Vice President, Operations. In addition to his initial base salary was $300 thousand per year and he is eligibleequity grant, Mr. Kaul's offer letter provided for (i) a one-time sign-on bonus of $40,000, subject to certain repayment requirements in the event of Mr. Kaul's termination from PMI within 12 months of his employment; (ii) eligibility to receive an annual performance bonus. Thebonus in a target amount of Mr. Stephan P. Vermut’s bonus, if any, shall be determined by PMI’s Compensation Committee40% of his base salary; (iii) reimbursement of certain relocation expenses; and (iv) eligibility to participate in its sole discretion. Mr. Stephan P. Vermut is also entitled to receive all customary and usual fringe benefitsthe benefit programs generally available to PMI’s employees. employees of PMI.
At December 31, 2015,
Nasos Topakas. In April 2017, PMI entered into an offer letter with Mr. Tonderys’Topakas in connection with his appointment as its Chief Technology Officer. In addition to his initial base salary was $300 thousand per year and he is eligibleequity grant, Mr. Topakas's offer letter provided for (i) eligibility to receive an annual performance bonus. Thebonus in a target amount of Mr. Tonderys’ bonus, if any, shall be determined by PMI’s Compensation Committee75% of his base salary in its sole discretion. Mr. Tonderys is also entitledhis first year of employment and 50% of his base salary in subsequent years; and (ii) eligibility to receive all customary and usual fringe benefitsparticipate in the benefit programs generally available to PMI’s employees.At December 31, 2015,employees of PMI.
Brad Pennington. In January 2012, PMI entered into an offer letter with Mr. Barrile’sPennington in connection with his appointment as its Director, Credit Risk Management. In addition to his initial base salary was $300 thousand per year and he is eligibleequity grant, Mr. Pennington's offer letter provided for (i) a one-time sign-on bonus of $15,000; (ii) reimbursement of certain relocation expenses; and (iii) eligibility to receive an annual performance bonus. The amount of Mr. Barrile’s bonus, if any, shall be determined by PMI’s Compensation Committeeparticipate in its sole discretion. Mr. Barrile is also entitled to receive all customary and usual fringe benefitsthe benefit programs generally available to PMI’s employees.employees of PMI. In November 2016, PMI has no formal incentive compensation programs in placeamended Mr. Pennington's offer letter to provide for its officers. PMI’s Compensation Committee is responsible for evaluating and approving compensation for PMI’s executive officers, includingcertain severance arrangements, the “named executive officers” identified in the Summary Compensation Tableterms of which are described under "Post-Employment Compensation" above. The compensation
Equity Incentive Plans
PMI
pays to its named executive officers generally consists of three components: base salary, a discretionary bonus and equity awards. Base salary is a fixed amount, and is not tied to any metric relating to the performance of PMI’s business as a whole. Discretionary bonuses are likewise not tied to any specific metrics regarding PMI’s performance, and are determined by PMI’s Compensation Committee in its sole discretion. PMI’s equity awards are generally structured so that they vest over multiple years, which align the interests of the grantees with the long-term interests of PMI’s stockholders. PMI believes that its compensation policies do not create or promote inappropriate or excessive risk taking.The named executive officers identified above have been granted equity awards upon employment with PMI and for merit increases as further discussed below under “Outstanding Equity Awards.” The options granted to Mr. Aaron Vermut, Mr. Stephan P. Vermut and Mr. Tonderys in the year ended December 31, 2014 vested in full upon the achievement of certain performance objectives. The options granted to Mr. Aaron Vermut and Mr. Stephan P. Vermut in the year ended December 31, 2015 vest over four years, with 1/2 vesting on the second anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following two years, except that, upon a change in control, any unvested options will vest immediately upon their termination of employment without cause within the twelve month period following the change in control.
In the year ended December 31, 2015, Mr. Tonderys was granted (i) 910,070 options that vest over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years, except that, upon a change in control, any unvested options will vest immediately upon Mr. Tonderys’ termination of employment without cause within the twelve month period following the change in control, and (ii) 550,000 options that vest over four years, with 1/2 vesting on the second anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following two years, except that, upon a change in control, any unvested options will vest immediately upon Mr. Tonderys’ termination of employment without cause within the twelve month period following the change in control.
The options granted to Mr. Barrile vest over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years, except that, upon a change in control, any unvested options will vest immediately upon Mr. Barrile’s termination of employment without cause within the twelve month period following the change in control. The RSUs granted to Mr. Barrile will initially vest, if at all, when PMI files for an initial public offering and the lock-up period expires or there is a change in control, whichever occurs first (each, a “Triggering Event”). The number of RSUs that vest upon a Triggering Event will be equal to the number of RSUs that would have vested had the RSUs been subject to only the following vesting condition: vesting over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years, except that, upon a change in control, any unvested RSUs will vest immediately upon Mr. Barrile’s termination of employment without cause within the twelve month period following the change in control (the “Time-Based Vesting Schedule”). Thereafter, the RSUs shall vest pursuant to the Time-Based Vesting Schedule until the RSUs are fully vested.
PMI has grantedgrants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by PMI's Board of Directors on April 7, 2015 and subsequently amended by an Amendment No. 1, Amendment No. 2, and Amendment No. 3, which were approved by PMI's Board of Directors on February 15, 2016, May 19, 2016, and January 23, 2018, respectively (as amended, the "2015 Plan"). The 2005 Plan and 2015 Plan (each,are collectively referred to in this Annual Report as defined below), which were adoptedthe "Equity Plans".
In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms. Unless sooner terminated by PMI’s
boardBoard of
directors and stockholders to permitDirectors, the
grant2015 Plan will expire ten years from the date of
equity awards to PMI’s officers, directors, employees and consultants.its adoption. All stock options granted to
PMI’s named executive officersNEOs are incentive stock options, to the extent permissible under the Internal Revenue Code, as amended. All equity awards to PMI’s employees and directors were granted at no less than the fair market value of
PMI’sits common stock on the date of each award. In the absence of a public trading market for
PMI’sPMI common stock, PMI’s
boardBoard of
directors,Directors, acting on its own or through the Compensation Committee, has determined the fair market value of
PMI’sits common stock in good faith based upon consideration of a number of relevant factors including the status of
PMI’sits development efforts, financial status and market conditions. See “Item
15.—Notes15.-Notes to Consolidated Financial Statements”.
Outstanding Equity Awards
The following table sets forth certain information regarding outstanding equity awards granted to PMI’s named executive officers that remained outstanding as of December 31, 2015.
Name | | Grant Date | | Vesting Commencement Date | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | | Option Exercise Price ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#) (1) | |
Aaron Vermut | | 8/20/2013(2) | | 3/30/2013 | | — | | | — | | | — | | — | | | 2,889,205 | |
| | 1/28/2014(3) | | 1/28/2014 | | | 2,940,660 | | | — | | | 0.11 | | 1/28/2024 | | — | |
| | 2/27/2015(4) | | 2/27/2014 | | | 1,170,000 | | | — | | | 3.62 | | 2/27/2025 | | — | |
Stephan P. Vermut | | 8/20/2013(2) | | 1/22/2013 | | — | | | — | | | — | | — | | | 2,503,980 | |
| | 1/28/2014(3) | | 1/28/2014 | | | 2,940,660 | | | — | | | 0.11 | | 1/28/2024 | | — | |
| | 2/27/2015(4) | | 2/27/2015 | | | 1,170,000 | | | — | | | 3.62 | | 2/27/2025 | | — | |
Josh Tonderys | | 8/5/2013(2) | | 3/19/2013 | | — | | | — | | | — | | — | | | 479,680 | |
| | 8/20/2013(2) | | 3/19/2013 | | — | | | — | | | — | | — | | | 14,925 | |
| | 2/20/2015(5) | | 2/13/2015 | | | 910,070 | | | — | | | 3.62 | | 2/20/2025 | | — | |
| | 2/27/2015(4) | | 2/27/2015 | | | 550,000 | | | — | | | 3.62 | | 2/27/2025 | | — | |
Parker Barrile | | 11/4/2015(6) | | 8/31/2015 | | — | | | | 1,596,160 | | | 5.52 | | 11/4/2025 | | — | |
| | 11/4/2015(7) | | 8/31/2015 | | — | | | — | | | — | | 11/4/2025 | | | 532,055 | |
| (1)
| Represents (i) shares of restricted stock issued upon the early exercise of stock options (“Restricted Stock”) and (ii) restricted stock units (“RSUs”), in each case that remained unvested as of December 31, 2015. PMI has a right to repurchase any shares of Restricted Stock that remain unvested at the time the holder of such shares ceases to provide services to PMI.
|
| (2)
| This Restricted Stock was issued upon early exercise of stock options granted to the executive officer on the applicable Grant Date, and shall vest and be released from PMI’s repurchase right over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years.
|
| (3)
| This option vested in full upon the achievement of certain performance objectives.
|
| (4)
| This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/2 vesting on the second anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following two years.
|
| (5)
| This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years.
|
| (6)
| This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years.
|
| (7)
| These RSUs will vest in accordance with a Time-Based Vesting Schedule, as described in the “Narrative Discussion of the Summary Compensation Table” above.
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Potential Payments Upon Termination or a Change In Control of PMI
As of December 31, 2015, there were no material contracts, agreements, plans or arrangements, written or unwritten, that provided for payments or equity awards to the named executive officers above in connection with their respective resignation, retirement or other termination. Certain of the stock options granted to our named executive officers will fully vest upon a change in control of PMI, while others will fully vest in the event that such officer is subject to a termination of employment without cause within 12 months after a change in control of PMI. In addition, the RSUs granted to our named executive officers will fully vest in the event that such officers are subject to termination of employment without cause within 12 months after a corporate transaction. All equity awards made to PMI’s named executive officers were granted under the 2005 Plan or the 2015 Plan.
Employee Benefit Plans
Equity Incentive Plans
PMI has equity awards outstanding under two plans: the Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by PMI’s stockholders on December 1, 2010; and the 2015 Equity Incentive Plan (the “2015 Plan”, which was approved by PMI’s stockholders on April 7, 2015 (collectively, the “Equity Plans”). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms. Unless sooner terminated by PMI’s board of directors, the 2015 Plan will expire ten years from the date of its adoption.
The 2005 Plan provided for grants in the form of non-qualified stock options and stock purchase rights, which were available for grant to PMI’s directors, consultants or employees, including officers, and incentive stock options, which were available for grant solely to PMI’sits employees, including officers. The 2015 Plan provides for grants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and unrestricted stock. Under the 2015 Plan, incentive stock options may be granted solely to PMI’s employees, including officers. Awards other than incentive stock options may be granted to PMI’sits directors, consultants or employees, including officers. The Equity Plans are administered by PMI’s boardBoard of directors,Directors, which in turn has delegated authority to administer the plans to the Compensation Committee (the “Administrator”).
Committee.
Shares of PMI’s common stock subject to options that have expired or otherwise terminate under the 2015 Plan or the 2005 Plan without having been exercised in full will become available for grant under the 2015 Plan. Shares of PMI’s common stock issued under the 2015 Plan may include previously unissued shares or reacquired shares bought on the market or otherwise.
As of December 31,
2015, a total of 29,869,445 shares of common stock were subject to options outstanding under the 2005 Plan and are reserved for issuance thereunder. As of December 31, 2015, there were zero stock options available for grant under the 2005 Plan. As of December 31, 2015,2017, an aggregate of 13,194,76561,684,896 options to purchase PMI’sour common stock were authorized for issuance under the 2015 Plan. Of such authorized options, as of December 31, 2015,2017, a total of 11,088,21551,281,644 options were outstanding under the 2015 Plan and 2,106,55010,403,252 options were available for grant, including 519,50030,411,881 shares that were forfeited under the 2015 Plan. As of December 31, 2015, none of the outstanding2017, 18,681,607 options under the 2015 Plan were vested and outstanding and 169,394 have been exercised. As of December 31, 2017, there were zero stock options available for grant under the 2005 Plan.
The NEOs identified herein have been granted equity awards upon employment with PMI, for merit increases, and for retention purposes.
Outstanding Equity Awards at 2017 Fiscal Year End
The following table sets forth certain information regarding outstanding equity awards granted to PMI’s named executive officers ("NEOs")that remained outstanding as of December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | |
| Name | | Grant Date | | | Vesting Commencement Date | | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Option Exercise Price ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#) (1) |
| David Kimball | | 5/3/2016 | (2) | | 3/18/2016 | | 617,279 |
| | 793,646 |
| | 0.22 | | 5/2/2026 | | |
| | | 5/3/2016 | (3) | | 3/18/2016 | | — |
| | — |
| | — |
| | — |
| | 705,465 |
|
| | | 6/17/2016 | (4) | | 4/28/2016 | | 1,175,391 |
| | 940,312 |
| | 0.22 | | 6/16/2026 | | — |
|
| | | 3/17/2017 | (5) | | 12/1/2016 | | 10,578,290 |
| | 10,578,289 |
| | 0.22 | | 3/16/2027 | | — |
|
| Usama Ashraf | | 3/17/2017 | (2) | | 2/27/2017 | | — |
| | 3,397,242 |
| | 0.22 | | 3/16/2027 | | — |
|
| | | 11/7/2017 | (2) | | 2/27/2017 | | — |
| | 402,758 |
| | 0.53 | | 11/6/2027 | | — |
|
| Brad Pennington | | 3/28/2012 | (6) | | 2/27/2012 | | 62,500 |
| | — |
| | 0.22 | | 2/27/2022 | | — |
|
| | | 1/28/2014 | (6) | | 1/1/2014 | | 125,000 |
| | — |
| | 0.11 | | 1/28/2024 | | — |
|
| | | 1/23/2015 | (6) | | 1/16/2015 | | 200,000 |
| | — |
| | 0.22 | | 1/22/2025 | | — |
|
| | | 2/20/2015 | (6) | | 2/13/2015 | | 85,000 |
| | — |
| | 0.22 | | 2/19/2025 | | — |
|
| | | 2/27/2015 | (7) | | 2/27/2015 | | 115,000 |
| | — |
| | 0.22 | | 2/26/2025 | | — |
|
| | | 6/17/2016 | (4) | | 4/28/2016 | | 1,535,638 |
| | 1,228,511 |
| | 0.22 | | 6/16/2026 | | — |
|
| Kunal Kaul | | 3/15/2016 | (3) | | 12/28/2015 | | — |
| | — |
| | — | | 3/14/2026 | | 125,000 |
|
| | | 5/3/2016 | (2) | | 12/28/2015 | | 125,000 |
| | 125,000 |
| | 0.22 | | 5/2/2026 | | — |
|
| | | 6/17/2016 | (4) | | 4/28/2016 | | 579,953 |
| | 463,963 |
| | 0.22 | | 6/16/2026 | | — |
|
| Nasos Topakas | | 11/7/2017 | (2) | | 4/17/2017 | | — |
| | 3,800,000 |
| | 0.53 | | 11/6/2027 | | — |
|
| |
| (1) | Represents restricted stock units (“RSUs”), in each case that remained unvested as of December 31, 2017. |
| |
| (2) | This option vests over four years, with 1/4 vesting on the first anniversary of the applicable vesting commencement date set forth in the table (the "Vesting Commencement Date") and 1/48 vesting each month thereafter for the following three years, except that, in the event the NEO is terminated without cause within 12 months of a change in control of PMI, a sale of all or substantially all of PMI's assets, or a liquidation, dissolution or winding up of PMI (each, a "Corporate Transaction"), any unvested options will vest in full immediately. |
| |
| (3) | These RSUs initially vest, if at all, when PMI files for an initial public offering and the lock-up period expires or there is a corporate transaction (as defined in the RSU grant notice), whichever occurs first (each, a “Triggering Event”). The number of RSUs that vest upon a Triggering Event will be equal to the number of RSUs that would |
have vested had the RSUs been subject to only the following vesting condition: vesting over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years (the “Time-Based Vesting Schedule”). If the NEO provides continuous service through the Triggering Event, the remaining RSUs will vest pursuant to the Time-Based Vesting Schedule until the RSUs are fully vested. In addition, the RSUs granted to the NEO will fully vest in the event that the NEO is terminated without cause within 12 months of a Corporate Transaction.
| |
| (4) | This option vests over three years, with 1/36 vesting on the one month anniversary of the Vesting Commencement Date and 1/36 vesting each month thereafter on the same day of the month as the Vesting Commencement Date (and if there is no corresponding day, on the last day of the month), except that, in the event the NEO is terminated without cause within 12 months of a Corporate Transaction, any unvested options will vest in full immediately. |
| |
| (5) | This option vests over three years, with 1/2 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following two years, except that, in the event of a Corporate Transaction, any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction. |
| |
| (6) | This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years. |
| |
| (7) | This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/2 vesting on the second anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following two years. |
2017 Option Exercises and Stock Vested
The following table sets forth information regarding equity awards held by PMI's named executive officers that were exercised, vested or
been exercised. 401(k) Plan
PMI hassettled during 2017 (dollar amounts in thousands):
|
| | | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards |
| Name | | Number of Shares Acquired on Exercise (#) | | Value Realized on Exercise ($) | | Number of Shares Acquired on Vesting (#) | | | Value Realized on Vesting/Settlement ($) (1) |
| David Kimball | | — |
| | — |
| | — |
| | | — |
|
| Usama Ashraf | | — |
| | — |
| | — |
| | | — |
|
| Brad Pennington | | — |
| | — |
| | 14,220 |
| | | $ | 3 |
|
| Kunal Kaul | | — |
| | — |
| | — |
| | | — |
|
| Nasos Topakas | | — |
| | — |
| | — |
| | | — |
|
| |
| (1) | The amount reported as value realized on vesting/settlement of restricted stock units is calculated by multiplying the fair value of PMI's common stock as of the vesting date of the award by the number of RSUs. |
Potential Payments Upon Termination or a 401(k) plan that covers all employees meeting certain eligibility requirements. Change In Control of PMI
The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance withfollowing table provides the provisions of Section 401(k)estimated value of the Internal Revenue Code. Eligible employees may defer uppayments that PMI would provide to 90%its named executive officers in connection with a change in control of eligible compensation upPMI and/or a termination of employment. In determining amounts payable, we have assumed in all cases that the change in control or termination of employment, as applicable, occurred on December 31, 2017. With respect to a termination of employment, we have assumed in all cases that the annual maximum as determined by the Internal Revenue Service. PMI’s contributions to the 401(k) plan are discretionary. termination was without cause.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Cash Severance ($) | | Number of Unvested Options (#) | | Estimated Value of Unvested Options at December 31, 2017 ($) | | Number of Unvested RSUs and Stock Awards (#) | | Estimated Value of Unvested RSUs and Stock Awards at December 31, 2017 ($) | | Total Estimated Value ($) |
| | | (dollar amounts in thousands) |
| | | | | | | | | | | | | |
| David Kimball | | | | | | | | | | | | |
| Involuntary Termination | | $ | 250 |
| | — |
| | — |
| | — |
| | $ | — |
| | $ | 250 |
|
| Change in Control | | | | 12,312,247 |
| | $ | 3,940 |
| | 705,465 |
| | $ | 381 |
| | $ | 4,321 |
|
| Involuntary Termination following Change in Control | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Usama Ashraf | | | | | | | | | | | | |
| Change in Control | | — |
| | — |
| — |
| $ | — |
| | — |
| | — |
| | $ | — |
|
| Involuntary Termination following Change in Control | | — |
| | 3,800,000 |
| | $ | 1,091 |
| | — |
| | — |
| | 1,091 |
|
| Brad Pennington | | | | | | | | | | | | |
| Involuntary Termination | | $ | 175 |
| | — |
| — |
| — |
| | — |
| | — |
| | $ | 175 |
|
| Change in Control | | | | — |
| | — |
| | — |
| | — |
| | $ | — |
|
| Involuntary Termination following Change in Control | | — |
| | 1,228,511 |
| | $ | 393 |
| | — |
| | $ | — |
| | $ | 393 |
|
| Kunal Kaul | | | | | | | | | | | |
|
| Change in Control | | — |
| | — |
| | — |
| | — |
| | — |
| | $ | — |
|
| Involuntary Termination following Change in Control | | — |
| | 588,963 |
| | $ | 188 |
| | 125,000 |
| | $ | 68 |
| | $ | 256 |
|
| Nasos Topakas | | | | | | | | | | | |
|
| Involuntary Termination | | $ | 175 |
| | — |
| | — |
| | — |
| | — |
| | $ | 175 |
|
| Change in Control | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Involuntary Termination following Change in Control | | — |
| | 3,800,000 |
| | $ | 38 |
| | — |
| | — |
| | $ | 38 |
|
Compensation Committee Interlocks and Insider Participation
During the
fiscal year ended December 31,
2015,2017, Christopher M. Bishko (who resigned from PMI's Board of Directors on February 22, 2018) and Patrick W. Grady served as members of the Compensation Committee. None of these directors is or has been an officer or employee of PMI
contributed $1.9 million toat any time or had any relationship with PMI requiring disclosure by PMI under Item 404 of Regulation S-K. During the
401(k) plan.fiscal year ended December 31, 2017, none of PMI's executive officers served as a member of the Board of Directors or Compensation Committee (or other board committee serving an equivalent function) of any unrelated entity that had one or more of its executive officers serving on PMI’s Board of Directors or Compensation Committee (or other board committee serving an equivalent function).
The following table shows compensation for the year ended December 31,
20152017 to PMI’s directors who were not also named executive officers at the time they received compensation as directors (in thousands):
|
| | | | | | | | | | | | |
| Name | | Fees earned or paid in cash ($) | | Equity awards ($) | | | Total |
| Patrick W. Grady | | — |
| | — |
| | | — |
|
| Rajeev V. Date | | $ | 37.5 |
| | — |
| | | $ | 37.5 |
|
| Christopher M. Bishko (1) | | — |
| | — |
| | | — |
|
| David R. Golob | | — |
| | — |
| | | — |
|
| Nigel W. Morris | | $ | 37.5 |
| | — |
| | | $ | 37.5 |
|
| Aaron Vermut (2) | | — |
| | — |
| | | — |
|
| Claire A. Huang | | — |
| | — |
| | | — |
|
Name
| | Fees
earned or
paid in
cash
| | | Stock
awards
| | | Option
awards($)
| | | Non-equity
incentive plan
compensation
| | | Nonqualified
deferred
compensation
earnings
| | | All other
compensation
| | | Total
| |
Patrick W. Grady
(1) | Mr. Bishko resigned as a Director of PMI effective February 22, 2018. |
| $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| |
Rajeev V. Date
(2) | | | —
| | | | —
| | | | —
| | | | —
| | | | —
| | | | —
| | | | —
| |
Christopher M. Bishko
| | | —
| | | | —
| | | | —
| | | | —
| | | | —
| | | | —
| | | | —
| |
David R. Golob
| | | —
| | | | —
| | | | —
| | | | —
| | | | —
| | | | —
| | | | —
| |
Nigel W. Morris
| | $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| | | $
| —
| Mr. Vermut resigned as a Director of PMI effective September 21, 2017. |
From time to time, PMI reimburses certain of its non-employee directors for travel and other expenses incurred in connection with attending board of directors meetings.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of PMI has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and based on such review and discussions, the Compensation Committee recommended to PMI's Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
COMPENSATION COMMITTEE
Patrick W. Grady, Chair
Mason D. Haupt
Claire A. Huang
Item
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Prosper Marketplace, Inc.
The following table sets forth information regarding the beneficial ownership of PMI’s common stock as of March
3, 2016,1, 2018, by:
| ×
| each of PMI’s directors;
|
| ×
| each of PMI’s named executive officers;
|
each of PMI’s directors; | ×
| each person, or group of affiliated persons, who is known by PMI to beneficially own more than 5% of PMI’s common stock; and
|
each of PMI’s named executive officers; | ×
| all of PMI’s directorseach person, or group of affiliated persons, who is known by PMI to beneficially own more than 5% of PMI’s common stock; and executive officers as a group.
|
all of PMI’s directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. Except as otherwise indicated in the footnotes to the table below, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
Percentage ownership calculations are based on
222,136,555260,199,139 shares of common stock outstanding as of March
3, 2016,1, 2018, assuming the conversion of all of PMI’s convertible preferred
stock.stock, but excluding any outstanding stock options or warrants. Each share of PMI preferred stock is convertible at any time at the discretion of the holder. Shares of PMI’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series
DG Preferred Stock, convert into shares of PMI common stock at a ratio of 1 to 1. Shares of PMI’s Series A-1 Preferred Stock convert into shares of PMI common stock at a ratio of 1,000,000 to 1.
In computing the number of shares of common stock beneficially owned by a person or entity and the percentage ownership of that person or entity, PMI deemed outstanding all shares of common stock subject to options RSUs and warrants held by that person or entity that are currently exercisable or vesting within 60 days of March 3, 2016.1, 2018. Except as set forth in footnote 17 below, PMI did not deem these shares outstanding however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than 1.0% is denoted with an asterisk (*). Except as otherwise indicated in the footnotes to the table below, addresses of named beneficial owners and officers are in care of Prosper Marketplace, Inc., 221 Main Street, 3rd Floor, San Francisco, CA 94105. | | Total Beneficial Ownership | |
Name of Beneficial Owner | | Number of Shares | | | Beneficial Ownership Percentage | |
Directors and Executive Officers | | 2015 | | | 2015 | |
Rajeev V. Date (1) | | | 226,115 | | | * | |
Patrick W. Grady (2) | | | 51,247,915 | | | | 23.07 | % |
Christopher M. Bishko (3) | | | 2,172,955 | | | | 0.98 | % |
David R. Golob (4) | | | 17,413,325 | | | | 7.84 | % |
Nigel W. Morris (5) | | | 1,448,970 | | | * | |
Stephan P. Vermut (6) | | | 14,325,925 | | | | 6.33 | % |
Aaron Vermut (7) | | | 14,325,925 | | | | 6.33 | % |
Ronald Suber (8) | | | 13,780,925 | | | | 6.11 | % |
Joshua Tonderys (9) | | | 3,600,845 | | | | 1.61 | % |
Parker Barrile | | | — | | | * | |
Sachin Adarkar (10) | | | 1,080,890 | | | * | |
All directors and executive officers as a group (11) | | | 119,623,790 | | | | 50.47 | % |
5% Shareholders | | | | | | | | |
Accel Partners (12) | | | 24,320,660 | | | | 10.95 | % |
IDG Capital Partners (13) | | | 24,320,660 | | | | 10.95 | % |
Sequoia Capital (14) | | | 51,247,915 | | | | 23.07 | % |
Francisco Partners (15) | | | 17,413,325 | | | | 7.84 | % |
|
| | | | | | | | | | | | |
| Name of Beneficial Owner | | Number of Shares Owned (1) | | Number of Shares Underlying Options, and Warrants Exercisable Currently or Within 60 Days (2) | | Total Number of Shares Beneficially Owned (3) | | Beneficial Ownership Percentage |
| Directors and Executive Officers | | | | | | | | |
| Rajeev V. Date (4) | | 26,115 |
| | 523,284 |
| | 549,399 |
| | * |
|
| Patrick W. Grady (5) | | 51,247,915 |
| | — |
| | 51,247,915 |
| | 19.70 | % |
| David R. Golob (6) | | 17,413,325 |
| | — |
| | 17,413,325 |
| | 6.69 | % |
| Nigel W. Morris (7) | | 1,073,970 |
| | 829,608 |
| | 1,903,578 |
| | * |
|
| Claire A. Huang | | — |
| | — |
| | — |
| | * |
|
| Mason D. Haupt (8) | | — |
| | 77,793 |
| | 77,793 |
| | |
| David Kimball | | — |
| | 14,898,041 |
| | 14,898,041 |
| | 5.42 | % |
| Usama Ashraf | | — |
| | 1,108,332 |
| | 1,108,332 |
| | * |
|
| Nasos Topakas | | — |
| | 950,000 |
| | 950,000 |
| | * |
|
| Brad Pennington | | 175,095 |
| | 2,391,875 |
| | 2,566,970 |
| | * |
|
| Sachin Adarkar | | — |
| | 1,486,074 |
| | 1,486,074 |
| | * |
|
| Kunal Kaul | | — |
| | 841,777 |
| | 841,777 |
| | * |
|
| All directors and executive officers as a group (9) | | 69,936,420 |
| | 23,106,784 |
| | 93,043,204 |
| | 32.84 | % |
| 5% Shareholders | | |
| |
|
| | | | |
| Sequoia Capital (10) | | 51,247,915 |
| | — |
| | 51,247,915 |
| | 19.70 | % |
| Pinecone Investments LLC (11) | | — |
| | 35,544,141 |
| | 35,544,141 |
| | 12.02 | % |
| LPG Capital GP Limited (12) | | 37,249,497 |
| | | | 37,249,497 |
| | 14.32 | % |
| PF WarrantCo (13) | | 723,902 |
| | 69,274,534 |
| | 69,998,436 |
| | 21.25 | % |
| Accel Partners (14) | | 24,320,667 |
| | — |
| | 24,320,667 |
| | 9.35 | % |
| IDG Capital Partners (15) | | 24,320,667 |
| | — |
| | 24,320,667 |
| | 9.35 | % |
(1)
|
|
| (1) | Includes shares of common stock (including common stock issuable upon the conversion of preferred stock) owned directly or indirectly, but does not include shares subject to options and warrants. |
| |
| (2) | Includes shares subject to options or warrants owned directly or indirectly that are currently exercisable or will become exercisable within 60 days of March 3, 2017. |
| |
| (3) | The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Commission, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities for which that person has a right to acquire beneficial ownership within 60 days. |
| |
| (4) | Consists of 200,000523,284 shares of common stock issuable upon the exercise of stock options and 26,115 shares of common stock issuable upon the conversion of preferred stock held by Mr. Date or his affiliate. |
(2)
| |
| (5) | Consists of 51,247,915 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Mr. Grady is a partner of Sequoia Capital and therefore may be deemed to share voting and investment power over these shares. Mr. Grady disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein. |
(3)
| Consists of 1,086,975 shares of common stock and 2,172,955 shares of common stock issuable upon the conversion of preferred stock held by Omidyar Network through certain of its affiliates. Mr. Bishko is a partner of Omidyar Technology Ventures and therefore may be deemed to share voting and investment power over these shares. Mr. Bishko disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein.
|
(4)
(6) | Consists of 17,413,325 shares of common stock issuable upon the conversion of preferred stock held by Francisco Partners through certain of its affiliates. Mr. Golob is a partner of Francisco Partners and therefore may be deemed to share voting and investment power over these shares. Mr. Golob disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein. |
to share voting and investment power over these shares. Mr. Golob disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein.
(5)
| |
| (7) | Consists of 1,005,935 shares of common stock, 1,073,97068,035 shares of common stock issuable upon the conversion of preferred stock and 171,875829,608 shares of common stock issuable upon the exercise of warrants held by QED Investors through certain of its affiliates. Mr. Morris is a partner of QED Investors and therefore may be deemed to share voting and investment power over these shares. Mr. Morris disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein. |
(6)
| |
| (8) | Consists of 8,231,99077,793 shares of common stock 10,215,265issuable upon the exercise and conversion of the preferred stock warrants held by Mr. Haupt. |
| |
| (9) | Consists of 1,207,145, shares of common stock, 68,729,725 shares of common stock issuable upon the conversion of preferred stock, 22,199,383 shares of common stock issuable upon the exercise of stock options, 829,608 shares of common stock issuable upon the exercise of warrants and 77,793 shares of common stock issuable upon the exercise and conversion of the preferred stock warrants. |
| |
| (10) | Represents 51,247,915 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Sequoia Capital is deemed to have voting and investment power over the shares. The address for Sequoia Capital is 3000 Sand Hill Road, 4-250, Menlo Park, California 94025. |
| |
| (11) | Represents 35,544,141 shares of common stock issuable upon the exercise and conversion of the preferred stock warrant held by Pinecone Investments LLC, an affiliate of Colchis Capital Management, L.P. The members of Pinecone Investments LLC are all of the partners of Colchis Capital Management, L.P., or entities established by one or more of them. The address for Colchis Capital Management, L.P. is 150 California St., 18th Floor, San Francisco, CA 94111. |
| |
| (12) | Represents 37,249,497 shares of common stock issuable upon the conversion of preferred stock held by LPG Capital through certain of its affiliates. LPG Capital l is deemed to have voting and investment power over the shares. The address for LPG Capital is 199-203 Hennessy Road, Flat 1002, Hong Kong, China. |
| |
| (13) | Consists of (i) 2 shares of common stock issuable upon the conversion of preferred stock and 4,110,66063,283,414 shares of common stock issuable upon the exercise and conversion of the preferred stock optionswarrants, in each case, held by Mr. Stephan Vermut or his affiliate. Mr. Vermut is deemed to have voting and investment power over these shares. Mr. Vermut disclaims beneficial ownership with respect to the shares held by his affiliate except to the extent of his pecuniary interest therein. 2,503,980 of thePF WarrantCo Holdings, LP, a Delaware limited partnership (the “PF WarrantCo Shares”); (ii) 5,747,582 shares of common stock are considered to be restricted as they were purchased throughissuable upon the early exercise and conversion of the preferred stock options and remain unvested. |
(7)
| Consists of 8,231,990warrants held by QPL Holdings (PF) LP, a Delaware limited partnership (the “QPL Shares”); (iii) 243,538 shares of common stock 10,215,265issuable upon the exercise and conversion of the preferred stock warrants held by QPB Holdings Ltd., a Cayman Islands exempted company (the “QPB Shares”); and (iv) 723,900 shares of common stock issuable upon the conversion of preferred stock and 4,110,660 shares of common stock issuable upon the exercise of stock options held by Mr. Aaron Vermut. 2,889,205 of the shares of common stock are considered to be restricted as they were purchased through the early exercise of stock options and remain unvested.
Quantum Strategic Partners Ltd., a Cayman Islands exempted company (the “Quantum Strategic Shares”). |
QPL Holdings (PF) GP Ltd., a Cayman Islands exempted company, is the general partner of PF WarrantCo Holdings, LP. Soros Fund Management LLC (“SFM LLC”) serves as principal investment manager to QPL Holdings (PF) GP Ltd., QPL Holdings (PF) LP, QPB Holdings Ltd., and Quantum Strategic Partners Ltd. As such, SFM LLC is deemed to have sole voting and dispositive power over the QPL Shares, the QPB Shares and the Quantum Strategic Shares, and shared voting and dispositive power over the PF WarrantCo Shares. SFM LLC disclaims beneficial ownership of the PF WarrantCo Shares except to the extent of its pecuniary interest therein. George Soros serves as Chairman and Manager of SFM LLC and Robert Soros serves as Manager of SFM LLC. The business address of SFM LLC is 250 West 55th Street, New York, NY 10019. The registered address for QPL Holdings (PF) GP Ltd. is c/o Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George Town, Grand Cayman, KY1-9008, Cayman Islands.
(8)
| Consists of 8,231,990 shares of common stock, 10,215,265 shares of common stock issuable upon the conversion of preferred stock and 3,565,660 shares of common stock issuable upon the exercise of stock options held by Mr. Suber or his affiliate. Mr. Suber is deemed to have voting and investment power over these shares. Mr. Suber disclaims beneficial ownership with respect to the shares held by his affiliate except to the extent of his pecuniary interest therein. 2,503,980 of the shares of common stock are considered to be restricted as they were purchased through the early exercise of stock options and remain unvested.
|
(9)
(14) | Consists of 2,140,775 shares of common stock and 1,460,070 shares of common stock issuable upon the exercise of stock options held by Mr. Tonderys. 494,605 of the shares of common stock are considered to be restricted as they were purchased through the early exercise of stock options and remain unvested.
|
(10)
| Consists of 1,080,890 shares of common stock issuable upon the exercise of stock options held by Mr. Adarkar.
|
(11)
| Consists of 28,929,655 shares of common stock, 104,720,850 shares of common stock issuable upon the conversion of preferred stock, 16,656,155 shares of common stock issuable upon the exercise of stock options and 375,000 shares of common stock issuable upon the exercise of warrants.
|
(12)
| Represents 5,703,470 shares of common stock and 12,949,3257,245,859 shares of common stock issuable upon the conversion of preferred stock held by Accel Partners through certain of its affiliates (collectively, the “Accel Shares”); 3,498,765 shares of common stock and 8,221,4954,722,733 shares of common stock issuable upon the conversion of preferred stock held by IDG Capital Partners through certain of its affiliates (the “IDG Shares”); and 877,185 shares of common stock and 3,149,840 shares of common stock issuable upon the conversion of preferred stock held by Breyer Capital, LLC and James W. Breyer 2005 Trust dated 2/25/2005 (collectively, the “Breyer Shares”). Accel Partners is deemed to have voting and investment power over the Accel Shares. Accel Partners is an affiliate of IDG Capital Partners and may also therefore be deemed to share voting and investment power over the IDG Shares. Mr. Breyer is a partner of Accel Partners and therefore Accel Partners may also be deemed to share voting and investment power over the Breyer Shares. Accel Partners disclaims beneficial ownership of the IDG Shares and Breyer Shares except to the extent of its pecuniary interest therein. The address of Accel Partners is 428 University Avenue, Palo Alto, California 94301. |
and 2,272,655 shares of common stock issuable upon the conversion of preferred stock held by Breyer Capital, LLC and James W. Breyer 2005 Trust dated 2/25/2005 (collectively, the “Breyer Shares”). Accel Partners is deemed to have voting and investment power over the Accel Shares. Accel Partners is an affiliate of IDG Capital Partners and may also therefore be deemed to share voting and investment power over the IDG Shares. Mr. Breyer is a partner of Accel Partners and therefore Accel Partners may also be deemed to share voting and investment power over the Breyer Shares. Accel Partners disclaims beneficial ownership of the IDG Shares and Breyer Shares except to the extent of its pecuniary interest therein. The address of Accel Partners is 428 University Avenue, Palo Alto, California 94301.
(13)
| |
| (15) | Represents 3,498,765 shares of common stock and 8,221,4954,722,733 shares of common stock issuable upon the conversion of preferred stock held by IDG Capital Partners through certain of its affiliates (“IDG Shares”); 5,703,470 shares of common stock and 12,949,3257,245,859 shares of common stock issuable upon the conversion of preferred held by Accel Partners through certain of its affiliates (collectively, the “Accel Shares”); and 877,185 shares of common stock and 3,149,8402,272,655 shares of common stock issuable upon the conversion of preferred stock held by Breyer Capital, LLC and James W. Breyer 2005 Trust dated 2/25/2005 (collectively, the “Breyer Shares”). IDG Capital Partners is deemed to have voting and investment power over the IDG Shares. IDG Capital Partners is an affiliate of Accel Partners and may also therefore be deemed to share voting and investment power over the Accel Shares. Mr. Breyer is a partner of Accel Partners, which is an affiliate of IDG Capital Partners, and therefore IDG Capital Partners may also be deemed to share voting and investment power over the Breyer Shares. IDG Capital Partners disclaims beneficial ownership of the Accel Shares and Breyer Shares except to the extent of its pecuniary interest therein. The address for IDG Capital Partners is 99 Queen’s Road Central, Unit 1509, The Center, Hong Kong, China. |
Securities Authorized for Issuance under Equity Compensation Plans
(14)
| Represents 51,247,915 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Sequoia Capital is deemed to have voting and investment power over these shares. The address for Sequoia Capital is 3000 Sand Hill Road, 4-250, Menlo Park, California 94025.
|
(15)
| Represents 17,413,325 shares of common stock issuable upon the conversion of preferred stock held by Francisco Partners through certain of its affiliates. Francisco Partners is deemed to have voting and investment power over these shares. The address for Francisco Partners is One Letterman Drive Building C – Suite 140 San Francisco, CA 94129.
|
The following table sets forth information, as of December 31, 2015,2017, with respect to shares of PMI common stock that may be issued under PMI’s existing equity compensation plans.
Plan Category | | Number of shares of common stock to be issued upon exercise of outstanding options, warrants, RSUs and rights (1) | | | Weighted average exercise price of outstanding options, warrants and rights | | | Number of shares of common stock remaining available for future issuance under equity compensation plans | |
Equity compensation plans approved by stockholders: | | | | | | | | | | | | |
Prosper Marketplace, Inc. 2005 Stock Plan, as amended and restated | | | 30,523,105 | | | $ | 1.61 | | | | - | |
Prosper Marketplace, Inc. 2015 Equity Incentive Plan | | | 10,491,160 | | | | 5.50 | | | | 2,106,550 | |
All stockholder approved plans | | | 41,014,265 | | | $ | 2.61 | | | | 2,106,550 | |
Equity compensation plans not approved by stockholders: | | | | | | | | | | | | |
N/A | | N/A | | | N/A | | | N/A | |
All non-stockholder approved plans | | N/A | | | N/A | | | N/A | |
Total | | | 41,014,265 | | | $ | 2.61 | | | | 2,106,550 | |
|
| | | | | | | | | | | | | | |
| Plan Category | | Number of shares of common stock to be issued upon exercise of outstanding options, warrants, RSUs and rights (1) | | Weighted average exercise price of outstanding options, warrants and rights | | Number of shares of common stock remaining available for future issuance under equity compensation plans |
| Equity compensation plans approved by stockholders: | | | | | | |
| Prosper Marketplace, Inc. 2005 Stock Plan, as amended and restated | | 8,507,570 | | | $ | 0.16 | | | — | |
| Prosper Marketplace, Inc. 2015 Equity Incentive Plan, as amended | | 51,281,644 | | | $ | 0.27 | | | 10,403,252 | |
| All stockholder approved plans | | 59,789,214 | | | $ | 0.25 | | | 10,403,252 | |
| Equity compensation plans not approved by stockholders: | | | | | | |
| Outstanding Common Stock Warrants | | 1,088,549 | | | $ | 0.22 | | | — | |
| All non-stockholder approved plans | | 1,088,549 | | | $ | 0.22 | | | — | |
| Total | | 60,877,763 | | | $ | 0.25 | | | 10,403,252 | |
(1)
| |
| (1) | Includes option and RSU issuances to employees, directors and certain consultants, advisors or vendors; however it does not include warrants granted to outside individuals, consultants, advisors and vendors. |
The information set forth in Note 14 to the “Notes to Consolidated Financial Statements” below under the caption “Stock-based Compensation” is incorporated herein by reference.
PMI is the sole member of, and holds a 100% equity interest in, PFL. PFL does not have any equity compensation plans.
Item
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Prosper Marketplace, Inc.
On January 22, 2013, PMI entered into an Administration Agreement with PFL
(the(as amended to date, the “PMI Administration Agreement”), pursuant to which PMI agreed to provide certain administrative services relating to the marketplace. Under the PMI Administration Agreement, PFL is required to pay PMI
(a)(a) an amount equal to one-twelfth (1/12) of the specified annual Corporate Administration Fees equal to 50% of finance and legal personnel costs, (b) a fee for each Borrower Loan originated through the marketplace, (c) 90% of all servicing fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of PFL.PFL.
Also on January 22, 2013, PFL and PMI entered into an Asset Transfer Agreement (the “Asset Transfer Agreement”) pursuant to which PMI, effective February 1, 2013 (i) transferred the marketplace and substantially all of PMI’s assets and rights related to the operation of the marketplace to PFL, and (ii) made a capital contribution to PFL in excess of $3 million. Under the Asset Transfer Agreement, PMI also transferred substantially all of its remaining assets to PFL, including (i) all outstanding Notes issued by PMI under the Indenture dated June 15, 2009 between PMI and Wells Fargo Bank, as trustee (“the Indenture”), (ii) all Borrower Loans corresponding to such Notes, (iii) all registration agreements related to such Notes and Borrower Loans, and (iv) all documents and information related to the foregoing. Certain hardware and agreements relevant to the development, maintenance and use of the marketplace, including in relation to the origination, funding and servicing of Borrower Loans, and the issuance, funding and payment of the Notes, were not transferred or assigned to PFL by PMI. In addition, PMI did not transfer to PFL (i) agreements with PMI’s directors, officers or employees and PMI’s financial, legal or other advisors or consultants, (ii) certain agreements with vendors to provide PMI with goods or services in the ordinary course of business (including software licensed pursuant to any “shrink wrap” or “click wrap” license), and (iii) certain cash and short-term investments.
In the Asset Transfer Agreement, PMI agreed, among other things, to:
| |
| (i) | fund any repurchase obligation with respect to the transferred Notes, and indemnify PFL for any other losses that arise out of any registration agreement related to the transferred Notes or Borrower Loans, including as a result of a breach by PMI of any of its representations or warranties made therein; |
| |
| (ii) | fund any arbitration filing or administrative fees or arbitrator fees payable under any registration agreement related to the transferred Notes or Borrower Loans; and |
| |
| (iii) | fund any indemnification obligations that arise under any registration agreement entered into by PMI prior to the date of the asset transfer. |
Holders of the transferred Notes are third party beneficiaries under the Asset Transfer Agreement and the Administration Agreement.
Under Section 4.1 of the Indenture, PMI could transfer substantially all of its assets to any person without the consent of the holders of the existing Notes, provided that the transferee expressly assumed all of PMI’s obligations under the Indenture and the existing Notes. In that case, the transferee would succeed to and be substituted for PMI, and PMI would be discharged from all of its obligations and covenants, under the Indenture and the existing Notes. Accordingly, on January 22, 2013, PMI, PFL and Wells Fargo Bank, as trustee entered an Amended and Restated Indenture (the “Amended and Restated Indenture”), effective February 1, 2013, which (i) effected such assumption, substitution and discharge (the “Note Assumption”), and (ii) amended and restated the Indenture to reflect the Note Assumption and to make certain other amendments to the Indenture as permitted therein. Following the Note Assumption, PFL became the obligor with respect to the transferred Notes and the Amended and Restated Indenture, and PMI no longer has any obligations with respect thereto.
Agreements with Prosper Asset Holdings LLC
On November 22, 2013, PMI entered into an Administration Agreement with Prosper Asset Holdings LLC (“PAH”), a wholly owned subsidiary of PFL (the “PAH Administration Agreement), pursuant to which PMI agreed to provide PAH certain administrative services related to PAH’s operations. Under the PAH Administration Agreement, PAH is required to pay PMI an annual fee in the amount of $150,000.
Also on November 22, 2013, PMI and PAH entered into a Loan Servicing Agreement, pursuant to which PMI agreed to service certain Borrower Loans acquired by PAH under a Loan Sale Agreement entered into on the same date between PAH and PFL. In exchange for servicing these Borrower Loans, PAH agreed to pay PMI the servicing fee identified in the loan listing for each loan purchased by PAH.
Certain Relationships Among Directors and Officers
None
Participation in the Marketplace
PMI’s executive officers, directors and certain affiliates, have opened investor accounts on the marketplace and have made deposits to and withdrawals from their accounts, and
fundedinvested in portions of borrowers’ loan requests from time to time in the past via purchases of Notes, and may do so in the future. The Notes and Borrower Loans were obtained on terms and conditions that were not more favorable than those obtained by other investors.
Agreements with Significant Shareholders
On February 27, 2017, PFL entered into a Loan Purchase Agreement (the “Purchase Agreement”) with PF LoanCo Funding LLC, a Cayman limited liability company (the “Beneficiary”), and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee of PF LoanCo Trust, a New York common law trust (the “Trust”). The Purchase Agreement sets forth the terms and conditions pursuant to which PFL will sell eligible consumer loans in an aggregate amount of up to $5.0 billion to the Purchaser for the benefit of the Beneficiary. As of December 31, 2017, an aggregate of $1,826,527 thousand of loans were purchased under the Purchase Agreement.
In connection with the Purchase Agreement, on February 27, 2017, PMI entered into a Warrant Agreement with PF WarrantCo Holdings, LP, a Delaware limited partnership and an entity related to the Beneficiary (the “PF WarrantCo”), and, for certain limited purposes, New Residential Investment Corp. (the “Warrant Agreement”). Pursuant to the Warrant Agreement, PMI issued to PF WarrantCo three warrant certificates to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
PF WarrantCo became a beneficial owner of more than 5% of PMI’s common stock in connection with the vesting of portions of the Warrant Shares. The Beneficiary is an affiliate under common control with PF WarrantCo Holdings, LP.
For more information regarding these transactions, please see Note 15 to our condensed consolidated financial statements.
Financing Arrangements with Significant Shareholders, Directors and Officers
In May 2014, PMI issued and sold an aggregate of 24,404,770 shares of PMI’s Series C convertible preferred stock for an aggregate consideration of $69.9 million. None of these shares were issued to a related party.
In June 2014, PMI issued a tender offer to purchase up to 6,963,785 shares of PMI’s Series A convertible preferred stock and Series B convertible preferred stock at a price equal to $2.87 per share. In July 2014, the tender offer expired as scheduled. Upon expiration of the tender offer, 782,540 shares of Series A convertible preferred stock and 5,667,790 shares of Series B convertible preferred stock had been validly tendered. As a result, in July 2014, PMI purchased these shares for an aggregate consideration of $18.5 million. The following table presents the number of shares sold to PMI by holders (whether held directly or through one or more affiliates) of more than 5% any class of PMI’s voting securities at the time the transaction was consummated:
Participant
| | Shares
| |
Blackrock (1)
| | | 2,263,235
| |
Garrison (2)
| | | 1,740,950
| |
(1)
| Includes shares held by Special Credit Opportunities (Offshore) Master, L.P., Special Credit Opportunities (Parallel) II, L.P., Special Credit Opportunities (Parallel) Master IV, L.P., Special Credit Opportunities – Series A, Special Credit Opportunities – Series B, and Facultas Fund, L.P.
|
(2)
| Includes shares held by Garrison Capital Equity Holdings II LLC and GLC GOF Onshore Holdings LLC.
|
In June 2015, as part of a share repurchase, PMI repurchased 3,885,125 shares of common stock from participating employees who, as of the determination date, had been employed by PMI for at least two years. The shares were repurchased at a price equal to $6.91 per share for an aggregate purchase price of $26.8 million. As part of this transaction, PMI repurchased 3,607,095 shares for a total of $24.9 million from the following directors and officers of PMI: Mr. Aaron Vermut, Mr. Stephan Vermut, Mr. Ronald Suber, Mr. Joshua Tonderys, and Mr. Sachin Adarkar.
For further information regarding stock ownership for executive officers, directors and security holders owning greater than 5% ownership of all PMI classes of voting securities please see “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Prosper Marketplace, Inc.”
Under the terms of the amended and restated voting agreement, dated April 7, 2015, certain investors in PMI’s convertible preferred stock, have each agreed, subject to maintaining certain ownership levels, to exercise their voting rights so as to elect one designee of Francisco Partners III, L.P., one designee of SC Prosper Holdings LLC, one designee of QPL Holdings (PF) LP, one designee of the Series A-1 convertible preferred stock holders, PMI’s Chief Executive Officer (“CEO”), one common director designated by the CEO, and two independent directors.
Under the terms of the amended and restated investor rights agreement, dated
April 7, 2015,February 27, 2017, the holders of a majority of the registrable securities of PMI have the right to demand that PMI file a registration statement under the Securities Act, so long as the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $20 million. These registration rights are subject to specified conditions and limitations. In addition, PMI is promptly required to give written notice to all holders of registrable securities prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of PMI. The amended and restated investor rights agreement also provides that if PMI registers any of its shares for public sale, stockholders with registration rights will have the right to include their shares in the registration statement, subject to specified conditions and limitations. Further, in the amended and restated investor rights agreement, if PMI receives from any holders of registrable securities a written request that PMI effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement, PMI is required to use reasonable best efforts to file a Form S-3 registration statement and to effect such registration as would permit or facilitate the sale and distribution of all or such portion of such holder’s registrable securities as are specified in the request, so long as the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $2.5 million.
Indemnification Agreements
PMI’s amended and restated certificate of incorporation provides that it will indemnify its directors and officers to the fullest extent permitted by Delaware law. In addition, PMI has entered into separate indemnification agreements with each of its directors and executive officers. For more information regarding these agreements, see “Item 10. Directors, Executive Officers and Corporate Governance—Prosper Marketplace, Inc.—Limitations on Officers’ and Directors’ Liability and Indemnification Agreements” for more information.
Policies and Processes for Transactions Involving Related Parties
PMI’s board of directors has not adopted a formal policy or procedure that must be followed prior to any transaction, arrangement or relationship with a related person, as defined by SEC regulations.
PMI has adopted a corporate Code of Ethics and Corporate Governance (the “Code”) that is enforced throughout all levels of management and deals with conflicts of interest, among other things. The Code requires PMI’s directors, officers and employees to avoid any conduct or activities that conflict, or appear to conflict, with Prosper’s interests, or that may make it difficult for the individual to perform his or her duties objectively. The Code also requires directors and executive officers to disclose any actual or potential conflict of interest to PMI’s Chief Compliance Officer, who will report such conflicts to PMI’s Audit Committee for review.
PMI’s directors and executive officers are required each year to respond to a questionnaire regarding their independence. The questionnaire also requires each director and executive officer to identify if they or an immediate family member had been indebted to, or had been a participant in any material transactions with, PMI or any of its subsidiaries. Additionally, PMI’s directors and executive officers are required to disclose on a quarterly basis whether they or an immediate family member had made any direct or indirect investments on Prosper’s platform.
The standards applied pursuant to the above-described procedures are to provide comfort that potential conflicts of interest or related party transactions are identified and received appropriate oversight and review.
For information regarding director independence, see “Item 10. Directors, Executive Officers, and Corporate Governance—Prosper Marketplace, Inc.—Director Independence.”
Item
| |
| Item 14. | Principal Accounting Fees and Services |
Prosper Marketplace, Inc. and Prosper Funding LLC
Deloitte & Touche LLP (“Deloitte”) served as PMI and PFL’s independent registered public accounting firm for the fiscal year ended December 31,
20142017 and is serving in such capacity for the current fiscal year. Deloitte was engaged in October 2014.
The aggregate fees billed by Deloitte for professional services to PMI and PFL were
$2,079$1,845 thousand and
$400$2,724 thousand in
20152017 and
2014,2016, respectively.
Burr Pilger Mayer, Inc. (“BPM”) served as PMI and PFL’s independent registered public accounting firm for the period from January 2013 through September 2014. The aggregate fees billed by BPM to PMI and PFL were $246 thousand during the fiscal years ended December 31, 2014.
Audit Fees. The aggregate fees billed by Deloitte for professional services rendered for PMI and PFL for the audit of annual financial statements, the review of the quarterly financial statements, and services that are normally provided in connection with statutory and regulatory filings or engagements were $1,840$1,670 thousand and $400$2,316 thousand in 20152017 and 2014,2016, respectively. BPM billed $155 thousand for such fees in 2014. Audit Related Fees. The aggregate fees billed by Deloitte for professional assurance and related services reasonably related to the performance of the audit of the PMI and PFL’s financial statements, but not included under Audit Fees were $237$163 thousand and $0$361 thousand in 20152017 and 2014,2016, respectively. These fees include merger and acquisition related due diligence, service organization control readiness assessment and service organization control readiness assessment. No aggregate fees were billed by BPM for 2015 and 2014 for professional assurance and related services reasonably related to the performance of the audit of the PMI and PFL’s financial statements, but not included under Audit Fees. Tax Fees. There were noThe aggregate fees billed by Deloitte for 20152017 and 20142016 for professional services for tax compliance, tax advice and tax planning were $10 thousand and $44 thousand in 20152017 and 2014. BPM billed $59 thousand for 2014 for professional services for tax compliance, tax advice and tax planning.2016. All Other Fees. Deloitte billed $2 thousand and $0,$2 thousand, in 20152017 and 2014,2016, respectively, related to fees not included in “Audit”, “Audit Related Fees” or “Tax Fees.” BPM billed $32 thousand for 2014 for an ISO gap analysis.
PART IV
PART IVItem
| |
| Item 15. | Exhibits and Financial Statement Schedule |
|
| |
| (a) Reports of Independent Registered Public Accounting Firms | |
| |
(a1) Report of Independent Registered Public Accounting Firm for PMI | |
| |
(a2) Report of Independent Registered Public Accounting Firm for Prosper Funding LLC | |
| |
(b) Documents List | |
| |
1.Financial Statements as of and for the year ended December 31, 20152017 | |
Prosper Marketplace, Inc. | |
| |
| |
| |
| |
| |
| |
| |
Prosper Funding LLC | |
| F-40
|
| F-41
|
| F-42
|
| F-43
|
| F-44
|
REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Prosper Marketplace, Inc.
San Francisco, CA
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Prosper Marketplace Inc. and subsidiaries (the "Company") as of December 31, 20152017 and 2014, and2016, the related consolidated statements of operations, other comprehensive loss, convertible preferred stock and stockholders’ deficit, and cash flows , for each of the twothree years in the period ended December 31, 2015. 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
thesethe Company's financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits, included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
supportingregarding the amounts and disclosures in the financial
statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial
statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Prosper Marketplace, Inc. as of December 31, 2015, and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We have served as the Company's auditor since 2014.
Prosper Marketplace, Inc.
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
| | December 31, | | | December 31, | |
ASSETS | | 2015 | | | 2014 | |
Cash and Cash Equivalents | | $ | 66,295 | | | $ | 50,557 | |
Restricted Cash | | | 151,223 | | | | 81,300 | |
Available for Sale Investments, at Fair Value | | | 73,187 | | | | - | |
Accounts Receivable | | | 2,434 | | | | 3,152 | |
Loans Held for Sale, at Fair Value | | | 32 | | | | 8,463 | |
Borrower Loans, at Fair Value | | | 297,273 | | | | 273,243 | |
Property and Equipment, Net | | | 24,965 | | | | 14,424 | |
Prepaid and Other Assets | | | 6,433 | | | | 4,856 | |
Servicing Assets | | | 14,363 | | | | 4,163 | |
Goodwill | | | 36,368 | | | | - | |
Intangible Assets, Net | | | 13,051 | | | | - | |
Total Assets | | $ | 685,624 | | | $ | 440,158 | |
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT | | | | | | | | |
Accounts Payable and Accrued Liabilities | | $ | 22,409 | | | $ | 12,787 | |
Payable to Investors | | | 136,507 | | | | 64,494 | |
Notes, at Fair Value | | | 297,405 | | | | 273,783 | |
Other Liabilities | | | 20,735 | | | | 13,323 | |
Total Liabilities | | | 477,056 | | | | 364,387 | |
Commitments and Contingencies (see Note 16) | | | | | | | | |
Convertible Preferred Stock – $0.01 par value; 177,388,425 shares authorized; 177,388,425 issued and outstanding as of December 31, 2015; 160,775,110 shares authorized; 153,499,785 issued and outstanding as of December 31, 2014. Aggregate liquidation preference of $325,952 and $160,952 as of December 31, 2015 and 2014, respectively. | | | 275,938 | | | | 111,145 | |
Stockholders' Deficit | | | | | | | | |
Common Stock – $0.01 par value; 270,326,075 shares authorized; 70,367,425 shares issued and 69,431,490 outstanding as of December 31, 2015; 239,644,415 shares authorized; 72,243,500 issued and outstanding as of December 31, 2014 | | | 127 | | | | 102 | |
Additional Paid-In Capital | | | 102,971 | | | | 86,340 | |
Less: Treasury Stock | | | (23,417 | ) | | | (303 | ) |
Accumulated Deficit | | | (146,907 | ) | | | (121,513 | ) |
Accumulated Other Comprehensive Income | | | (144 | ) | | | - | |
Total Stockholders' Deficit | | $ | (67,370 | ) | | $ | (35,374 | ) |
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit | | $ | 685,624 | | | $ | 440,158 | |
|
| | | | | | | |
| | December 31, | | December 31, |
| ASSETS | 2017 | | 2016 |
| Cash and Cash Equivalents | $ | 45,795 |
| | $ | 22,337 |
|
| Restricted Cash | 152,668 |
| | 163,907 |
|
| Available for Sale Investments, at Fair Value | 53,147 |
| | 32,769 |
|
| Accounts Receivable | 683 |
| | 757 |
|
| Loans Held for Sale, at Fair Value | 49 |
| | 624 |
|
| Borrower Loans, at Fair Value | 293,005 |
| | 315,627 |
|
| Property and Equipment, Net | 18,136 |
| | 24,853 |
|
| Prepaid and Other Assets | 7,796 |
| | 4,606 |
|
| Servicing Assets | 14,711 |
| | 12,786 |
|
| Goodwill | 36,368 |
| | 36,368 |
|
| Intangible Assets, Net | 1,377 |
| | 9,212 |
|
| Total Assets | $ | 623,735 |
| | $ | 623,846 |
|
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT | |
| | |
|
| Accounts Payable and Accrued Liabilities | $ | 11,942 |
| | $ | 15,017 |
|
| Payable to Investors | 132,432 |
| | 142,644 |
|
| Notes, at Fair Value | 293,948 |
| | 316,236 |
|
| Other Liabilities | 12,669 |
| | 17,173 |
|
| Convertible Preferred Stock Warrant Liability | 116,366 |
| | 21,711 |
|
| Total Liabilities | 567,357 |
| | 512,781 |
|
| Commitments and Contingencies (see Note 16) |
|
| |
|
|
Convertible Preferred Stock – $0.01 par value; 444,760,848 shares authorized; 214,637,925 issued and outstanding as of December 31, 2017; and 217,388,425 shares authorized, 177,388,425 issued and outstanding as of December 31, 2016. Aggregate liquidation preference of $375,952 and $325,952 as of December 31, 2017 and December 31, 2016, respectively. | 323,793 |
| | 275,938 |
|
| Stockholders' Deficit | |
| | |
|
| Common Stock – $0.01 par value; 625,000,000 shares authorized; 71,226,934 shares issued, and 70,290,999 shares outstanding, as of December 31, 2017; 338,222,103 shares authorized; 70,843,044 shares issued and 69,907,109 outstanding as of December 31, 2016. | 228 |
| | 212 |
|
| Additional Paid-In Capital | 136,653 |
| | 123,988 |
|
| Less: Treasury Stock | (23,417 | ) | | (23,417 | ) |
| Accumulated Deficit | (380,806 | ) | | (265,648 | ) |
| Accumulated Other Comprehensive Loss | (73 | ) | | (8 | ) |
| Total Stockholders' Deficit | $ | (267,415 | ) | | $ | (164,873 | ) |
| Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit | $ | 623,735 |
| | $ | 623,846 |
|
All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
The accompanying notes are an integral part of these consolidated financial statements.
Prosper
Prosper Marketplace, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
| | Year ended December 31, | |
| | 2015 | | | 2014 | |
Revenues | | | | | | | | |
Operating Revenues | | | | | | | | |
Transaction Fees, Net | | $ | 161,708 | | | $ | 68,229 | |
Servicing Fees, Net | | | 17,238 | | | | 4,552 | |
Gain on Sale of Borrower Loans | | | 14,151 | | | | 3,227 | |
Other Revenues | | | 7,687 | | | | 1,828 | |
Total Operating Revenues | | | 200,784 | | | | 77,836 | |
Interest Income | | | | | | | | |
Interest Income on Borrower Loans | | | 41,606 | | | | 42,087 | |
Interest Expense on Notes | | | (38,174 | ) | | | (38,734 | ) |
Net Interest Income | | | 3,432 | | | | 3,353 | |
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | | | 59 | | | | 128 | |
Total Net Revenues | | | 204,275 | | | | 81,317 | |
Expenses | | | | | | | | |
Origination and Servicing | | | 31,139 | | | | 14,098 | |
Sales and Marketing | | | 112,284 | | | | 41,971 | |
General and Administrative | | | 86,480 | | | | 27,917 | |
Total Expenses | | | 229,903 | | | | 83,986 | |
Net Loss Before Taxes | | | (25,628 | ) | | | (2,669 | ) |
Income Tax Expense | | | 340 | | | | - | |
Net Loss | | $ | (25,968 | ) | | $ | (2,669 | ) |
Excess Return to Preferred Shareholders on Repurchase | | | - | | | | (14,892 | ) |
Net Loss Applicable to Common Shareholders | | $ | (25,968 | ) | | $ | (17,561 | ) |
Net Loss Per Share – Basic and Diluted | | | (0.47 | ) | | $ | (0.39 | ) |
Weighted-Average Shares - Basic and Diluted | | | 55,547,408 | | | | 44,484,005 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues | | | | | |
| Operating Revenues | | | | | |
| Transaction Fees, Net | $ | 130,174 |
| | $ | 95,130 |
| | $ | 161,708 |
|
| Servicing Fees, Net | 27,206 |
| | 28,903 |
| | 17,238 |
|
| Gain on Sale of Borrower Loans | 11,431 |
| | 3,637 |
| | 14,151 |
|
Fair Value of Warrants Vested on Sale of Borrower Loans
| (60,122 | ) | | — |
| | — |
|
| Other Revenues | 4,806 |
| | 5,245 |
| | 7,687 |
|
| Total Operating Revenues | 113,495 |
| | 132,915 |
| | 200,784 |
|
| Interest Income | |
| | |
| | |
|
| Interest Income on Borrower Loans | 47,208 |
| | 44,649 |
| | 41,606 |
|
| Interest Expense on Notes | (43,954 | ) | | (41,187 | ) | | (38,174 | ) |
| Net Interest Income | 3,254 |
| | 3,462 |
| | 3,432 |
|
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | (514 | ) | | (372 | ) | | 59 |
|
| Total Net Revenues | 116,235 |
| | 136,005 |
| | 204,275 |
|
| Expenses | |
| | |
| | |
|
| Origination and Servicing | 34,881 |
| | 33,944 |
| | 31,139 |
|
| Sales and Marketing | 83,462 |
| | 70,146 |
| | 112,284 |
|
| General and Administrative | 75,686 |
| | 102,735 |
| | 86,480 |
|
| Restructuring Charges, Net | 1,340 |
| | 17,027 |
| | — |
|
| Change in Fair Value of Convertible Stock Warrants | 29,140 |
| | 7 |
| | — |
|
| Other Expenses, Net | 7,392 |
| | 30,341 |
| | — |
|
| Total Expenses | 231,901 |
| | 254,200 |
| | 229,903 |
|
| Net Loss Before Taxes | (115,666 | ) | | (118,195 | ) | | (25,628 | ) |
| Income Tax Expense | (508 | ) | | 546 |
| | 340 |
|
| Net Loss | $ | (115,158 | ) | | $ | (118,741 | ) | | $ | (25,968 | ) |
| Net Loss Per Share – Basic and Diluted | $ | (1.65 | ) | | $ | (1.85 | ) | | $ | (0.47 | ) |
| Weighted-Average Shares - Basic and Diluted | 69,687,836 |
| | 64,196,537 |
| | 55,547,408 |
|
The weighted average number of shares and the net loss per share reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016
The accompanying notes are an integral part of these consolidated financial statements.
Prosper Marketplace, Inc.
Consolidated Statements of Other Comprehensive Loss
| | | | | | | | |
| | Year Ended December 31, | |
| | 2015 | | | 2014 | |
Net Loss | | $ | (25,968 | ) | | $ | (2,669 | ) |
Other Comprehensive Income (Loss), Before Tax | | | | | | | | |
Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value | | | (144 | ) | | | - | |
Other Comprehensive Income (Loss), Before Tax | | | (144 | ) | | | - | |
Income tax effect | | | - | | | | - | |
Other Comprehensive Income (Loss), Net of Tax | | | (144 | ) | | | - | |
Comprehensive Income/(Loss) | | | (26,112 | ) | | | (2,669 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net Loss | $ | (115,158 | ) | | $ | (118,741 | ) | | $ | (25,968 | ) |
| Other Comprehensive Income (Loss), Before Tax | |
| | |
| | |
| Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value | (74 | ) | | 148 |
| | (144 | ) |
| Realized (Gain) Loss on Sale of Available for Sale Investments, at Fair Value | 9 |
| | (12 | ) | | — |
|
| Other Comprehensive Income (Loss), Before Tax | (65 | ) | | 136 |
| | (144 | ) |
| Income tax effect | — |
| | — |
| | — |
|
| Other Comprehensive Income (Loss), Net of Tax | (65 | ) | | 136 |
| | (144 | ) |
| Comprehensive Loss | $ | (115,223 | ) | | $ | (118,605 | ) | | $ | (26,112 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Prosper Marketplace, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit
(in thousands, except for share amounts)
| | Convertible Preferred Stock | | | Common Stock | | | Treasury Stock | | | | | | | | | | | | | | | | | |
| | Shares | | Amount | | | Shares | | Amount | | | Shares | | Amount | | | Additional Paid-In Capital | | | Accumulated Other Comprehensive Income | | | Accumulated Deficit | | | Total | |
Balance as of January 1, 2014 | | | 136,370,340 | | $ | 44,822 | | | | 67,944,015 | | $ | 75 | | | | (911,320 | ) | $ | (291 | ) | | $ | 83,676 | | | $ | — | | | $ | (103,952 | ) | | $ | (20,492 | ) |
Issuance of convertible preferred stock, Series C, net of issuance costs | | | 24,404,770 | | | 69,958 | | | | — | | | — | | | | — | | | — | | | | — | | | | — | | | | — | | | | — | |
Exercise of vested stock options | | | — | | | — | | | | 295,750 | | | 1 | | | | — | | | — | | | | 76 | | | | — | | | | — | | | | 77 | |
Exercise of nonvested stock options | | | — | | | — | | | | 4,328,585 | | | — | | | | — | | | — | | | | — | | | | — | | | | — | | | | — | |
Repurchase of restricted stock | | | — | | | — | | | | (909,465 | ) | | — | | | | (24,615 | ) | | (12 | ) | | | — | | | | — | | | | — | | | | (12 | ) |
Restricted stock vested | | | — | | | — | | | | — | | | 25 | | | | — | | | — | | | | 320 | | | | — | | | | — | | | | 345 | |
Exercise of warrants | | | — | | | — | | | | 584,615 | | | 1 | | | | — | | | — | | | | 226 | | | | — | | | | — | | | | 227 | |
Stock-based compensation expense | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | 2,042 | | | | — | | | | — | | | | 2,042 | |
Repurchase of preferred stock | | | (7,275,325 | ) | | (3,635 | ) | | | — | | | — | | | | — | | | — | | | | — | | | | — | | | | (14,892 | ) | | | (14,892 | ) |
Net Loss | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | — | | | | — | | | | (2,669 | ) | | | (2,669 | ) |
Balance as of December 31, 2014 | | | 153,499,785 | | $ | 111,145 | | | | 72,243,500 | | $ | 102 | | | | (935,935 | ) | $ | (303 | ) | | $ | 86,340 | | | $ | — | | | $ | (121,513 | ) | | $ | (35,374 | ) |
Cumulative effect of adoption of fair value method for servicing rights | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | — | | | | — | | | | 574 | | | | 574 | |
Issuance of convertible preferred stock, Series D, net of issuance costs | | | 23,888,640 | | | 164,793 | | | | — | | | — | | | | — | | | — | | | | — | | | | — | | | | — | | | | — | |
Exercise of vested stock options | | | — | | | — | | | | 3,125,890 | | | 8 | | | | — | | | — | | | | 771 | | | | — | | | | — | | | | 779 | |
Exercise of nonvested stock options | | | — | | | — | | | | 76,045 | | | — | | | | — | | | — | | | | — | | | | — | | | | — | | | | — | |
Repurchase of restricted stock | | | — | | | — | | | | (1,493,775 | ) | | — | | | | — | | | — | | | | — | | | | — | | | | — | | | | — | |
Repurchase of common stock | | | — | | | — | | | | — | | | — | | | | (4,241,300 | ) | | (23,114 | ) | | | — | | | | — | | | | — | | | | (23,114 | ) |
Restricted stock vested | | | — | | | — | | | | — | | | 17 | | | | — | | | — | | | | 471 | | | | — | | | | — | | | | 488 | |
Restricted stock units sold | | | — | | | — | | | | 450,000 | | | — | | | | — | | | — | | | | 1,630 | | | | — | | | | — | | | | 1,630 | |
Exercise of warrants | | | — | | | — | | | | 207,065 | | | — | | | | — | | | — | | | | 125 | | | | — | | | | — | | | | 125 | |
Stock-based compensation expense | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | 13,634 | | | | — | | | | — | | | | 13,634 | |
Change in net unrealized loss on available for sale investments, at fair value | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | — | | | | (144 | ) | | | — | | | | (144 | ) |
Net Loss | | | — | | | — | | | | — | | | — | | | | — | | | — | | | | — | | | | — | | | | (25,968 | ) | | | (25,968 | ) |
Balance as of December 31, 2015 | | | 177,388,425 | | $ | 275,938 | | | | 74,608,725 | | $ | 127 | | | | (5,177,235 | ) | $ | (23,417 | ) | | $ | 102,971 | | | $ | (144 | ) | | $ | (146,907 | ) | | $ | (67,370 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Convertible Preferred Stock | | Common Stock | | Treasury Stock | | | | | | | | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total |
| Balance as of January 1, 2015 | | 153,499,785 |
| | $ | 111,145 |
| | 72,243,500 |
| | $ | 102 |
| | (935,935 | ) | | $ | (303 | ) | | $ | 86,340 |
| | $ | — |
| | $ | (121,513 | ) | | $ | (35,374 | ) |
| Cumulative effect of adoption of fair value method for servicing rights | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 574 |
| | 574 |
|
Issuance of convertible
preferred stock, Series D, net of issuance costs | | 23,888,640 |
| | 164,793 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Exercise of vested stock
options | | — |
| | — |
| | 3,125,890 |
| | 8 |
| | — |
| | — |
| | 771 |
| | — |
| | — |
| | 779 |
|
Exercise of nonvested stock
options | | — |
| | — |
| | 76,045 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of restricted stock | | — |
| | — |
| | (1,493,775 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | (4,241,300 | ) | | (23,114 | ) | | — |
| | — |
| | — |
| | (23,114 | ) |
| Restricted stock vested | | — |
| | — |
| | — |
| | 17 |
| | — |
| | — |
| | 471 |
| | — |
| | — |
| | 488 |
|
| Restricted stock units sold | | — |
| | — |
| | 450,000 |
| | — |
| | — |
| | — |
| | 1,630 |
| | — |
| | — |
| | 1,630 |
|
| Exercise of warrants | | — |
| | — |
| | 207,065 |
| | — |
| | — |
| | — |
| | 125 |
| | — |
| | — |
| | 125 |
|
Stock-based compensation
expense | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13,634 |
| | — |
| | — |
| | 13,634 |
|
| Change in net unrealized loss on available for sale investments, at fair value | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (144 | ) | | — |
| | (144 | ) |
| Net Loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (25,968 | ) | | (25,968 | ) |
| Balance as of December 31, 2015 | | 177,388,425 |
| | 275,938 |
| | 74,608,725 |
| | 127 |
| | (5,177,235 | ) | | (23,417 | ) | | 102,971 |
| | (144 | ) | | (146,907 | ) | | (67,370 | ) |
Exercise of vested stock
options | | — |
| | — |
| | 466,300 |
| | 6 |
| | — |
| | — |
| | 305 |
| | — |
| | — |
| | 311 |
|
| Repurchase of restricted stock | | — |
| | — |
| | (673,750 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Restricted stock vested | | — |
| | — |
| | — |
| | 79 |
| | — |
| | — |
| | 196 |
| | — |
| | — |
| | 275 |
|
| Issuance of common stock, for settlement of vested RSUs | | — |
| | — |
| | 635,068 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercise of warrants | | — |
| | — |
| | 48,001 |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
Stock-based compensation
expense | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 20,505 |
| | — |
| | — |
| | 20,505 |
|
| Change in net unrealized loss on available for sale investments, at fair value | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 136 |
| | — |
| | 136 |
|
| Net Loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (118,741 | ) | | (118,741 | ) |
| Balance as of December 31, 2016 | | 177,388,425 |
| | 275,938 |
| | 75,084,344 |
| | 212 |
| | (5,177,235 | ) | | (23,417 | ) | | 123,988 |
| | (8 | ) | | (265,648 | ) | | (164,873 | ) |
Issuance of convertible
preferred stock, Series G, net of issuance costs
| | 37,249,497 |
| | 47,855 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Exercise of vested stock options | | — |
| | — |
| | 606,284 |
| | 6 |
| | — |
| | — |
| | 97 |
| | — |
| | — |
| | 103 |
|
| Repurchase of restricted stock | | — |
| | — |
| | (266,130 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Restricted stock vested | | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 31 |
| | — |
| | — |
| | 41 |
|
| Exercise of warrants | | 3 |
| | — |
| | 43,736 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
Stock-based compensation expense | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,532 |
| | — |
| | — |
| | 12,532 |
|
| Change in net unrealized loss on available for sale investments, at fair value | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (65 | ) | | — |
| | (65 | ) |
| Net Loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (115,158 | ) | | (115,158 | ) |
| Balance as of December 31, 2017 | | 214,637,925 |
| | $ | 323,793 |
| | 75,468,234 |
| | $ | 228 |
| | (5,177,235 | ) | | $ | (23,417 | ) | | $ | 136,653 |
| | $ | (73 | ) | | $ | (380,806 | ) | | $ | (267,415 | ) |
The number of shares reflects a 5-for-1 forward stock split effected by PMI on February 16, 2016.
The accompanying notes are an integral part of these consolidated financial statements.
Prosper
Prosper Marketplace, Inc.
Consolidated Statements of Cash Flows
| | For the Year Ended December 31, | |
| | 2015 | | | 2014 | |
Cash Flows from Operating Activities: | | | | | | | | |
Net Loss | | $ | (25,968 | ) | | $ | (2,669 | ) |
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | | | | | | | | |
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes | | | (59 | ) | | | (596 | ) |
Depreciation and Amortization | | | 7,649 | | | | 2,097 | |
Gain on Sales of Borrower Loans | | | (14,561 | ) | | | (4,048 | ) |
Amortization and Change in Fair Value of Servicing Rights | | | 4,860 | | | | 792 | |
Stock-Based Compensation Expense | | | 13,011 | | | | 2,021 | |
Change in Fair Value of Contingent Consideration | | | 1,001 | | | | - | |
Other, Net | | | 216 | | | | 444 | |
Changes in Operating Assets and Liabilities: | | | | | | | | |
Purchase of Loans Held for Sale at Fair Value | | | (3,517,467 | ) | | | (1,416,715 | ) |
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | | | 3,525,759 | | | | 1,411,531 | |
Restricted Cash Except for those Related to Investing Activities | | | (68,896 | ) | | | (28,125 | ) |
Accounts Receivable | | | 865 | | | | (2,856 | ) |
Prepaid and Other Assets | | | (1,360 | ) | | | (2,840 | ) |
Accounts Payable and Accrued Liabilities | | | 6,493 | | | | 8,047 | |
Payable to Investors | | | 72,013 | | | | 26,469 | |
Other Liabilities | | | 1,888 | | | | 1,797 | |
Net cash provided by (Used in) Operating Activities | | | 5,444 | | | | (4,651 | ) |
Cash Flows from Investing Activities: | | | | | | | | |
Purchase of Borrower Loans Held at Fair Value | | | (197,436 | ) | | | (177,088 | ) |
Principal Payments of Borrower Loans Held at Fair Value | | | 151,893 | | | | 121,082 | |
Purchases of Property and Equipment | | | (15,977 | ) | | | (12,246 | ) |
Maturities of Short Term Investments | | | 1,274 | | | | 1,271 | |
Purchases of Short Term Investments | | | (1,277 | ) | | | (1,274 | ) |
Purchases of Available for Sale Investments, at Fair Value | | | (77,538 | ) | | | - | |
Proceeds from Sale of Available for Sale Securities | | | 4,022 | | | | - | |
Acquisition of Businesses, Net of Cash Acquired | | | (38,147 | ) | | | - | |
Changes in Restricted Cash Related to Investing Activities | | | (1,027 | ) | | | (3,351 | ) |
Net Cash Used in Investing Activities | | | (174,213 | ) | | | (71,606 | ) |
Cash Flows from Financing Activities: | | | | | | | | |
Proceeds from Issuance of Notes Held at Fair Value | | | 197,228 | | | | 176,865 | |
Payments of Notes Held at Fair Value | | | (151,838 | ) | | | (120,909 | ) |
Repayment of Borrowings | | | (5,047 | ) | | | - | |
Proceeds from Issuance of Convertible Preferred Stock, Net | | | 164,793 | | | | 69,958 | |
Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock | | | 2,617 | | | | 1,118 | |
Repurchase of Preferred Stock | | | - | | | | (18,527 | ) |
Repurchase of Common Stock and Restricted Stock | | | (23,246 | ) | | | (30 | ) |
Net Cash Provided by Financing Activities | | | 184,507 | | | | 108,475 | |
Net Increase in Cash and Cash Equivalents | | | 15,738 | | | | 32,218 | |
Cash and Cash Equivalents at Beginning of the Year | | | 50,557 | | | | 18,339 | |
Cash and Cash Equivalents at End of the Year | | $ | 66,295 | | | $ | 50,557 | |
Cash Paid for Interest | | $ | 38,168 | | | $ | 41,053 | |
Non-Cash Investing Activity- Accrual for Property and Equipment, Net | | | 1,483 | | | | 1,550 | |
Non-Cash Investing Activity- Amount Payable for the Acquisition of Business | | $ | 4,488 | | | $ | - | |
|
| | | | | | | | | | | |
| | For the Year
Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash Flows from Operating Activities: | | | | | |
| Net Loss | $ | (115,158 | ) | | $ | (118,741 | ) | | $ | (25,968 | ) |
| Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: | |
| | |
| | |
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes | 514 |
| | 372 |
| | (59 | ) |
| Depreciation and Amortization | 12,348 |
| | 13,220 |
| | 7,649 |
|
| Gain on Sales of Borrower Loans | (14,138 | ) | | (9,634 | ) | | (14,561 | ) |
| Change in Fair Value of Servicing Rights | 12,074 |
| | 11,053 |
| | 4,860 |
|
| Stock-Based Compensation Expense | 12,238 |
| | 19,787 |
| | 13,011 |
|
| Restructuring Liability | 1,343 |
| | 6,052 |
| | — |
|
| Fair Value of Warrants Vested | 61,605 |
| | — |
| | — |
|
| Change in Fair Value of Warrants | 29,140 |
| | 7 |
| | — |
|
| Change in Fair Value of Contingent Consideration | — |
| | 199 |
| | 1,001 |
|
| Other, Net | 377 |
| | 1,527 |
| | 216 |
|
| Impairment Losses on Assets Held for Sale | 6,399 |
| | — |
| | — |
|
| Warrants Issued for Contract Termination | — |
| | 21,711 |
| | — |
|
| Changes in Operating Assets and Liabilities: | |
| | |
| | |
| Purchase of Loans Held for Sale at Fair Value | (2,619,130 | ) | | (1,979,952 | ) | | (3,517,467 | ) |
| Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | 2,619,709 |
| | 1,979,352 |
| | 3,525,759 |
|
| Restricted Cash Except for those Related to Investing Activities | 11,870 |
| | (5,459 | ) | | (68,896 | ) |
| Accounts Receivable | 74 |
| | 1,677 |
| | 865 |
|
| Prepaid and Other Assets | (3,208 | ) | | 1,825 |
| | (1,360 | ) |
| Accounts Payable and Accrued Liabilities | (2,268 | ) | | 379 |
| | 6,493 |
|
| Payable to Investors | (10,212 | ) | | 6,137 |
| | 72,013 |
|
| Other Liabilities | (2,496 | ) | | (12,179 | ) | | 1,888 |
|
| Net cash provided by (Used in) Operating Activities | 1,081 |
| | (62,667 | ) | | 5,444 |
|
| Cash Flows from Investing Activities: | |
| | |
| | |
| Purchase of Borrower Loans Held at Fair Value | (194,887 | ) | | (217,582 | ) | | (197,436 | ) |
| Principal Payments of Borrower Loans Held at Fair Value | 192,054 |
| | 173,710 |
| | 151,893 |
|
| Purchases of Property and Equipment | (4,174 | ) | | (10,760 | ) | | (15,977 | ) |
| Maturities of Short Term Investments | 1,280 |
| | 1,279 |
| | 1,274 |
|
| Purchases of Short Term Investments | (1,262 | ) | | (1,277 | ) | | (1,277 | ) |
| Purchases of Available for Sale Investments, at Fair Value | (68,297 | ) | | (11,725 | ) | | (77,538 | ) |
| Proceeds from Sale of Available for Sale Securities | 31,232 |
| | 12,445 |
| | 4,022 |
|
| Maturities of Available for Sale Securities | 16,600 |
| | 39,593 |
| | — |
|
| Acquisition of Businesses, Net of Cash Acquired | — |
| | — |
| | (38,147 | ) |
| Changes in Restricted Cash Related to Investing Activities | (631 | ) | | (7,225 | ) | | (1,027 | ) |
| Net Cash Used in Investing Activities | (28,085 | ) | | (21,542 | ) | | (174,213 | ) |
| Cash Flows from Financing Activities: | |
| | |
| | |
| Proceeds from Issuance of Notes Held at Fair Value | 194,391 |
| | 217,767 |
| | 197,228 |
|
| Payments of Notes Held at Fair Value | (191,828 | ) | | (173,958 | ) | | (151,838 | ) |
| Repayment of Borrowings | — |
| | — |
| | (5,047 | ) |
| Proceeds from Issuance of Convertible Preferred Stock, Net | 47,855 |
| | — |
| | 164,793 |
|
| Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock | 123 |
| | 541 |
| | 5,004 |
|
| Repurchase of Common Stock and Restricted Stock | (64 | ) | | (80 | ) | | (23,246 | ) |
| Taxes Paid for Awards Vested Under Equity Incentive Plans | (15 | ) | | (219 | ) | | (2,387 | ) |
| Contingent Consideration Paid | — |
| | (3,800 | ) | | — |
|
| Net Cash Provided by Financing Activities | 50,462 |
| | 40,251 |
| | 184,507 |
|
| Net Increase (Decrease) in Cash and Cash Equivalents | 23,458 |
| | (43,958 | ) | | 15,738 |
|
| Cash and Cash Equivalents at Beginning of the Year | 22,337 |
| | 66,295 |
| | 50,557 |
|
| Cash and Cash Equivalents at End of the Year | $ | 45,795 |
| | $ | 22,337 |
| | $ | 66,295 |
|
| Cash Paid for Interest | $ | 43,776 |
| | $ | 40,369 |
| | $ | 38,168 |
|
| Non-Cash Investing Activity- Accrual for Property and Equipment, Net | 171 |
| | 382 |
| | 1,483 |
|
| Non-Cash Investing Activity- Amount Payable for the Acquisition of Business | $ | — |
| | $ | — |
| | $ | 4,488 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Prosper Marketplace, Inc.
Notes to Consolidated Financial Statements
(in thousands, except for share
1. Organization and
per share amounts)Business 1.
| Organization and Business
|
Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005. Except as the context requires otherwise, as used in these Notes to Consolidated Financial Statements of Prosper Marketplace, Inc., “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.
PMI developed a peer-to-peer online credit marketplace (the “marketplace”), and, in February 2013, transferred ownership of the marketplace to Prosper Funding LLC (“PFL”), its wholly-owned subsidiary. All of the borrower payment dependent notes (“Notes”) issued and sold through the marketplace today are issued and sold by PFL. PFL also operates the marketplace and facilitates the origination of unsecured, consumer loans by WebBank (“Borrower Loans”), an FDIC-insured, Utah-chartered industrial bank, through the marketplace. Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the marketplace, as agent of WebBank, in connection with the submission of loan applications by potential borrowers, the origination of related loans by WebBank and the funding of such Borrower Loans by WebBank. On February 1, 2013, PFL entered into an Administration Agreement with PMI in its capacity as licensee, corporate administrator, loan marketplace administrator and loan and note servicer, pursuant to which PMI provides certain back office support, loan platform administration and loan servicing to PFL.
The marketplace is designed to allow investors to invest in Borrower Loans in an open, transparent marketplace, with the aim of allowing both investors and borrowers to benefit financially as well as socially. Prosper believes marketplace lending represents a
new model of consumer lending, where individuals and institutions can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional consumer lender.
A borrower who wishes to obtain a Borrower Loan through the marketplace must post a loan listing on the marketplace. Listings are allocated to one of two investor funding channels: (i) the “Note Channel,” which allows investors to commit to purchase Notes from PFL, the payments of which are dependent on PFL’s receipt of payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows investors to commit to purchase 100% of a Borrower Loan directly from Prosper.
As of December 31,
2015,2017, the marketplace is open to investors in 30 states and the District of Columbia. Additionally, as of December 31,
2015,2017, the marketplace is open to borrowers in 46 states and the District of Columbia. Currently our marketplace does not operate internationally.
2.
| Summary of Significant Accounting Policies
|
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of PMI and its wholly owned subsidiaries
including PFL, PHL and BillGuard. All intercompany balances and transactions between PMI and its subsidiaries have been eliminated in consolidation. PMI and PFL’s financial statements have been prepared in
accordanceconformity with
U.Saccounting principles generally accepted
accounting principlesin the United States of America (“U.S. GAAP”).
On January 23, 2015, PMI acquired all of the outstanding limited liability company units of American HealthCare Lending, LLC (“American HealthCare Lending”), a company that operated a patient financing platform, and merged American HealthCare Lending with and into Prosper Healthcare Lending LLC (“PHL”), a newly established entity surviving the merger. Prosper’s consolidated financial statements include PHL’s results of operations and financial position from the date of acquisition forward (see Note 8 – American HealthCare Lending Acquisition).
On October 9, 2015, PMI acquired all of the outstanding stock of BillGuard, Inc. (“BillGuard”), a company incorporated in Delaware in 2010 that developed applications that help consumers manage their identity, finances and credit. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. Prosper’s consolidated financial statements include BillGuard’s results of operations and financial position from the date of acquisition forward (see Note 9 – BillGuard Acquisition).
Use of Estimates
The preparation of the 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, including contingent liabilities at the date of the financial 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 Loans Held for Sale, Borrower Loans and associated Notes, valuation of servicing rights, valuation allowance on deferred tax assets, stock-based compensation expense, intangible assets, goodwill, contingent consideration,
restructuring liability, convertible preferred stock warrant liability and contingent liabilities. Actual results could differ from those
estimates, and those differences could be material.estimates.
In the normal course of its business, Prosper encounters significant credit risk. Financial instruments that potentially subject Prosper to significant
concentrations of credit risk consist primarily of cash, cash equivalents, available for sale investments, Borrower Loans held
for investment and restricted cash. Prosper places cash
cash equivalents, and restricted cash with high-quality financial institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds federally insured amounts. Prosper
performs periodic evaluationsinvests cash equivalents in highly liquid marketable securities with original maturities of
three months or less at the
relative credit standingtime of
these financial institutionspurchase, consisting primarily of money market funds, commercial paper, US treasury securities and
has not recognized any losses in earnings from instruments held at these financial institutions.As a lending marketplace, Prosper believes its customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact its customers’ ability or desire to participate on its marketplace as borrowers or investors, and consequently could negatively affect its business and results of operations.
US agency securities.
To the extent that payments on Borrower Loans (including Borrower Loans that have been sold) are not made, interest income and/or servicing income will be reduced. A series of Notes corresponding to a particular Borrower Loan is wholly dependent on the repayment of such Borrower Loan. As a result, Prosper does not bear the credit risk on such Borrower Loan.
Due to the early adoption of ASU 2016-09 on January 1, 2016, reclassifications were made to the financing section of the consolidated statements of cash flows to reflect employee taxes paid to a tax authority to satisfy the employer's statutory income tax withholding obligation in relation to the exercise of stock awards. Prior period amounts have been reclassified to conform to the current presentation.
During the
periodyear ended December 31,
2015,2017, Prosper changed the presentation of its
revenueexpenses in the consolidated statements of operations. A new line called
“Gain on Sales“Change in the Fair Value of
Borrower Loans”Convertible Stock Warrants” was created with the amounts included in this line previously classified as “Other
Revenue”Expenses, Net”.
Prior period amounts have been reclassified to conform to the current presentation.Prosper changed the presentation of the servicing assets on its Consolidated Balance Sheet by reclassifying them from “Prepaid and Other Assets” to “Servicing Assets”. Prosper also changed the presentation of liabilities by creating “Other Liabilities” and reclassified deferred rent and servicing liabilities from “Accounts Payable and Accrued Liabilities”, the “Class Action Settlement Liability” and “Repurchase Liability for Unvested Stock Awards” to “Other Liabilities”. Prior period amounts have been reclassified to conform to the current presentation. Management believes these changes make our financial statements more useful for the readers of the financial statements and comparable with Prosper’s competitors.
Certain prior period amounts have been reclassified on the Consolidated Statements of Cash Flows to reflect the above changes to the Balance Sheet. Additionally the lines “Proceeds from the Early Exercise of Stock Options”, “Proceeds from the Exercise of Vested Stock Options” and “Proceeds from Exercise of Common Stock Warrants” were combined into one line item.
Consolidation of Variable Interest Entities
The determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment around whether we are the primary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support or (ii) when a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity.
As a result of the nature of the retained servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain special purposes entities that purchase these Borrower Loans. For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a potentially significant economic interest in the VIE. In no case are we the primary beneficiary, and as a result none oftherefore, we do not consolidate these entities are consolidated on Prosper’s consolidated financial statements.
entities.
Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.
Transfers of Financial Assets
Prosper accounts for transfers of entire financial assets or a participating interest in an entire financial asset as sales when it has surrendered control over the transferred assets. Control is generally considered to have been surrendered when the transferred assets have been legally isolated from Prosper, the transferee has the right to pledge or exchange the assets without any significant constraints, and Prosper has not entered into a repurchase agreement, does not hold significant call options and has not written significant put options on the transferred assets.
Prosper sells loans or participating interests in loans via whole loan sale transactions and the fractional note channel. In certain instances of whole loan sales transactions Prosper will sell whole loans to unconsolidated VIEs that then securitize the whole loans purchased.
Prosper recognizes a gain or loss on the sale of financial assets by comparing the net sales proceeds (including fair value of any servicing asset or liability and recourse obligation recognized) to the carrying amount of the assets sold. Transfers of financial assets that do not qualify for sale accounting are reported as secured borrowings. Accordingly, the related assets remain on Prosper’s Consolidated Balance Sheets and continue to be reported and accounted for as if the transfer had not occurred. Cash proceeds from these transfers are reported as liabilities, with related interest expense recognized over the life of the related assets.
Cash and Cash Equivalents
Cash includes various unrestricted deposits with highlyinvestment grade rated financial institutions. Cash equivalents consist of highly liquid marketable securities with original maturities of three months or less at the time of purchase and consist primarily of money market funds, commercial paper, US treasury securities and US agency securities. Cash equivalents are statedrecorded at cost, which approximates fair valuevalue.
.RestrictedRestricted Cash
Restricted cash consists primarily of cash deposits and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors or Prosper has on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.
Short Term Investments which are included in Prepaid and Other Assets
consistsconsist of certificates of deposit with a term greater than three months but less than a year that are held as collateral as required for loan funding and servicing activities.
Available for Sale Investments Available for sale securities consist of commercial paper
with terms longer than three months, US treasury securities, US agency securities and corporate debt securities. Available for sale investments are recorded at fair value with unrealized gains and losses reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired.
Management evaluates whether
impairment of available for sale debt securities are other than
temporarily impairedtemporary impairment (“OTTI”) on a quarterly basis. Debt securities with unrealized losses are considered OTTI if Prosper intends to sell the investment or if it is more likely than not that it will be required to sell such investment before any anticipated recovery. If management determines that an investment is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and then-current fair value.
An investment is also OTTI if management does not expect to recover all of the amortized cost of the investment. In this circumstance, the impairment recognized in earnings represents estimated credit losses, and is measured by the difference between the present value of expected cash flows and the amortized cost of the investment. Management utilizes cash flow models to estimate the expected future cash flow from the securities to estimate the credit loss. Expected cash flows are discounted using the investment's effective interest rate. The evaluation of whether Prosper expects to recover the amortized cost of an investment is inherently judgmental. The evaluation includes the assessment of several bond performance indicators, including the current price and magnitude of the unrealized loss and whether Prosper has received all scheduled principal and interest payments. There were no impairment charges recognized during the
yearyears ended December 31,
2015.2017 and December 31, 2016.
Prosper measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures
determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
We define fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs. The fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entityProsper would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability, it is assumed that the reporting entityProsper has access to the market as of the measurement date. If no market for the asset exists or if the reporting entityProsper does not have access to the principal market, the reporting entity should useProsper uses a hypothetical market.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors,
Convertible Preferred Stock Warrant Liability and Notes. Servicing Assets and Liabilities are also subject to fair value measurement within the financial statements of Prosper. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
As observable market prices are not available for the Borrower Loans, Loans Held for Sale and Notes, or for similar assets and liabilities, Prosper believes the Borrower Loans, Loans Held for Sale and Notes should be considered
Levellevel 3 financial instruments. In a hypothetical transaction as of the measurement date, Prosper believes that differences in the principal marketplace in which the Borrower Loans are originated and the principal marketplace in which Prosper might offer those loans may result in differences between the originated amount of the loans and their fair value as of the transaction date. For Borrower Loans and Loans Held for Sale, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including prepayment speeds, default rates and discount rates based on the perceived credit risk within each credit grade.
The obligation to pay principal and interest on any series of Notes is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of our servicing fee which is generally 1%1.0% of the outstanding balance. The fair value election for Notes and Borrower Loans allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to investors that are dependent upon borrower payments. As such, the fair value of a series of Notes is approximately equal to the fair value of the corresponding Borrower Loan, adjusted for the 1.0% servicing fee and the timing of loan purchase, note issuance and borrower payments subsequently disbursed to such Note holders. As a result, the valuation of the Notes uses the same methodology and assumptions as the Borrower Loans, except that the Notes incorporate the 1%1.0% servicing fee and any differences in timing in payments. Any unrealized gains or losses
on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations. The effective interest rate associated with a group of Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee. See Note 4 for a roll-forward and further discussion of the significant assumptions used to value Borrower Loans and Notes.
Restructuring Charges
Restructuring charges consist of severance costs and contract termination related costs and impairment charges associated with the severance actions. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals.
Through the Note Channel, Prosper purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes
fundedoriginated through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes
fundedoriginated through the Note Channel are carried on Prosper’s consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for the expected prepayment, loss, recovery and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.
Loan Servicing Assets and Liabilities Prosper records servicing assets and liabilities at their estimated fair values for servicing rights retained when Prosper sells Borrower Loans to unrelated third-party buyers. The change in fair value of servicing assets and liabilities is recognized in “Servicing Fees” revenue. The gain or loss on a loan sale is recorded in “Gain on Sale” while the fair value of the servicing rights, which is based on the degree to which the contractual loan servicing fee is above or below an estimated market servicing rate is recorded in servicing assets or liabilities. Servicing assets and liabilities are recorded in “Servicing Assets” and “Other Liabilities,” respectively, on the consolidated balance sheets.
On January 1, 2015, Prosper elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition. Management believes that the fair value option is more meaningful for readers of the financial statements as it more accurately reflects the expected benefits and obligations of the servicing rights. The adoption of the fair value method for a particular class is irrevocable. Prior to January 1, 2015, Prosper measured the servicing assets and liabilities using the amortized cost method. This change resulted in a $574 thousand decrease to accumulated deficit, a $545 thousand increase in net servicing assets and a $29 thousand decrease in net servicing liabilities.
Prosper uses a discounted cash flow model to estimate the fair value of the loan servicing assets or liabilities which considers the contractual projected servicing fee revenue that Prosper earns on the Borrower Loans, estimated market servicing rates to service such loans, prepayment rates, default rates and the current principal balances of the Borrower Loans.
Loans Held for Sale are comprised of Borrower Loans held for short durations and are recorded at fair value. The fair value is estimated using discounted cash flow methodologies based upon a set of valuation assumptions similar to those of other Borrower Loans. We measure
certain financial instruments and certain other itemsLoans Held for Sale at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows for the Loans Held for Sale to be measured at fair value similar to Borrower Loans and Notes. The fair value election, with respect to an item, may not be revoked once an election is made.
Property and equipment consists of computer equipment, office furniture and equipment, leasehold improvements, software purchased or developed for internal use and web site development costs. Property and equipment are stated at cost, less accumulated depreciation and amortization, and are computed using the straight-line method based upon estimated useful lives of the assets. Estimated useful lives of the assets are as follows:
|
| |
| Furniture and fixtures | | 7 years |
Office equipment | | 5 years |
Computers and equipment | | 3 years |
Leasehold improvements | | 5-8 years |
Software and website development costs | | 1-5 years |
The costs to develop software for the website and other internal uses are capitalized when management has authorized and committed project funding, preliminary development efforts are successfully completed, and it is probable that the project will be completed and the software will be used as intended. Capitalized software and website development costs primarily include software licenses acquired, fees paid to outside consultants, and salaries and payroll related costs for employees directly involved in the development efforts.
Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed. 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 straight-line method over their expected lives. Software and website development assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software and website development assets to be held and used is measured by a comparison of the carrying amount of the asset group to the future net undiscounted cash flows expected to be generated by the asset group. If such software and website development assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software and website development asset group.
Goodwill associated with business combinations is computed by recognizing the portion of the purchase price that is not tied to individually identifiable and separately recognizable assets. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. Our annual impairment testing date is October 1. Impairment exists whenever the carrying value of goodwill exceeds its implied fair value. Adverse changes in impairment indicators such as loss of key personnel, increased regulatory oversight, or unplanned changes in our operations could result in impairment. We did not recognize any goodwill impairments during the years ended December 31, 2017 and 2016.
Costs of internally developing any intangibles is expensed as incurred.
Intangible assets identified through the acquisitions of American Healthcare Lending and BillGuard include customer relationships, technology and a brand name. The customer relationship intangible assets are amortized on an accelerated basis over three to ten year periods. The technology and brand name intangible assets are amortized on a straight line basis over three to five years and one year, respectively. Prosper values the customer relationships, technology and brand name assets using the income approach. Significant assumptions in valuing certain intangible assets include, but are not limited
Payable to future expected cash flows from acquired users, acquired technology, and brand names from a market participant perspective, useful lives and discount rates. Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant assumptions in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and brand names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value, whichever comes first, any subsequent adjustments are recorded to earnings.
Payable to Investors
Payable to investors primarily represents our obligation to investors related to cash held in an account for the benefit of investors and payments-in-process received from borrowers.
Repurchase Liability
Convertible Redeemable Preferred Stock Warrant Liabilities
Freestanding warrants to acquire shares that may be redeemable are accounted for Unvested Restricted Stock Awardsin accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480,
Distinguishing Liabilities from Equity "ASC" 480"). Under ASC 480, vested freestanding warrants to purchase the termsCompany’s convertible redeemable preferred stock are classified as a liability on the consolidated balance sheets and carried at fair value because the warrants may conditionally
obligate the Company to transfer assets at some point in the future. The Company initially measured the warrants at fair value on issuance. The warrants are subject to remeasurement to fair value at each balance sheet date, and any change in their fair value is recognized as a component of PMI’s equity plans,change in fair value of convertible stock warrants, in the consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants, the completion of a deemed liquidation event, or the conversion of convertible redeemable preferred stock into common stock.
Loan Trailing Fee
On July 1, 2016, Prosper signed a series of agreements with WebBank which, among other things, includes an additional program fee (the "Loan Trailing Fee") paid to WebBank in connection with the performance of each loan sold to Prosper. These agreements are effective as of August 1, 2016. The Loan Trailing Fee is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans, irrespective of whether the loans are sold by Prosper, and gives WebBank an ongoing financial interest in the performance of the loans it originates. This fee is paid by Prosper to WebBank over the term of the respective loans and is a function of the principal and interest payments made by borrowers of such loans. In the event that principal and interest payments are not made with respect to any loan, Prosper is not required to make the related Loan Trailing Fee payment. The obligation to pay the Loan Trailing Fee for any loan sold to Prosper is recorded at fair value at the
Administrator’s discretion, certain equity awards issued to employees may be exercised before they have vested. When this occurs Prosper records a liability for the unvested portiontime of the
exercised option. Iforigination of such loan within Other Liabilities and recorded as a reduction of Transaction Fees, net. Any changes in the
employee’s employment is terminated before allfair value of this liability are recorded in Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net on the consolidated statements of operations. The fair value of the
shares become vested PMI may repurchaseLoan Trailing Fee represents the
unvested shares atpresent value of the
original exercise price. The liability is releasedexpected monthly Loan Trailing Fee payments, which takes into
equity as the shares become vested. Early exercises of options are not deemedconsideration certain assumptions related to be substantive exercises for accounting purposeexpected prepayment rates and
are excluded from the basic earnings per share calculation and treated as unexercised options shares for stock compensation purposes.defaults rates.
Revenue Recognition
Revenue primarily results from fees and net interest income earned. Fees include transaction fees for our services performed on behalf of WebBank to originate a loan and servicing fees paid by investors. We also have other smaller sources of revenue reported as other revenue, this includes referral fees, securitization fees and subscription fees.
Prosper earns a transaction fee upon the successful origination of all Borrower Loans facilitated through Prosper’s marketplace. Prosper receives payments from WebBank as compensation for the activities Prosper performs on behalf of WebBank.
Prosper’s fee is determined by the term and credit grade of the Borrower Loans that Prosper facilitates on its marketplace and WebBank originates. The transaction fee Prosper earns is determined by the term and credit grade of the Borrower Loan that is facilitated on Prosper’s marketplace, and ranges from 1.00% to 5.00% of the original principal amount of such Borrower Loan that WebBank originates. Prosper records the transaction fee net of any fees paid to WebBank because Prosper does not receive an identifiable benefit from WebBank other than the Borrower Loan that has been recognized at fair value.
Investors who purchase Borrower Loans from Prosper typically pay Prosper a servicing fee which is currently set at
1%1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment.
Historically the servicing fee was set at 1.0% per annum and was increased to 1.075% per annum in August 2016 for loans originated after July 2016. The servicing fee compensates Prosper for the costs incurred in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Prosper records servicing fees from Investors as a component of operating revenue when received.
The amortization of servicing rights and the change in fair value is also included in servicing fees.Gain on Sale of Borrower Loans Prosper recognizes gains or losses on the sale of Borrower Loans when it
retainsis retained for the servicing
assetsof Borrower Loans by WebBank. Additionally, Prosper recognizes gains or
liabilities uponlosses on the sale of Borrower
Loans.Loans when it sells Borrower Loans to third parties. Gains or losses on sales of Borrower Loans that are recognized at the time of sale are determined by the difference between the net sales proceeds, fair value of any servicing rights retained and the carrying value of the Borrower Loans sold.
Fair Value of Warrants Vested on the Sale of Borrower Loans
Fair Value of Warrants Vested on the Sale of Borrower Loans relates to warrants to purchase Series F Convertible Preferred Stock issued to the Consortium that vest when the Consortium purchases whole loans under the Consortium Purchase Agreement that was signed in February 2017. On vesting of the Series F warrants, Prosper records a liability as "Convertible Preferred Stock Warrant Liability" on the Consolidated Balance Sheet at fair value and a corresponding amount as "Fair Value of Warrants Vested on Sale of Borrower Loans" on the Consolidated Statement of Operations. ASC 505-50 “Share Based Payments to Non-Employees" addresses the accounting by both the grantor and the grantee for share-based payments made in exchange for goods and services. The counterparty to whom we issued the warrants is a customer of the Company to whom we sell loans. Following the guidance in ASC 505-50, Prosper records the vesting of the warrants as contra-revenue on the Consolidated Statement of Operations.
Interest Income on Borrower Loans, and Interest Expense on Notes Prosper recognizes interest income on Borrower Loans
fundedoriginated through the Note Channel and interest expense on the corresponding Notes using the accrual method based on the stated interest rate to the extent Prosper believes it to be collectable.
Advertising costs are expensed when incurred and are included in sales and marketing expense in the accompanying Consolidated Statements of Operations. Prosper incurred advertising costs of
$60.1$66.9 million, $48.1 million and
$24.1$60.1 million for the years ended December 31,
2017, 2016 and 2015,
and 2014, respectively.
Stock-Based
We determine the fair value of our stock options issued to employees on the date of grant using the Black-Scholes option pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions that include, but are not limited to, the
fair value of our common stock, the expected common stock price volatility over the term of the option awards, the expected term of the awards, risk-free interest rates and the expected dividend yield.
We recognize compensation expense for our stock based awards on a straight-line basis over the period during which an employee is required to provide services in exchange for the award (the vesting period of the award). Stock-based compensation expense is recognized only for those awards expected to vest. We estimate future forfeitures at the date of grant and revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock-based awards issued to non-employees are marked-to-market up until the point that the awards measurement period has been achieved. Compensation expense for stock options issued to nonemployees is calculated using the Black-Scholes option pricing model and is recorded over the vesting period of the award.
Foreign Currency Transactions
The functional currency of our international subsidiary is the U.S. dollar. For this subsidiary, foreign currency denominated monetary assets and liabilities are remeasured into U.S. dollars at current exchange rates and foreign currency denominated nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Gains or losses from foreign currency remeasurement and settlements are included in general and administrative expense in the Consolidated Statements of Operations.
The asset and liability method is used to account for income taxes. Under this method, deferred income tax assets and liabilities are based on the differences between the financial statement carrying values and tax bases 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 when necessary to reduce deferred tax assets to the amount expected to be realized.
Prosper’s policy is to include interest and penalties related to gross unrecognized tax benefits within its provision for income taxes. U.S. Federal,
Israel, California,
Israel and other state income tax returns are filed. Prosper is currently not undergoing any income tax examinations. Due to the net operating loss, generally all tax years remain open.
We recognize benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
Other (Income) Expense, net
Other (income) expense, net includes interest income from available for sale securities, accretion on available for sale securities, changes in fair value of contingent liabilities, realized gains and losses on the sale of available for sale securities, changes in fair value of convertible preferred stock warrant liabilities and contract termination costs that are expected to be non-recurring and not part of restructuring activities.
Marketable debt securities are generally considered available-for-sale and are carried at fair value, based on quoted market prices or other readily available market information. Gains and losses are recognized when realized using the specific identification method and included in Other RevenuesIncome in the Consolidated Statements of Operations. Unrealized gains and losses, net of taxes, are included in Accumulated Other Comprehensive Income, which is reflected as a separate component of stockholders’ deficit in our Consolidated Balance Sheet. If we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to an identified loss is recognized in income. Prosper monitors its investment portfolio for potential impairment on a quarterly basis.
RecentRecent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”No. 2014-09, 2016-08, 2016-10, 2016-12 and 2016-20, collectively implemented as FASB Accounting Standards Codification Topic 606 ("ASC 606") 2014-09, “Revenue from Contracts with Customers.”, provides guidance for revenue recognition. The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper plans to adopt ASC 606 on a modified retrospective basis in the first quarter of fiscal 2018. In August 2015,Our implementation efforts to date related to this standard have included identifying revenue streams that are within the FASB issued ASU No. 2015-14, which amendedscope of this guidance, the standard to provide a one-year deferralevaluation of associated contracts and accounting policies, the evaluation of processes and systems of internal control, and the assessment of disclosure requirements of the effective date, as well as providingstandard. Our scoping analysis indicates that transaction fees and referral fees are included in the option to early adoptscope of the standardnew guidance, while servicing fees and gain or loss on the original effective date. Accordingly, Prosper may adoptsale of borrower loans remain within the standard in either Prosper’s fiscal year ending December 31, 2017 or 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment asscope of the date of adoption. Prosper has not yet selected a transition methodASC topic 860, Transfers and is evaluating theServicing. We have determined that ASC 606 will have little, if any, impact of adopting this new accounting standard update on the consolidated financial statementstiming and related disclosures. In November 2014,amount of revenue recognition as compared to the FASB issued ASU 2014-16, Derivativescurrent standard and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issuedthat there will be no material impact upon adoption. As part of our implementation process to date, we are evaluating new qualitative and quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. Prosper will make such disclosures in the Formfirst quarter of a Share Is More Akin to Debt or to Equity 2018.
to eliminate the use of different methods in practice and thereby reduce existing diversity in the accounting for hybrid financial instruments issued in the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument. The existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Prosper is currently assessing the potential impact on its consolidated financial statements from adopting this new guidance.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for periods beginning after December 15, 2015 with early adoption permitted. Prosper has decided to early adopt this guidance effective January 1, 2015, and the adoption of this standard had no impact on Prosper’s financial statements.
In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which will be effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper is currently assessing the potential impact on its consolidated financial statements from adopting this new guidance.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The new guidance simplifies the accounting for measurement period adjustments in connection with businesscombinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during themeasurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective forfinancial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. Prosper is currently assessing the potential impact on its consolidated financial statements from adopting this new guidance.
In January 2016, the FASB issued ASU 2016-01, 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial LiabilitiesLiabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, 2016-2, "Leases (Topic 842)", which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements, however we do
expect that this guidance will have a material impact on Prosper's consolidated financial statements.
As of December 31, 2017, Prosper has a total of $31.6 million in non-cancelable operating lease commitments, net of minimum sublease rentals. 3.
| Property and Equipment, Net
|
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting(Topic 718)". This guidance makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This guidance was effective for us in the first quarter of our fiscal year 2017, and early adoption was permitted. Prosper decided to early adopt this guidance effective January 1, 2016, the adoption of this standard did not have a material impact on Prosper’s consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper is currently evaluating the impacts the adoption of this accounting standard will have on Prosper's statement of cash flows, however we do not expect a material impact.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16)", which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory. This guidance will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. Prosper will adopt this guidance on January 1, 2018, and we believe the adoption of this standard will not have a material impact on Prosper’s financial statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18)", which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for us in the first quarter of 2018 and early adoption is permitted. Prosper will adopt this standard on January 1, 2018. As at December 31, 2017, we had restricted cash of $152.7 million. Currently, changes in these balances are presented as operating and investing cash activities in the consolidated statements of cash flows. Under the new guidance, changes in these amounts will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The standard eliminates Step 2 from the goodwill impairment test, which requires a hypothetical purchase price allocation. Prosper will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The standard should be applied on a prospective basis. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
3. Property and Equipment, Net
Property and equipment consist of the following (in thousands):
| | December 31, | |
| | 2015 | | | 2014 | |
Property and equipment: | | | | | | | | |
Computer equipment | | $ | 10,522 | | | $ | 3,824 | |
Internal-use software and website development costs | | | 10,990 | | | | 4,486 | |
Office equipment and furniture | | | 2,442 | | | | 1,904 | |
Leasehold improvements | | | 5,719 | | | | 5,274 | |
Assets not yet placed in service | | | 3,242 | | | | 4,361 | |
Property and equipment | | | 32,915 | | | | 19,849 | |
Less accumulated depreciation and amortization | | | (7,950 | ) | | | (5,425 | ) |
Total property and equipment, net | | $ | 24,965 | | | $ | 14,424 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Property and equipment: | |
| | |
|
| Computer equipment | $ | 14,499 |
| | $ | 14,107 |
|
| Internal-use software and website development costs | 19,910 |
| | 16,750 |
|
| Office equipment and furniture | 3,010 |
| | 3,010 |
|
| Leasehold improvements | 7,078 |
| | 7,038 |
|
| Assets not yet placed in service | 1,216 |
| | 1,222 |
|
| Property and equipment | 45,713 |
| | 42,127 |
|
| Less accumulated depreciation and amortization | (27,577 | ) | | (17,274 | ) |
| Total property and equipment, net | $ | 18,136 |
| | $ | 24,853 |
|
Depreciation and amortization expense for property and equipment for
2017, 2016 and 2015
and 2014 was
$6,080$10,963 thousand, $9,381 thousand and
$2,097$6,080 thousand, respectively. Prosper capitalized internal-use software and website development costs in the amount of
$7,348$3,687 thousand, $6,251 thousand and
$846$7,348 thousand for the years ended December 31,
20152017, 2016 and
2014,2015, respectively. Prosper recorded
internal-use software and website developmentgains on disposals of $11 thousand, impairment charges of
$0$1,083 thousand and
$322 thousand$0 for the years ended December 31,
20152017, 2016 and
20142015 respectively, as a result of our decision to discontinue several software and website development
projects.projects and to cease the use of certain leased properties and related leasehold improvements, computer equipment and furniture at these locations.4.
| Borrower Loans, Loans Held for Sale, and Notes Held at Fair Value
|
4. Borrower Loans, Loans Held for Sale, and Notes Held at Fair Value
The fair value of the Borrower Loans
fundedoriginated and Notes issued through the Note Channel is estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used to value such Borrower Loans and
Notes include default rates derived from historical performance, market conditions and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. The obligation to pay principal and interest on any series of Notes is equal to the payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the Notes is approximately equal to the fair value of the Borrower Loans fundedoriginated through the Note Channel, adjusted for the servicing fee and the timing of borrower payments subsequently disbursed to the Note holders. The effective interest rate associated with a series of Notes will be less than the interest rate earned on the corresponding Borrower Loan due to the servicing fee.
At December 31, 20152017 and 2014,2016, Borrower Loans, Notes and Loans Held for Sale (in thousands) were:
| | Borrower Loans | | | Notes | | | Loans Held for Sale | |
| | December 31, 2015 | | | December 31, 2014 | | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2015 | | | December 31, 2014 | |
Aggregate principal balance outstanding | | $ | 296,945 | | | $ | 268,598 | | | $ | (294,331 | ) | | $ | (272,269 | ) | | $ | 42 | | | $ | 8,295 | |
Fair value adjustments | | | 328 | | | | 4,645 | | | | (3,074 | ) | | | (1,514 | ) | | | (10 | ) | | | 168 | |
Fair value | | $ | 297,273 | | | $ | 273,243 | | | $ | (297,405 | ) | | $ | (273,783 | ) | | $ | 32 | | | $ | 8,463 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Borrower Loans | | Notes | | Loans Held for Sale |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
Aggregate principal balance outstanding | $ | 296,668 |
| | $ | 319,143 |
| | $ | (300,922 | ) | | $ | (323,358 | ) | | $ | 59 |
| | $ | 641 |
|
| Fair value adjustments | (3,663 | ) | | (3,516 | ) | | 6,974 |
| | 7,122 |
| | (10 | ) | | (17 | ) |
| Fair value | $ | 293,005 |
| | $ | 315,627 |
| | $ | (293,948 | ) | | $ | (316,236 | ) | | $ | 49 |
| | $ | 624 |
|
At December 31,
2015,2017, outstanding Borrower Loans had original maturities between 36 and 60 months, had monthly payments with fixed interest rates ranging from
5.32%5.31% to
33.04%32.32% and had various maturity dates through December
2020.2022. At December 31,
2014,2016, Loans Held for Sale and Borrower Loans had original terms between 36 months and 60 months, had monthly payments with fixed interest rates ranging from
5.77%5.32% to 33.04% and had various maturity dates through December
2019.Within2021.
Approximately $1.7 million and $2.4 million represents the
change in fair value of Borrower Loans, Prosper recorded a gain of approximately $2.8 millionloss that is attributable to changes in the
instrument specific credit risks
associated withrelated to Borrower Loans that were recorded in the
instrument.change in fair value during the years ended December 31, 2017 and December 31, 2016, respectively.
As of December 31,
20152017 the Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of
$2.3$3.5 million and a fair value of
$0.9$1.3 million. As
of December 31,
20142016 the Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of
$1.7$3.2 million and a fair value of
$0.6$1.0 million. We place loans on non-accrual status when they are over 120 days
past due. As of December 31,
20152017 and
2014,2016, Borrower Loans in non-accrual status had a fair value of
$0.1$0.3 million and
zero,$0.5 million, respectively.
5.
| Loan Servicing Assets and Liabilities
|
5. Loan Servicing Assets and Liabilities
Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains and losses recognized on the sale of such Borrower Loans for the year ended December 31, 2017 were a gain of $11.4 million and a loss of $60.1 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium. Prosper initially records servicing assets and liabilities at their estimated fair values when Prosper sells Borrower Loans in their entirety to unrelated third-party buyers. During 2014, the initial fair value of such servicing assets or liabilities was amortized in proportion to the estimated servicing income or loss and was amortized over the period of servicing income or loss. The total gains recognized on the sale of such Borrower Loans were $14.2$3.6 million and $4.0$14.2 million for the years ended December 31, 2016 and 2015 and 2014 respectively. For the years ended December 31, 2014 no impairment was recorded. For the year ended December 31, 2015, servicing assets and liabilities were measured at fair value subsequent to the initial recognition. At December 31,
2015,2017, Borrower Loans that were sold to unrelated third parties, but for which we retained servicing rights had a total outstanding principal balance of
$3.8$3.7 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from
5.32%5.31% to
31.90%35.52% and maturity dates through December
2020.2022. At December 31,
2014,2016, Borrower Loans that were sold but for which we retained servicing rights had a total outstanding principal balance of
$1.4$3.5 billion, original terms between 36 and 60 months and had monthly payments with fixed interest rates ranging from
6.05%5.32% to
31.34%35.52% and maturity dates through December
2019.2021.
$
22.139.0 million, $38.9 million and
$5.3$22.1 million of contractually specified servicing fees, late charges and ancillary fees are included on our Statement of Operations in Servicing Fees, Net for the years ended December 31,
2017, 2016 and 2015,
and 2014 respectively.
Valuation method – Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount. Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the
Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.
Prepayment of the loans has historically been insignificant and therefore does not currently have a material impact on the fair value of servicing assets and liabilities.
Market servicing rate – Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates
for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider.
Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets. Default Rate – The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. Prosper ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. Prosper ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues. 6. Available for Sale Investments, at Fair Value
Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in Accumulated Other Comprehensive
Income (Loss)Loss included in Stockholders'
Equity (Deficit)Deficit unless management determines that an investment is
other-than-temporarily impaired (“OTTI”).OTTI.
The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of December 31,
2015,2017 and December 31, 2016, are as
follows:follows (in thousands): | | | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
Fixed maturity securities: | | | | | | | | | | | | | | | | |
Corporate debt securities | | $ | 50,327 | | | $ | 1 | | | $ | (94 | ) | | $ | 50,234 | |
Commercial paper | | | 9,493 | | | | - | | | | - | | | | 9,493 | |
US Treasury securities | | | 8,512 | | | | - | | | | (41 | ) | | | 8,471 | |
Agency bonds | | | 2,499 | | | | - | | | | (8 | ) | | | 2,491 | |
Total fixed maturity securities | | | 70,831 | | | | 1 | | | | (143 | ) | | | 70,689 | |
Short term bond funds | | | 2,500 | | | | - | | | | (2 | ) | | | 2,498 | |
Total Available for Sale Investments | | $ | 73,331 | | | $ | 1 | | | $ | (145 | ) | | $ | 73,187 | |
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Fixed maturity securities: | |
| | |
| | |
| | |
|
| Treasury Bills | $ | 34,014 |
| | $ | — |
| | $ | (36 | ) | | $ | 33,978 |
|
| US Treasury securities | 19,207 |
| | — |
| | (38 | ) | | 19,169 |
|
| Total Available for Sale Investments | $ | 53,221 |
| | $ | — |
| | $ | (74 | ) | | $ | 53,147 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Fixed maturity securities: | |
| | |
| | |
| | |
|
| Corporate debt securities | $ | 21,762 |
| | $ | 1 |
| | $ | (10 | ) | | $ | 21,753 |
|
| US Treasury securities | $ | 8,516 |
| | $ | 3 |
| | $ | (3 | ) | | $ | 8,516 |
|
| Agency bonds | 2,499 |
| | 1 |
| | — |
| | 2,500 |
|
| Total Available for Sale Investments | $ | 32,777 |
| | $ | 5 |
| | $ | (13 | ) | | $ | 32,769 |
|
A summary of available for sale investments with unrealized losses as of December 31,
2015,2017, aggregated by category and period of continuous unrealized loss, is as
follows: | | Less than 12 months | | | 12 months or longer | | | Total | |
| | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | $ | 45,375 | | | $ | (94 | ) | | $ | - | | | $ | - | | | $ | 45,375 | | | $ | (94 | ) |
U.S. treasury securities | | | 8,471 | | | | (41 | ) | | | - | | | | - | | | | 8,471 | | | | (41 | ) |
Agency bonds | | | 2,491 | | | | (8 | ) | | | - | | | | - | | | | 2,491 | | | | (8 | ) |
Total fixed maturity securities | | | 56,337 | | | | (143 | ) | | | - | | | | - | | | | 56,337 | | | | (143 | ) |
Short term bond funds | | | 2,498 | | | | (2 | ) | | | - | | | | - | | | | 2,498 | | | | (2 | ) |
Total Investments with Unrealized Losses | | $ | 58,835 | | | $ | (145 | ) | | $ | - | | | $ | - | | | $ | 58,835 | | | $ | (145 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| Fixed maturity securities: | |
| | |
| | |
| | |
| | |
| | |
|
| Treasury Bills | $ | 33,978 |
| | $ | (36 | ) | | $ | — |
| | $ | — |
| | $ | 33,978 |
| | $ | (36 | ) |
| US Treasury securities | 19,169 |
| | (38 | ) | | — |
| | — |
| | 19,169 |
| | (38 | ) |
| Total Investments with Unrealized Losses | $ | 53,147 |
| | $ | (74 | ) | | $ | — |
| | $ | — |
| | $ | 53,147 |
| | $ | (74 | ) |
The maturities of available for sale investments at December 31, 2015,2017, are as follows:follows (in thousands):
| | | | | | |
| | Within 1 year | | | After 1 year through 5 years | | | After 5 years to 10 years | | | After 10 years | | | Total | |
Corporate debt securities | | $ | 26,289 | | | $ | 23,945 | | | $ | - | | | $ | - | | | $ | 50,234 | |
Commercial paper | | | 9,493 | | | | - | | | | - | | | | - | | | | 9,493 | |
US Treasury securities | | | - | | | | 8,471 | | | | - | | | | - | | | | 8,471 | |
Agency bonds | | | | | | | 2,491 | | | | | | | | | | | | 2,491 | |
Total Fair Value | | $ | 35,782 | | | $ | 34,907 | | | $ | - | | | $ | - | | | $ | 70,689 | |
Total Amortized Cost | | $ | 35,831 | | | $ | 35,000 | | | $ | - | | | $ | - | | | $ | 70,831 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Within 1 year | | After 1 year through 5 years | | After 5 years to 10 years | | After 10 years | | Total |
| Treasury Bills | | 33,978 |
| | — |
| | — |
| | — |
| | 33,978 |
|
| US Treasury securities | | 14,947 |
| | 4,222 |
| | — |
| | — |
| | 19,169 |
|
| Total Fair Value | | $ | 48,925 |
| | $ | 4,222 |
| | $ | — |
| | $ | — |
| | $ | 53,147 |
|
| Total Amortized Cost | | $ | 48,992 |
| | $ | 4,229 |
| | $ | — |
| | $ | — |
| | $ | 53,221 |
|
Prosper sold investments in available for sale securities in the amount of
$4.0$31.2 million during the year ended December 31,
2015.2017 which resulted in a loss of $9 thousand.
7. Fair Value of Assets and Liabilities
For a description of the fair value hierarchy and Prosper’s fair value methodologies, see Note 2 - Summary of Significant Accounting Policies. Prosper did not transfer any assets or liabilities in or out of level 3 during the year ended December 31,
2015.2017.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
Investments held at fair value consist of available for sale investments. The available for sale investments consist of corporate
debt securities, U.S. treasury securities, treasury bills and
governmentagency bonds. When available, Prosper uses quoted prices in active markets to measure the fair value of
securities available for
sale.sale securities. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.
The Convertible Preferred Stock Warrant Liability is valued using a Black Scholes-Option pricing model. Refer to Note 13 for further details.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
| | | | | | | | | | | | | | | | | |
December 31, 2015 | | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total | | |
Assets: | | | | | | | | | | | | | | | | | |
Borrower Loans | | $ | - | | | $ | - | | | $ | 297,273 | | | $ | 297,273 | | |
Loans Held for Sale | | | - | | | | - | | | | 32 | | | | 32 | | |
Available for Sale Investments, at Fair Value | | | - | | | | 73,187 | | | | - | | | | 73,187 | | |
Servicing Assets | | | - | | | | - | | | | 14,363 | | | | 14,363 | | |
Total Assets | | | - | | | | 73,187 | | | | 311,668 | | | | 384,855 | | |
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Notes | | $ | - | | | $ | - | | | $ | 297,405 | | | $ | 297,405 | | |
Servicing Liabilities | | | - | | | | - | | | | 484 | | | | 484 | | |
Contingent Consideration | | | - | | | | - | | | | 4,801 | | | | 4,801 | | |
Total Liabilities | | $ | - | | | $ | - | | | $ | 302,690 | | | $ | 302,690 | | |
| | | | | | | | | | | | | | | | | |
December 31, 2014 | | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total | | |
Assets: | | | | | | | | | | | | | | | | | |
Borrower Loans | | $ | - | | | $ | - | | | $ | 273,243 | | | $ | 273,243 | | |
Loans Held for Sale | | | - | | | | - | | | | 8,463 | | | | 8,463 | | |
Total Assets | | | - | | | | - | | | | 281,706 | | | | 281,706 | | |
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Notes | | $ | - | | | $ | - | | | $ | 273,783 | | | $ | 273,783 | | |
Total Liabilities | | $ | - | | | $ | - | | | $ | 273,783 | | | $ | 273,783 | | |
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | |
| | |
| | |
| | |
|
| Borrower Loans | $ | — |
| | $ | — |
| | $ | 293,005 |
| | $ | 293,005 |
|
| Loans Held for Sale | — |
| | — |
| | 49 |
| | 49 |
|
| Available for Sale Investments, at Fair Value | — |
| | 53,147 |
| | — |
| | 53,147 |
|
| Servicing Assets | — |
| | — |
| | 14,711 |
| | 14,711 |
|
| Total Assets | — |
| | 53,147 |
| | 307,765 |
| | 360,912 |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Notes | $ | — |
| | $ | — |
| | $ | 293,948 |
| | $ | 293,948 |
|
| Servicing Liabilities | — |
| | — |
| | 59 |
| | 59 |
|
| Convertible Preferred Stock Warrant Liability | — |
| | — |
| | 116,366 |
| | 116,366 |
|
| Loan Trailing Fee Liability | — |
| | — |
| | 2,595 |
| | 2,595 |
|
| Total Liabilities | $ | — |
| | $ | — |
| | $ | 412,968 |
| | $ | 412,968 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | |
| | |
| | |
| | |
|
| Borrower Loans | $ | — |
| | $ | — |
| | $ | 315,627 |
| | $ | 315,627 |
|
| Loans Held for Sale | — |
| | — |
| | 624 |
| | 624 |
|
| Available for Sale Investments, at Fair Value | — |
| | 32,769 |
| | — |
| | 32,769 |
|
| Servicing Assets | — |
| | — |
| | 12,786 |
| | 12,786 |
|
| Total Assets | — |
| | 32,769 |
| | 329,037 |
| | 361,806 |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Notes | $ | — |
| | $ | — |
| | $ | 316,236 |
| | $ | 316,236 |
|
| Servicing Liabilities | $ | — |
| | $ | — |
| | $ | 198 |
| | $ | 198 |
|
| Convertible Preferred Stock Warrant Liability | $ | — |
| | $ | — |
| | $ | 21,711 |
| | $ | 21,711 |
|
| Loan Trailing Fee Liability | $ | — |
| | $ | — |
| | $ | 665 |
| | $ | 665 |
|
Total Liabilities
| $ | — |
| | $ | — |
| | $ | 338,810 |
| | $ | 338,810 |
|
As Prosper’s Borrower Loans, Loans Held for Sale, Notes,
Servicing Assets, Servicing Liabilities and
loan servicing rightsLoan Trailing Fee Liability do not trade in an active market with readily observable prices, Prosper uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at December 31,
2015:2017:
Borrower Loans, Loans Held for Sale and Notes:
| | Range
|
| | | | |
| | Range |
| Unobservable Input | | December 31, 2015 2017 | | December 31, 2014 2016 |
Discount rate | | 4.3%4.0% - 14.5%
14.4% | | 3.2%4.0% - 10.6%
15.9% |
Default rate | | 1.4%2.0% - 14.4%
15.4% | | 2.6%1.7% - 19.7%
14.9% |
Servicing
Rights:Assets and Liabilities: |
| | | | | | |
| | | Range |
| Unobservable Input | | December 31, 2017 | | December 31, 2016 |
| Discount rate | | 15% - 25% |
| | 15% - 25% |
|
| Default rate | | 1.5% - 16.1% |
| | 1.5% - 15.2% |
|
| Prepayment rate | | 13.5% - 30.2% |
| | 13.6% - 26.6% |
|
Market servicing rate (1) | | 0.625 | % | | 0.625 | % |
(1) Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of December 31, 2017 and 2016, the market rate for collection fees and non-sufficient fund fees was assumed to be 7 basis points and 7 basis points for a weighted-average total market servicing rate of 69.5 basis points and 69.5 basis points respectively.
Loan Trailing Fee Liability:
| | Range
| |
| | | | |
| | Range |
| Unobservable Input | | December 31, 2015 2017 | | | December 31, 2014 | 2016 |
Discount rate | | 15% - 25% | | | 15% - 25% | |
Default rate | | 1.2%1.5% - 14.7%
16.1% | | | 2.6%1.5% - 26.3%
| 15.2% |
Prepayment rate | | 14.3%13.5% - 25.6%
30.2% | | | 8.0%13.6% - 25.8%
| |
Market servicing rate
| | | 0.625
| %
| | 0.625% - 0.70%
| 26.6% |
At December 31, 2015,2017 and 2016, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
The following tables present additional information about level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring
basis: basis (in thousands): Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | Borrower Loans | | | Notes | | | Loans Held for Sale | | | Total | |
Balance at January 1, 2015 | | $ | 273,243 | | | $ | (273,783 | ) | | $ | 8,463 | | | $ | 7,923 | |
Purchase of Borrower Loans/Issuance of Notes | | | 197,436 | | | | (197,228 | ) | | | 3,517,467 | | | $ | 3,517,675 | |
Principal repayments | | | (151,038 | ) | | | 151,025 | | | | (552 | ) | | $ | (565 | ) |
Borrower Loans sold to third parties | | | (855 | ) | | | 813 | | | | (3,525,207 | ) | | $ | (3,525,249 | ) |
Other changes | | | 81 | | | | (6 | ) | | | (18 | ) | | $ | 57 | |
Change in fair value | | | (21,594 | ) | | | 21,774 | | | | (121 | ) | | $ | 59 | |
Balance at December 31, 2015 | | $ | 297,273 | | | $ | (297,405 | ) | | $ | 32 | | | $ | (100 | ) |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Borrower Loans | | | Notes | | | Loans Held for Sale | | | Total | | Borrower Loans | | Notes | | Loans Held for Sale | | Total |
Balance at January 1, 2014 | | $ | 233,105 | | | $ | (234,218 | ) | | $ | 3,206 | | | $ | 2,093 | | |
| Balance at January 1, 2017 | | $ | 315,627 |
| | $ | (316,236 | ) | | $ | 624 |
| | $ | 15 |
|
Purchase of Borrower Loans/Issuance of Notes | | | 177,088 | | | | (176,865 | ) | | | 1,416,715 | | | | 1,416,938 | | 194,887 |
| | (194,391 | ) | | 2,619,130 |
| | $ | 2,619,626 |
|
Principal repayments | | | (121,082 | ) | | | 120,909 | | | | — | | | | (173 | ) | (188,199 | ) | | 191,828 |
| | (89 | ) | | $ | 3,540 |
|
Borrower Loans sold to third parties | | | — | | | | — | | | | (1,411,531 | ) | | | (1,411,531 | ) | (3,855 | ) | | — |
| | (2,619,620 | ) | | $ | (2,623,475 | ) |
| Other changes | | 97 |
| | (180 | ) | | (3 | ) | | $ | (86 | ) |
Change in fair value | | | (15,868 | ) | | | 16,391 | | | | 73 | | | | 596 | | (25,552 | ) | | 25,031 |
| | 7 |
| | $ | (514 | ) |
Balance at December 31, 2014 | | $ | 273,243 | | | $ | (273,783 | ) | | $ | 8,463 | | | $ | 7,923 | | |
| Balance at December 31, 2017 | | $ | 293,005 |
| | $ | (293,948 | ) | | $ | 49 |
| | $ | (894 | ) |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Borrower Loans | | Notes | | Loans Held for Sale | | Total |
| Balance at January 1, 2016 | $ | 297,273 |
| | $ | (297,405 | ) | | $ | 32 |
| | $ | (100 | ) |
| Purchase of Borrower Loans/Issuance of Notes | 217,582 |
| | (217,767 | ) | | 1,979,952 |
| | 1,979,767 |
|
| Principal repayments | (171,195 | ) | | 173,958 |
| | (447 | ) | | 2,316 |
|
| Borrower Loans sold to third parties | (2,515 | ) | | — |
| | (1,978,905 | ) | | (1,981,420 | ) |
| Other changes | 416 |
| | (591 | ) | | (1 | ) | | (176 | ) |
| Change in fair value | (25,934 | ) | | 25,569 |
| | (7 | ) | | (372 | ) |
| Balance at December 31, 2016 | $ | 315,627 |
| | $ | (316,236 | ) | | $ | 624 |
| | $ | 15 |
|
The following table presents additional information about
the level 3 servicing assets and liabilities measured at fair value on a recurring
basis:basis (in thousands): | | Servicing Assets | | | Servicing Liabilities | |
Amortized Cost at January 1, 2014 | | $ | 460 | | | $ | 167 | |
Additions | | | 4,700 | | | | 662 | |
Less: Changes in fair value | | | (997 | ) | | | (205 | ) |
Amortized Cost at December 31, 2014 | | | 4,163 | | | | 624 | |
Adjustment to adopt fair value measurement | | | 545 | | | | (29 | ) |
Fair Value at January 1, 2015 | | | 4,708 | | | | 595 | |
Additions | | | 14,909 | | | | 283 | |
Less: Changes in fair value | | | (5,254 | ) | | | (394 | ) |
Fair Value at December 31, 2015 | | $ | 14,363 | | | $ | 484 | |
Contingent Consideration:
On October 9, 2015, PMI, purchased 100% of the outstanding shares of BillGuard.
|
| | | | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair Value at January 1, 2016 | $ | 14,363 |
| | $ | 484 |
|
| Additions | 9,833 |
| | 9 |
|
| Less: Changes in fair value | (11,410 | ) | | (295 | ) |
| Fair Value at December 31, 2016 | 12,786 |
| | 198 |
|
| Additions | 14,138 |
| | — |
|
| Less: Changes in fair value | (12,213 | ) | | (139 | ) |
| Fair Value at December 31, 2017 | $ | 14,711 |
| | $ | 59 |
|
The contingent consideration was primarily performance-based and will be determined over a one-year period from the date of purchase. Total contingent consideration due in October 2016 is based on revenues generated and other criteria. Wefollowing table presents additional information about level 3 Preferred Stock Warrant Liability measured theat fair value of the contingent consideration usingon a probability-weighted discounted cash flow approach. Some of the significant inputs used for the valuation are not observable in the market and are thus Levelrecurring basis (in thousands):
|
| | | |
| Balance as of January 1, 2016 | $ | — |
|
| Add Issuances of Preferred Stock Warrant | 21,704 |
|
| Change in fair value of the preferred stock warrant liability | $ | 7 |
|
| Balance at December 31, 2016 | $ | 21,711 |
|
| Add Issuances of Preferred Stock Warrant | 65,516 |
|
| Change in fair value of the preferred stock warrant liability | 29,139 |
|
| Balance at December 31, 2017 | $ | 116,366 |
|
The following table presents additional information about level 3
inputs. Contingent consideration is recorded in the consolidated balance sheet under "Other Liabilities." Significant increases or decreases in certain underlying assumptions used to value the contingent consideration could significantly increase or decrease theLoan Trailing Fee Liability measured at fair value
estimates recorded in the Consolidated Balance Sheets. On October 9, 2015, the fair value of the contingent consideration was $3.8 million, during the year ended December 31, 2015 there were fair value changes of $1.0 million resulting inon a
fair value of $4.8 million at December 31, 2015. recurring basis (in thousands):
|
| | | |
| Balance as of January 1, 2016 | $ | — |
|
| Issuances | 647 |
|
| Cash payment of Loan Trailing Fee | (21 | ) |
| Change in fair value | 39 |
|
| Balance at December 31, 2016 | $ | 665 |
|
| Issuances | 2,631 |
|
| Cash payment of Loan Trailing Fee | (956 | ) |
| Change in fair value | 255 |
|
| Balance at December 31, 2017 | $ | 2,595 |
|
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at December 31, 20152017 for Borrower Loans, Loans Held for Sale and Notes fundedoriginated through the Note Channel are presented in the following table (in thousands, except percentages):
| | Borrower Loans / Loans Held for Sale | | | Notes | | | |
| | | | Borrower Loans / Loans Held for Sale | | Notes | |
| Fair value at December 31, 2017 | | $ | 293,054 |
| | $ | 293,948 |
| |
Discount rate assumption: | | | 6.97 | % | * | | 6.97 | % | * | 7.15 | % | * | 7.15 | % | * |
Resulting fair value from: | | | | | | | | | | |
| | |
| |
100 basis point increase | | $ | 294,179 | | | $ | 294,305 | | | $ | 290,116 |
| | $ | 290,948 |
| |
200 basis point increase | | | 291,165 | | | | 291,284 | | | 287,206 |
| | 288,024 |
| |
Resulting fair value from: | | | | | | | | | | |
| | |
| |
100 basis point decrease | | $ | 300,449 | | | $ | 300,589 | | | $ | 296,169 |
| | $ | 297,028 |
| |
200 basis point decrease | | | 303,710 | | | | 303,858 | | | 299,319 |
| | 300,192 |
| |
| | | | | | |
Default rate assumption: | | | 10.11 | % | * | | 10.11 | % | * | 13.52 | % | * | 13.52 | % | * |
Resulting fair value from: | | | | | | | | | | |
| | |
| |
100 basis point increase | | $ | 294,480 | | | $ | 294,601 | | | $ | 289,386 |
| | $ | 290,202 |
| |
200 basis point increase | | | 291,741 | | | | 291,851 | | | 285,792 |
| | 286,581 |
| |
Resulting fair value from: | | | | | | | | | | |
| | |
| |
100 basis point decrease | | $ | 300,090 | | | $ | 300,235 | | | $ | 296,868 |
| | $ | 297,742 |
| |
200 basis point decrease | | | 302,931 | | | | 303,088 | | | 300,679 |
| | 301,584 |
| |
* Represents weighted average assumptions considering all credit grades.
The following table presents the estimated impact on Prosper’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of December 31,
20152017 (in thousands, except percentages).
| | Servicing Assets | | | Servicing Liabilities | |
Weighted average market servicing rate assumptions | | | 0.625 | % | | | 0.625 | % |
Resulting fair value from: | | | | | | | | |
Market servicing rate increase to 0.65% | | $ | 13,327 | | | $ | 533 | |
Market servicing rate decrease to 0.60% | | $ | 15,399 | | | $ | 435 | |
Weighted average prepayment assumptions | | | 18.9 | % | | | 18.9 | % |
Resulting fair value from: | | | | | | | | |
Applying a 1.1 multiplier to default rate | | $ | 14,000 | | | $ | 458 | |
Applying a 0.9 multiplier to default rate | | $ | 14,524 | | | $ | 476 | |
Weighted average default assumptions | | | 11 | % | | | 11 | % |
Resulting fair value from: | | | | | | | | |
Applying a 1.1 multiplier to default rate | | $ | 14,163 | | | $ | 484 | |
Applying a 0.9 multiplier to default rate | | $ | 14,565 | | | $ | 484 | |
|
| | | | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair value at December 31, 2017 | $ | 14,711 |
| | $ | 59 |
|
| Market servicing rate assumptions | 0.625 | % | | 0.625 | % |
| Resulting fair value from: | |
| | |
|
| Market servicing rate increase to 0.65% | $ | 13,816 |
| | $ | 65 |
|
| Market servicing rate decrease to 0.60% | $ | 15,690 |
| | $ | 53 |
|
| | | | |
| Weighted average prepayment assumptions | 19.80 | % | | 19.80 | % |
| Resulting fair value from: | |
| | |
|
| Applying a 1.1 multiplier to prepayment rate | $ | 14,509 |
| | $ | 59 |
|
| Applying a 0.9 multiplier to prepayment rate | $ | 14,882 |
| | $ | 60 |
|
| | | | |
| Weighted average default assumptions | 13.00 | % | | 13.00 | % |
| Resulting fair value from: | |
| | |
|
| Applying a 1.1 multiplier to default rate | $ | 14,556 |
| | $ | 59 |
|
| Applying a 0.9 multiplier to default rate | $ | 14,954 |
| | $ | 59 |
|
These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
8.
American HealthCare Lending AcquisitionOn January 23, 2015, PMI acquired all of the outstanding limited liability company interests of American HealthCare Lending,Goodwill and merged American HealthCare Lending with and into PHL, with PHL surviving the merger (the “Merger”). Under the terms of the purchase agreement, the sellers of American HealthCare Lending received an aggregate of $20.2 million in cash on the closing date and will receive $0.8 million in cash one year after the closing date subject to general representations and warranties.
PHL operates a cloud-based patient financing company for healthcare providers in the cosmetic, dentistry, bariatric surgery, fertility, plastic surgery and other markets. PHL has relationships with a nationwide network of healthcare providers. These
healthcare providers refer individuals who would like to finance medical procedures through Prosper’s marketplace. Through this acquisition Prosper expects to be able to more effectively offer affordable payment options to consumers who would like to finance elective medical procedures at the point of service. Prosper has included the financial results of PHL in the consolidated financial statements from the date of acquisition. The amounts of gross revenue and net loss of PHL included in Prosper’s consolidated financial statements from the merger date of January 23, 2015 to December 31, 2015 were $2.8 million and $(5.8) million, respectively. Prosper recorded acquisition-related expenses of $0.2 million for the year ended December 31, 2015, which is included in general and administrative expense.
The purchase price allocation is as follows (in thousands):
| | Fair Value | |
Assets: | | | | |
Cash | | $ | 1,219 | |
Accounts receivable, net | | | 147 | |
Property, equipment and software, net | | | 6 | |
Other assets | | | 63 | |
Identified intangible assets: | | | | |
Customer relationships | | | 2,650 | |
Developed technology | | | 810 | |
Brand name | | | 60 | |
Goodwill | | | 16,825 | |
| | | | |
Liabilities: | | | | |
Accrued expenses and other liabilities | | | 708 | |
Total purchase consideration | | $ | 21,072 | |
The goodwill balance is primarily attributed to expected operational synergies and the assembled workforce. Goodwill is expected to be deductible for U.S. income tax purposes.
The impact was not material on Prosper’s revenue and net earnings on a pro forma basis for all periods presented.
9. BillGuard Acquisition
On October 9, 2015, PMI acquired all of the outstanding shares of BillGuard. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. Under the terms of the purchase agreement, the sellers of BillGuard received an aggregate of approximately $20 million in cash on the closing date and will receive up to $5 million in cash one year after the closing date subject to general representations and warranties. The contingent consideration has a maximum value of $5 million, and the events that would trigger the payout include the revenues of BillGuard during a specific three month period in 2016 and other criteria as described in the purchase agreement. The consideration is to be paid in October 2016. The liability for the fair value of the contingent consideration is included in Other Liabilities on the Consolidated Balance Sheets. Changes in the fair value of the contingent consideration is recognized in earnings through General and Administrative expense. The liability had a fair value of $3.8 million and $4.8 million at October 9, 2015 and December 31, 2015, respectively.
BillGuard has developed applications that help consumers manage their identity, finances and credit. The acquisition will enable Prosper to offer borrowers and investors a full suite of powerful tools to help them make smarter financial decisions including obtaining loans through Prosper, and will give Prosper access to BillGuard’s engineering and product talent pool. Prosper has included the financial results of BillGuard in the consolidated financial statements from the date of acquisition. The amounts of gross revenue and net loss of BillGuard included in Prosper’s consolidated financial statements from October 9, 2015 to December 31, 2015 were $0.2 million and $2.6 million, respectively. Prosper recorded acquisition-related expenses of $0.9 million for the year ended December 31, 2015, which is included in General and Administrative Expense.
The preliminary purchase price allocation as of the merger date is as follows (in thousands):
Goodwill
| | Fair Value | |
Assets: | | | | |
Cash | | $ | 811 | |
Property and equipment | | | 82 | |
Prepaid and other assets | | | 152 | |
Identified intangible assets: | | | | |
Developed technology | | | 7,500 | |
Customer relationships | | | 3,600 | |
Goodwill | | | 19,543 | |
| | | | |
Liabilities: | | | | |
Accounts payable and accrued expenses | | | (1,635 | ) |
Long term debt | | | (1,395 | ) |
Convertible loan | | | (3,652 | ) |
Deferred revenue | | | (1,400 | ) |
Total purchase consideration | | $ | 23,606 | |
The allocation of the purchase price is preliminary and subject to further adjustment as information relative to closing date balances and related tax balances are finalized.
Prosper believes the amount of goodwill resulting from the allocation of purchase consideration is attributable to expected operating synergies, assembled workforce, and the future development initiatives of the assembled workforce, which will position Prosper to be able to further expand its long-term growth strategy. Goodwill is not expected to be deductible for U.S. or Israel income tax purposes.
The following unaudited pro forma financial information summarizes the combined results of operations for Prosper and BillGuard, as though the companies were combined as of January 1, 2014. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have resulted had the acquisition occurred as of January 1, 2014, nor is it indicative of future operating results. The pro forma results presented below include, amortization of acquired intangible assets and compensation expense related to the post-acquisition compensation arrangements entered into with the continuing employees (in thousands, except per share data):
Years Ended December 31, | | 2015 | | | 2014 | |
Total net revenue | | $ | 204,350 | | | $ | 81,195 | |
Net loss (1) | | | (33,677 | ) | | | (16,728 | ) |
Basic and diluted net loss per share attributable to common stockholders | | $ | (0.61 | ) | | $ | (0.71 | ) |
(1)
| Net loss for the year ended December 31, 2015 excludes $1.6 million of one-time acquisition-related costs expenses incurred in 2015. Net loss for the year ended December 31, 2014 was adjusted to include these numbers.
|
10.
| Goodwill and Other Intangible Assets
|
The following table presents the goodwill activity for the periods presented (in thousands):
Goodwill - December 31, 2014 | | $ | - | |
2015 acquisitions | | | 36,368 | |
Goodwill - December 31, 2015 | | $ | 36,368 | |
|
| | | |
| Goodwill - January 1, 2016 | $ | 36,368 |
|
| 2016 acquisitions | $ | — |
|
| Goodwill - December 31, 2016 | $ | 36,368 |
|
| 2017 acquisitions | — |
|
| Goodwill - December 31, 2017 | $ | 36,368 |
|
We did not record any goodwill in the year ended December 31, 2014. We did not record any goodwill impairment expense for the
yearyears ended December 31,
2017, 2016 and 2015.
Other Intangible Assets,
Net
The following table presents the detail of other intangible assets for the periods presented (dollars in thousands):
| | December 31, 2015 | |
| | Gross Carrying Value | | | Accumulated Amortization | | | Net Carrying Value | | | Remaining Useful Life (In Years) | |
Developed technology | | $ | 8,310 | | | $ | (622 | ) | | $ | 7,688 | | | | 4.8 | |
User base and customer relationships | | | 6,250 | | | | (892 | ) | | | 5,358 | | | | 9.1 | |
Brand name | | | 60 | | | | (55 | ) | | | 5 | | | | 0.1 | |
Total intangible assets subject to amortization | | $ | 14,620 | | | $ | (1,569 | ) | | $ | 13,051 | | | | | |
|
| | | | | | | | | | | | | |
| | December 31, 2017 |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Remaining Useful Life (In Years) |
| Developed technology | $ | 3,060 |
| | $ | (3,038 | ) | | $ | 22 |
| | 0.3 |
| User base and customer relationships | 5,050 |
| | (3,695 | ) | | 1,355 |
| | 7.3 |
| Brand name | 60 |
| | (60 | ) | | — |
| | 0.0 |
| Total intangible assets subject to amortization | $ | 8,170 |
| | $ | (6,793 | ) | | $ | 1,377 |
| | |
|
| | | | | | | | | | | | | |
| | December 31, 2016 |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Remaining Useful Life (In Years) |
| Developed technology | $ | 8,310 |
| | $ | (2,393 | ) | | $ | 5,917 |
| | 3.8 |
| User base and customer relationships | 6,250 |
| | (2,955 | ) | | 3,295 |
| | 8.3 |
| Brand name | 60 |
| | (60 | ) | | — |
| | 0.0 |
| Total intangible assets subject to amortization | $ | 14,620 |
| | $ | (5,408 | ) | | $ | 9,212 |
| | |
We did not record any
intangiblesintangible additions for the year ended December 31,
2014. 2017 or 2016.
The user base and customer relationship intangible assets are being amortized on an accelerated basis over a three to ten year period. The technology and brand name intangible assets are being amortized on a straight line basis over three to five years and one year, respectively.Amortization expense for During the year ended December 31, 2017, certain intangible assets were made available for sale and as a result they were written down to fair value. This resulted in a
$6.4 million impairment loss, which is recorded in Other Expenses on the Consolidated Statement of Operations.
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was
$1.4 million, $3.8 million and $1.6
million.million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):
Year Ending December 31, | | | | |
2016 | | $ | 3,859 | |
2017 | | | 3,205 | |
2018 | | | 2,310 | |
2019 | | | 1,789 | |
2020 | | | 1,366 | |
Thereafter | | | 522 | |
Total | | $ | 13,051 | |
11.
|
| | | |
| Year Ending December 31, | |
| 2018 | 379 |
|
| 2019 | 279 |
|
| 2020 | 219 |
|
| 2021 | 172 |
|
| 2022 | 136 |
|
| Thereafter | 192 |
|
| Total | $ | 1,377 |
|
Other Liabilities includes the
following:following (in thousands): | | Year Ending December 31, | |
| | 2015 | | | 2014 | |
Class action settlement liability | | $ | 5,949 | | | $ | 7,861 | |
Repurchase liability for unvested restricted stock awards | | | 473 | | | | 1,010 | |
Contingent consideration | | | 4,801 | | | | - | |
Deferred revenue | | | 1,591 | | | | - | |
Servicing liabilities | | | 484 | | | | 624 | |
Deferred rent | | | 5,240 | | | | 3,657 | |
Other | | | 2,197 | | | | 171 | |
Total Other Liabilities | | $ | 20,735 | | | $ | 13,323 | |
|
| | | | | | | |
| | Year Ending December 31, |
| | 2017 | | 2016 |
| Class action settlement liability | $ | — |
| | $ | 2,996 |
|
| Loan trailing fee | 2,595 |
| | 665 |
|
| Deferred revenue | 452 |
| | 226 |
|
| Servicing liabilities | 59 |
| | 198 |
|
| Deferred income tax liability | 225 |
| | 766 |
|
| Deferred rent | 3,904 |
| | 4,469 |
|
| Restructuring liability | 3,355 |
| | 6,052 |
|
| Other | 2,079 |
| | 1,801 |
|
| Total Other Liabilities | $ | 12,669 |
| | $ | 17,173 |
|
10. Net Loss Per Share
Prosper computes net loss per share in accordance with ASC Topic 260, Earnings Per Share(“ (“ASC Topic 260”). Under ASC Topic 260, basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
We compute Earnings per Share (“EPS”) using the two-class method. The two-class method allocates earnings that otherwise would have been available to common shareholders to holders of participating securities. We consider all series of our convertible preferred stock to be participating securities due to their rights to participate in dividends with common stock. As such, earnings allocated to these participating securities, which include participation rights in undistributed earnings, are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders. All participating securities are excluded from basic weighted-average common shares outstanding. Prior to any conversion to common shares, each series of PMI’s convertible preferred stock was entitled to participate on an if converted basis in distributions of earnings, when and if declared by the board of directors, that were made to common stockholders and as a result these shares were considered participating securities. During the year ended December 31, 20152017, 2016 and 2014,2015, certain shares issued as a result of the early exercise of stock options, which are subject to a repurchase right by PMI, were entitled to receive non-forfeitable dividends during the vesting period and as a result were considered participating securities.
The adjustment from net loss to net loss available to common shareholders represents the excess over the carrying value of such shares paid to certain preferred shareholders upon repurchase of their preferred shares as described below in Note 13 Convertible Preferred Stock and Stockholders’ Deficit.
The weighted average shares used in calculating basic and diluted net loss per share excludes certain shares that are disclosed as outstanding shares in the Consolidated Balance Sheets and Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit because such shares are restricted as they were associated with options that were early exercised and continue to remain unvested.
Basic and diluted net loss per share was calculated as follows (net loss in thousands):
| | Year Ended December 31, | |
| | 2015 | | | 2014 | |
Numerator: | | | | | | | | |
Net loss | | $ | (25,968 | ) | | $ | (2,669 | ) |
Excess return to preferred shareholders on repurchase | | | - | | | | (14,892 | ) |
Net loss available to common stockholders for basic and diluted EPS | | | (25,968 | ) | | | (17,561 | ) |
Denominator: | | | | | | | | |
Weighted average shares used in computing basic and diluted net loss per share | | | 55,547,408 | | | | 44,484,005 | |
Basic and diluted net loss per share | | $ | (0.47 | ) | | $ | (0.39 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Numerator: | |
| | |
| | |
| Net loss available to common stockholders for basic and diluted EPS | $ | (115,158 | ) | | $ | (118,741 | ) | | $ | (25,968 | ) |
| Denominator: | |
| | |
| | |
Weighted average shares used in computing basic and diluted net loss per share | 69,687,836 |
| | 64,196,537 |
| | 55,547,408 |
|
| Basic and diluted net loss per share | $ | (1.65 | ) | | $ | (1.85 | ) | | $ | (0.47 | ) |
Due to losses attributable to PMI’s common shareholders for each of the periods below, the following potentially dilutive shares are excluded from the diluted net loss per share calculation because they were anti-dilutive under the treasury stock or if converted
method, in accordance with ASC Topic 260:method: | | Year Ended December 31, | |
| | 2015 | | | 2014 | |
| | (shares) | | | (shares) | |
Excluded securities: | | | | | | | | |
Convertible preferred stock issued and outstanding | | | 177,388,425 | | | | 153,499,785 | |
Stock options issued and outstanding | | | 34,358,106 | | | | 24,974,990 | |
Unvested stock options exercised | | | 9,806,170 | | | | 20,571,345 | |
Restrictive Stock Units | | | 190,517 | | | | - | |
Warrants issued and outstanding | | | 588,660 | | | | 884,435 | |
Total common stock equivalents excluded from diluted net loss per common share computation | | | 222,331,878 | | | | 199,930,555 | |
|
| | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (shares) | | (shares) | | (shares) |
| Excluded securities: | |
| | |
| | |
| Convertible preferred stock issued and outstanding | 214,637,925 |
| | 177,388,425 |
| | 177,388,425 |
|
| Stock options issued and outstanding | 46,722,408 |
| | 44,099,577 |
| | 34,358,106 |
|
| Unvested stock options exercised | 11,565 |
| | 1,126,210 |
| | 9,806,170 |
|
| Restricted Stock Units | — |
| | 351,721 |
| | 190,517 |
|
| Warrants issued and outstanding | 1,166,145 |
| | 988,513 |
| | 588,660 |
|
| Series E-1 Convertible Preferred Stock warrants | 35,544,141 |
| | 1,254,111 |
| | — |
|
| Series F Convertible Preferred Stock warrants | 177,720,704 |
| | — |
| | — |
|
Total common stock equivalents excluded from diluted net loss per common share computation | 475,802,888 |
| | 225,208,557 |
| | 222,331,878 |
|
The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
13.
11. Convertible Preferred Stock,
Warrant Liability and Stockholders’ Deficit
Convertible Preferred Stock
Under PMI’s amended and restated certificate of incorporation, preferred stock is issuable in series, and the boardBoard of directorsDirectors is authorized to determine the rights, preferences, and terms of each series.
In January 2013, PMI issued and sold 69,340,760 shares of New Series A (“New Series A”) convertible preferred stock in a private placement at a purchase price of $0.29 per share for $19.8 million, net of issuance costs. In connection with that sale, PMI issued 25,585,910 shares at par value $0.01 per share of Series A-1 (“Series A-1”) convertible preferred stock to the holders of shares of PMI’s convertible preferred stock that was outstanding immediately prior to the sale (“Old Preferred Shares”) in consideration for such stockholders participating in the sale. In connection with the New Series A sale, Old Preferred Shares were converted into shares of common stock at a ratio of 1:1 if the holder of the Old Preferred Shares participated in the New Series A sale or at a 10:1 ratio if the holder of the Old Preferred Shares did not so participate. In addition, each such participating holder received a share of New Series A-1 convertible preferred stock for every dollar of liquidation preference associated with an Old Preferred Share held by such holder. Each share of Series A-1 preferred stock has a liquidation preference of $2.00 and converts into common stock at a ratio of 1,000,000:1. The New Series A and Series A-1 convertible preferred stock 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 regarding sales by an issuer not involving a public offering.
In September 2013, PMI issued and sold 41,443,670 shares of New Series B (“New Series B”) convertible preferred stock in a private placement at a purchase price of $0.60 per share for approximately $24.9 million, net of issuance costs. The New Series B convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering.
In May 2014, PMI issued and sold 24,404,770 shares of New Series C (“New Series C”) convertible preferred stock in a private placement at a purchase price of $2.87 per share for approximately $69.9 million, net of issuance costs. The Series C convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering. The purpose of the New Series C private placement was to raise funds for general corporate needs and for the tender offer discussed below.
On June 18, 2014, PMI issued a Tender Offer Statement to purchase up to 6,963,785 shares, in the aggregate, of its New Series A convertible preferred Stock and New Series B convertible preferred Stock, at a price equal to $2.87 per share. Upon closure of the tender offer on July 16, 2014, 782,540 shares of New Series A convertible preferred Stock and 5,667,790
shareshares of New Series B convertible preferred Stock were purchased for an aggregate price of $18.5
millionmillion.
In April 2015,
PMI issued and sold 23,888,640 shares of New Series D (“New Series D”) convertible preferred stock in a private placement at a purchase price of $6.91 per share for proceeds of approximately $164.8 million, net of issuance costs. The New Series D convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering. The purpose of the New Series D private placement was to raise funds for general corporate needs and for the share repurchase discussed below.
In December 2016, PMI authorized 40,000,000 shares of New Series E ("New Series E") convertible preferred stock. These shares are reserved for the convertible preferred stock warrants that were also issued in December 2016.
On December 16, 2016, PMI issued a warrant to purchase 20,267,135 shares of Series E-1 convertible preferred stock of PMI ("Series E-1") at an exercise price of $0.01 per share (the “First Series E-1 Warrant”) to Pinecone Investments LLC (“Pinecone”), an affiliate of Colchis Capital Management, L.P. (“Colchis”).
On February 27, 2017, PMI issued to Pinecone a second warrant (the “Second Series E-1 Warrant,” and together with the First Series E-1 Warrant, the “Series E-1 Warrants”) to purchase 15,277,006 shares of Series E-1 at an exercise price of $0.01 per share. The Series E-1 Warrants are immediately exercisable, in whole or in part, by paying in cash the full purchase price payable in respect of the number of shares purchased. The Series E-1 Warrants were issued pursuant to the Warrant Agreement, dated December 16, 2016, between PMI and Colchis, as previously described in PMI’s Current Report on Form 8-K as filed with the Commission on December 22, 2016.
In connection with a loan purchase agreement (“Consortium Purchase Agreement”) with affiliates of the Consortium ("Warrant Holders'") a warrant agreement was signed (the "Warrant Agreement"). Pursuant to the Warrant Agreement, PMI issued to the Consortium, three warrants (together, the “Series F Warrant”) to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”). Refer to Note 15 for more details.
On September 20, 2017, Prosper issued and sold 37,249,497 shares of Series G convertible preferred stock ("Series G") in a private placement at a purchase price of $1.34 per share for proceeds of approximately $47.9 million, net of issuance costs. The Series G convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(a)(2) of the Securities Act regarding sales by an issuer not involving a public offering. The purpose of the new Series G private placement was to raise funds for general corporate purposes.
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of December 31, 20152017 are disclosed in the table below (dollars(dollar amounts in thousands)thousands, except per share information):
Convertible Preferred Stock | | Par Value | | | Authorized shares | | | Outstanding and Issued shares | | | Liquidation Preference | |
New Series A | | $ | 0.01 | | | | 68,558,220 | | | | 68,558,220 | | | $ | 19,774 | |
Series A-1 | | | 0.01 | | | | 24,760,915 | | | | 24,760,915 | | | | 49,522 | |
New Series B | | | 0.01 | | | | 35,775,880 | | | | 35,775,880 | | | | 21,581 | |
New Series C | | | 0.01 | | | | 24,404,770 | | | | 24,404,770 | | | | 70,075 | |
New Series D | | | 0.01 | | | | 23,888,640 | | | | 23,888,640 | | | | 165,000 | |
| | | | | | | 177,388,425 | | | | 177,388,425 | | | | 325,952 | |
|
| | | | | | | | | | | | | | |
| Convertible Preferred Stock | | Par Value | | Authorized shares | | Outstanding and Issued
shares | | Liquidation Preference |
| Series A | | $ | 0.01 |
| | 68,558,220 |
| | 68,558,220 |
| | $ | 19,774 |
|
| Series A-1 | | 0.01 |
| | 24,760,915 |
| | 24,760,915 |
| | 49,522 |
|
| Series B | | 0.01 |
| | 35,775,880 |
| | 35,775,880 |
| | 21,581 |
|
| Series C | | 0.01 |
| | 24,404,770 |
| | 24,404,770 |
| | 70,075 |
|
| Series D | | 0.01 |
| | 23,888,640 |
| | 23,888,640 |
| | 165,000 |
|
| Series E-1 | | 0.01 |
| | 35,544,141 |
| | — |
| | — |
|
| Series E-2 | | 0.01 |
| | 16,858,078 |
| | — |
| | — |
|
| Series F | | 0.01 |
| | 177,720,707 |
| | 3 |
| | — |
|
| Series G | | 0.01 |
| | 37,249,497 |
| | 37,249,497 |
| | 50,000 |
|
| | | |
| | 444,760,848 |
| | 214,637,925 |
| | $ | 375,952 |
|
The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Dividends on shares of the
New Series A,
New Series B,
New Series C,
and New Series D,
Series E-1, Series E-2, Series F, and Series G convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the
New Series A,
New Series B,
New Series C,
and New Series D,
Series E-1, Series E-2 Series F and Series G convertible preferred stock have been
paid or set aside for payment to the New Series A, New Series B, New Series C, and New Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights. To date, no dividends have been declared on any of the PMI’s preferred stock or common stock.
Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an Initial Public Offering (“IPO”) that values Prosper at least at $2 billion and that results in aggregate proceeds to Prosper of at least $100 million or (ii) upon a written request from the holders of at least 60% of the voting power of the outstanding preferred stock (on an as-converted basis) including at least 14% of the voting power of the outstanding Series A-1 convertible preferred
stock.stock ; (ii) the Series D shall not be converted without at least 60% of the voting power of the outstanding Series D; (iii) the Series E-1 and Series E-2 shall not be converted without at least 60% of the voting power of the outstanding Series E-1 and Series E-2, voting together as a single class; (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F, and (v) the shares of Series G Preferred Stock will not be automatically converted unless the holders of at least 60% of the outstanding shares of Series G Preferred Stock approve such conversion. In addition, if a holder of the
New Series A convertible preferred stock has converted any of the
New Series A convertible preferred stock, then all of such holder’s shares of Series A-1 convertible preferred stock also will be converted upon a liquidation event. In lieu of any fractional shares of common stock to which a holder would otherwise be entitled, PMI shall pay such holder cash in an amount equal to the fair market value of such fractional shares, as determined by its Board of Directors. At present, the
New Series A,
New Series B,
New Series C,
Series D, Series E-1, Series E-2 and the
New Series
DF convertible preferred stock converts into PMI common stock at a 1:1 ratio while the Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio.
The conversion price of the Series G convertible preferred stock shall be reduced to a number equal to the Series G Preferred Stock original issuance price divided by the quotient obtained by dividing the Series G "true up" amount by the total number of Series G Preferred Stock issued as of the Series G closing date. The Series G "true up" amount means the aggregate number of shares of Series G Preferred Stock that would have been issued to the purchasers of the Series G Preferred Stock on the Series G closing date, if warrants to purchase shares of Series E-2 Preferred Stock or Series F Preferred Stock that were exercisable or exercised as of the "true up" time (end of vesting period) were exercisable or exercised as of the Series G Preferred Stock closing date.
PMI’s convertible preferred stock has been classified as temporary equity on the Consolidated Balance Sheets. The preferred stock is not redeemable; however,
upon in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive
itstheir liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of New Series A, NewE-1, Series B, NewE-2 and Series C and New Series DF convertible preferred stock is entitled to receive on a pari passu basis, prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A, Series B, Series C, Series D, Series G and Series A-1 preferred stock or common stock, an amount per share for (i) each share of New Series A, New Series B, New Series C and New Series DE-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, (ii) each share of Series E-2 convertible preferred stock equal to the sum of two-thirds the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (iii) each share of Series F convertible preferred stock equal to the sum of two-thirds of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of NewSeries E-1, Series E-2, and Series F convertible preferred stock, each holder of Series A, New Series B, New Series C and New Series D, Series E-2, Series F and Series G convertible preferred stock is entitled to receive, on a pari passu basis, prior to and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 preferred stock or common stock, (i) an amount per share for each share of Series E-2 and Series F convertible preferred stock equal to the sum of one-third of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (ii) an amount per share for each share of Series A, Series B, Series C, Series D and Series G convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of New Series A, New Series B, New Series C, and New Series D, convertible preferred stockSeries E-1, Series E-2, Series F, Series G and Series A-1 preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of New Series A preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the New Series A preferred stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum aggregate amount per share of New Series A convertible preferred stock which the holders of New Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the New Series A convertible preferred stock.
At present, the liquidation preferences are equal to $0.29 per share for the New Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the New Series B convertible preferred stock, $2.87 per share for the New Series C convertible preferred stock, and $6.91 per share for the New Series D convertible preferred stock, $0.84 per share for the Series E-1 convertible preferred stock, $0.84 per share for the Series E-2 convertible preferred stock, $0.84 per share for the Series F convertible preferred stock and $1.34 per share for the Series G convertible preferred stock. Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the bylaws of PMI. Convertible Preferred Stock Warrant Liability
Series E-1 Warrants
In connection with the Settlement and Release Agreement dated November 17, 2016 among PMI, PFL and Colchis, on December 16, 2016, PMI issued the First Series E-1 Warrant. The Second Series E-1 Warrant for an additional 15,277,006 shares of Series E-1 convertible preferred stock was granted on the signing of the Consortium Purchase Agreement on February 27, 2017. The warrants expire ten years from the date of issuance. For the year ended December 31, 2017, Prosper recognized $17.8 million of expense from the re-measurement of the fair value of the warrants. The expense is recorded through change in fair value of convertible stock warrants in the consolidated statement of operations.
To determine the fair value of the Series E-1 Convertible Preferred Stock Warrants, the Company first determined the value of a share of a Series E-1 convertible preferred stock. To determine the fair value of the convertible preferred stock, the Company first derived the business enterprise value (“BEV”) of the Company using a variety of valuation methods, including recent transactions in the Company's stock, discounted cash flow models and market based methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the option pricing method ("OPM") was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The per share value for the Series E-1 convertible preferred stock was utilized as an input to the Black-Scholes option pricing model to determine the fair value of the Series E-1 Convertible Stock Warrants.
The Company determined the fair value of the outstanding Series E-1 Convertible Preferred Stock Warrants utilizing the following assumptions as of the following dates:
|
| | | | |
| | | December 31, 2017 | | December 31, 2016 |
| Volatility | | 40.0% | | 40.0% |
| Risk-free interest rate | | 2.38% | | 2.45% |
| Remaining contractual term (in years) | | 9.04 | | 9.96 |
| Dividend yield | | 0% | | 0% |
The above assumptions were determined as follows:
Volatility: The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield in effect as of December 31, 2017, and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant.
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
Series F Warrants
In connection with the Consortium Purchase Agreement (as described in Note 15), PMI issued warrants to purchase up to 177,720,706 of PMI's Series F convertible preferred stock at $0.01 per share. For the year ended December 31, 2017, Prosper recognized $11.3 million of expense from the re-measurement of the fair value of the warrants. The expense is recorded through other expenses in the condensed consolidated statement of operations. To determine the fair value of the Series F Convertible Preferred Stock Warrants, the Company first determined the value of a share of a Series F convertible preferred stock.
To determine the fair value of the Series F Convertible Preferred Stock Warrants, the Company first derived the BEV of the Company using a combination of methods, as deemed appropriate under the circumstances applicable at the valuation
date, including recent transactions of the Company's stock, discounted cash flow models and market based methods. Once the Company determined an estimated BEV, the OPM was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The per share value for the Series F convertible preferred stock warrants was utilized as an input to the the Black-Scholes option pricing model to determine the fair value of the Series F Convertible Preferred Stock Warrant.
The Company determined the fair value of the outstanding Series F Convertible Preferred Stock warrants utilizing the following assumptions as of December 31, 2017:
|
| | |
| | December 31, 2017 |
| Volatility | | 40.0% |
| Risk-free interest rate | | 2.38% |
| Remaining contractual term (in years) | | 9.16 |
| Dividend yield | | 0% |
The above assumptions were determined as follows:
Volatility: The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield in effect as of the period end date and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant.
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
The combined activity of the Convertible Preferred Stock Warrant Liability is as follows (in thousands):
|
| | | | |
| Balance at January 1, 2016 | | $ | — |
|
| Warrants vested | | 21,704 |
|
| Change in Fair Value | | 7 |
|
| Balance at December 31, 2016 | | 21,711 |
|
| Warrants Vested | | 65,516 |
|
| Change in Fair Value | | 29,139 |
|
| Balance at December 31, 2017 | | $ | 116,366 |
|
PMI, through its amended and restated certificate of incorporation, is the sole issuer of common stock and related options, RSUs and warrants. On May 15, 2014,February 16, 2016, PMI amended and restated its certificateCertificate of incorporationIncorporation to, among other things, effect ana 5-for-1 forward stock split. On September 20, 2017, PMI further amended its Amended and Restated Certificate of Incorporation to increase in the number of authorized shares of stock.common stock authorized for issuance. The total number of shares of stock which PMI has the authority to issue is 454,989,825,1,069,760,848, consisting of 270,326,075625,000,000 shares of common stock, $0.01 par value per share, and 184,663,750444,760,848 shares of preferred stock, $0.01$0.01 par value per share,
69,340,760 of which are designated as New Series A preferred stock, 25,585,910 of which are designated as Series A-1 preferred stock, 41,443,670 of which are designated New Series B preferred stock, 24,404,770 of which are designated as Series C preferred stock, and 23,888,640 of which are designated New Series D preferred stock.share. As of December 31, 2015, 70,367,4252017, 71,226,934 shares of common stock were issued and 69,431,49070,290,999 shares of common stock were outstanding. As of December 31, 2014, 72,243,500 2016, 70,843,044
shares of common stock were issued and 69,907,109 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held. Also,on October 29, 2013, PMI amended and restated its certificate of incorporation to effect a 1-for-10 reverse stock split. During 2015, PMI repurchased 4,225,490 shares of common stock from certain employees at a price equal to
6.91$6.91 per share for an aggregate purchase price of $29.2 million. As the purchase price exceeded the fair value of common stock at the time of
the repurchase, Prosper recognized compensation costs of $6.2 million of which $0.33 million is recorded in Origination and Servicing, $0.07 million in Sales and Marketing and $5.7 million in General and Administrative on the Consolidated Statements of Operations. As part of the transactions, PMI repurchased 3,607,095 shares for a total of $24.9 million from Prosper’s executive officers.
Common Stock Issued upon Exercise of Stock Options
During the year ended December 31,
20152017 and
2014,December 31, 2016, PMI issued
3,211,935606,284 and
4,624,335466,300 shares of common stock, respectively, upon the exercise of options for cash proceeds of
$0.88$0.1 million and
$0.89$0.3 million,
respectively, of which 76,045 and 4,328,585 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 schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the holder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At December 31,
20152017 and
2014,2016, there were
9,806,17011,565 and
20,571,3451,126,210 shares respectively of restricted stock outstanding that remain unvested and subject to PMI’s right of repurchase.
Common Stock Issued upon Exercise of Warrants For the year ended December 31,
20152017 and
2014,December 31, 2016, PMI issued
207,06530,615 and
584,61556,480 shares of common stock upon the exercise of warrants, for
$0.61$0.34 per share and
$0.39$0.38 per share respectively.
14.
| Stock-based Compensation
|
In 2005, PMI’s stockholders approved the adoption of the 2005 Stock Plan. On December 1, 2010, PMI’s stockholders approved the adoption of the
12. Stock-based Compensation
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2, which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, the "2015 Plan"). During the year ended December 31,In March 2015, the 2005 Plan expired, and PMI’s stockholders approvedexcept that any awards granted under the adoption of the 2015 Equity Incentive2005 Plan (the “2015 Plan”).prior to its expiration remain in effect pursuant to their terms. As of December 31, 2015,2017, under the 2015 Plan, options to purchase up to 13,194,76562,489,358 shares of PMI's common stock are reserved and may be granted to employees, directors, and consultants by PMI’s Board of Directors and stockholders to promote the success of Prosper’s business. Options generally vest 25% one year from the vesting commencement date and 1/4848tthh per month thereafter or vest 50% two years from the vesting commencement date and 1/48 per month thereafter. thereafter or vest 1/36th per month from the vesting commencement date. In no event are options exercisable more than ten years after the date of grant. The number of options, restricted stock units and amounts per share reflects a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Stock Option Reprice
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “2016 Reprice”) authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that had exercise prices above the current fair market value of PMI’s common stock. The repricing was effected on May 16, 2016 for eligible directors and employees located in the United States and on May 19, 2016 for eligible employees located in Israel.
On March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2017 Reprice” and together with the 2016 Reprice, the "Repricings"), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that had exercise prices above the current fair market value of PMI’s common stock. The 2017 Reprice was effected on March 17, 2017 for eligible directors and employees. Prosper believes that the Repricings will encourage the continued service of valued employees and directors, and motivate them to perform at high
levels, both of which are critical to Prosper’s continued success. Prosper incurred additional stock based compensation charges as a result of the Repricings. The financial statement impact of the above Repricings was $1.9 million and $2.2 million in the years ended December 31, 2017 and December 31, 2016, respectively, as well as $1.3 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 1.5 years.
Early Exercised Stock Options
With the approval
The balance of its Board of Directors, PMI allows certain employees and directors to exercise stock options granted under the 2005 Plan prior to vesting. The unvested shares are subject to a repurchase right held by PMI at the original exercise price. Early exercises of options are not deemed to be substantive exercises for accounting purposes and therefore, amounts received for early exercises are initially recorded in repurchase liability for unvested restricted stock awards which is included in Other Liabilities on the Consolidated Balance Sheets. Such amounts are reclassified to common stock and additional paid-in capital as the underlying shares vest. The activity of options that were early exercised under the 2005 Plan follow for the years below: | | Early exercised options, unvested | | | Weighted average exercise price | | | Weighted Average Contractual Term (in years) | | | Aggregate Intrinsic Value (in thousands) | |
Balance as of January 1, 2014 | | | 27,970,670 | | | $ | 0.02 | | | | | | | | | |
Exercise of non-vested stock options | | | 4,328,585 | | | | 0.19 | | | | | | | | | |
Repurchase of restricted stock | | | (909,465 | ) | | | 0.02 | | | | | | | | | |
Restricted stock vested | | | (10,828,445 | ) | | | 0.03 | | | | | | | | | |
Balance as of December 31, 2014 | | | 20,561,345 | | | | 0.05 | | | | | | | | | |
Exercise of non-vested stock options | | | 76,045 | | | | 1.11 | | | | | | | | | |
Repurchase of restricted stock | | | (1,493,775 | ) | | | 0.10 | | | | | | | | | |
Restricted stock vested | | | (9,337,445 | ) | | | 0.05 | | | | | | | | | |
Balance as of December 31, 2015 | | | 9,806,170 | | | | 0.05 | | | | 1.58 | | | $ | 54,620 | |
Options expected to vest | | | 9,614,920 | | | $ | 0.05 | | | | 1.58 | | | $ | 53,555 | |
Additional information regarding the unvested early exercised stock options outstanding as of
December 31, 20152017 is as follows: | | Options Outstanding | |
Range of Exercise Prices | | Number Outstanding | | | Weighted –Avg. Remaining Life | | | Weighted –Avg. Exercise Price | |
$0.02 | | | 9,116,670 | | | | 1.56 | | | $ | 0.02 | |
0.11 | | | 511,180 | | | | 1.69 | | | | 0.11 | |
1.13 | | | 165,820 | | | | 2.58 | | | | 1.13 | |
3.62 | | | 12,500 | | | | 3.17 | | | | 3.62 | |
$0.02 - $3.62 | | | 9,806,170 | | | | 1.58 | | | $ | 0.05 | |
Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized as follows for the years below:
| | Options Issued and Outstanding | | | Weighted- Average Exercise Price | | | Weighted Average Contractual Term (in years) | | | Aggregate Intrinsic Value (in thousands) | |
Balance as of January 1, 2014 | | | 4,474,880 | | | $ | 0.29 | | | | | | | | | |
Options granted | | | 26,438,815 | | | $ | 0.35 | | | | | | | | | |
Options exercised – vested | | | (295,750 | ) | | $ | 0.26 | | | | | | | | | |
Options exercised – nonvested | | | (4,328,585 | ) | | $ | 0.19 | | | | | | | | | |
Options forefeited | | | (1,314,370 | ) | | $ | 0.36 | | | | | | | | | |
Balance as of December 31, 2014 | | | 24,974,990 | | | $ | 0.37 | | | | | | | | | |
Options granted | | | 23,422,230 | | | $ | 4.51 | | | | | | | | | |
Options exercised – vested | | | (3,135,890 | ) | | $ | 0.25 | | | | | | | | | |
Options exercised – nonvested | | | (76,045 | ) | | $ | 1.11 | | | | | | | | | |
Options forfeited | | | (4,759,680 | ) | | $ | 1.52 | | | | | | | | | |
Balance as of December 31, 2015 | | | 40,425,605 | | | $ | 2.64 | | | | 8.80 | | | $ | 118,331 | |
Options vested and expected to vest as of December 31, 2015 | | | 34,959,394 | | | $ | 2.64 | | | | 8.80 | | | $ | 102,331 | |
Options vested and exercisable at December 31, 2015 | | | 28,022,165 | | | $ | 1.67 | | | | 8.45 | | | $ | 109,395 | |
|
| | | | | | | | |
| | Options Issued and Outstanding | | Weighted- Average Exercise Price | | Weighted Average Contractual Term (in years) |
| Balance as of January 1, 2017 | 41,395,719 |
| | $ | 1.48 |
| | |
| Options granted | 37,964,549 |
| | $ | 0.28 |
| | |
| Options exercised – vested | (606,284 | ) | | $ | 0.16 |
| | |
| Options forfeited | (20,123,445 | ) | | $ | 0.74 |
| | |
| Option expirations | (2,500 | ) | | $ | 0.22 |
| | |
| Balance as of December 31, 2017 | 58,628,039 |
| | $ | 0.25 |
| | 8.62 |
| Options vested and expected to vest as of December 31, 2017 | 50,670,325 |
| | $ | 0.25 |
| | 8.62 |
| Options vested and exercisable at December 31, 2017 | 27,189,177 |
| | $ | 0.20 |
| | 7.99 |
For the year ended December 31,
2015,2017, we granted stock options to purchase
23,422,23037,964,549 shares of common stock at a weighted average grant date fair value of
$5.14$0.28 per share.
Other Information Regarding Stock Options
Additional information regarding common stock options outstanding as of December 31,
20152017 is as follows:
| | Options Outstanding | | | Options Vested and Exercisable | |
| | | | | | Weighted – | | | Weighted – | | | | | | | Weighted - | |
Range of | | | | | | Avg. | | | Avg. | | | | | | | Avg. | |
Exercise | | Number | | | Remaining | | | Exercise | | | Number | | | Exercise | |
Prices | | Outstanding | | | Life | | | Price | | | Vested | | | Price | |
$ | 0.02 - $0.20 | | | 12,742,705 | | | | 8.08 | | | $ | 0.11 | | | | 12,742,705 | | | $ | 0.11 | |
| 0.21 - 0.99 | | | 901,860 | | | | 5.31 | | | | 0.33 | | | | 892,410 | | | | 0.33 | |
| 1.00 - 2.00 | | | 4,694,560 | | | | 8.54 | | | | 1.13 | | | | 2,856,730 | | | | 1.13 | |
| 2.01 - 4.00 | | | 11,530,320 | | | | 9.13 | | | | 3.62 | | | | 11,530,320 | | | | 3.62 | |
| 4.01 - 5.52 | | | 10,556,160 | | | | 9.73 | | | | 5.50 | | | | - | | | | - | |
$ | 0.02 - $5.52 | | | 40,425,605 | | | | 8.80 | | | $ | 2.64 | | | | 28,022,165 | | | $ | 1.67 | |
|
| | | | | | | | | | | | | | | | | |
| | | | Options Outstanding | | Options Vested and Exercisable |
| | Range of Exercise Prices | | Number Outstanding | | Weighted – Avg. Remaining Life | | Weighted – Avg. Exercise Price | | Number Vested | | Weighted - Avg. Exercise Price |
| $ | 0.02 - 0.20 | | 4,768,290 |
| | 6.04 | | $ | 0.11 |
| | 4,768,290 |
| | $ | 0.11 |
|
| | 0.21 - 0.50 | | 46,316,491 |
| | 8.69 | | 0.22 |
| | 22,398,767 |
| | 0.22 |
|
| | 0.51 - 1.13 | | 7,543,258 |
| | 9.84 | | 0.53 |
| | 22,120 |
| | 1.13 |
|
| $ | 0.02 - 1.13 | | 58,628,039 |
| | 8.62 | | $ | 0.25 |
| | 27,189,177 |
| | $ | 0.20 |
|
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires Prosper to make assumptions and judgments about the variables used in the calculation, including the fair value of PMI’s common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of PMI’s common stock, a risk-free interest rate, and expected dividends. Given the absence of a publicly traded market, Prosper considered numerous objective and subjective factors to determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) the prices for PMI’s preferred stock sold to outside investors; (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock; (iv) the lack of marketability of PMI’s common stock; (v) developments in the business; (vi) secondary transactions of PMI’s common and
preferred shares and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not
publicallypublicly traded volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of Prosper. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Prosper uses an expected dividend yield of zero as it does not anticipate paying any dividends in the foreseeable future.
Prosper also estimates forfeitures of unvested stock options. Expected forfeitures are based on Prosper’s historical experience. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for
stock options that do not vest.
The fair value of PMI’s stock option awards for the year ended December 31,
20152017, 2016 and
20142015 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
| | Year ended | |
| | December 31, | |
| | 2015 | | | 2014 | |
Volatility of common stock | | | 55.69 | % | | | 68.28 | % |
Risk-free interest rate | | | 1.74 | % | | | 1.79 | % |
Expected life | | 6.0 years | | | 5.7 years | |
Dividend yield | | | 0 | % | | | 0 | % |
Under the 2005 Stock Plan certain executive officers of PMI were granted performance-based stock options during 2014. The vesting of these performance-based stock options was contingent upon the achievement of certain revenue targets or target ratios of marketing expenditures to revenues for the year ended December 31, 2014.
The fair value of the performance-based stock options was estimated on the date of grant using the Black-Scholes option valuation model. Prosper used the following assumptions in measuring the fair value of these performance-based stock options: a 66% rate for expected volatility, 0% rate for expected dividends, 5.23 years for the expected term and a 1.66% risk-free rate.
|
| | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Volatility of common stock | 49.24 | % | | 50.88 | % | | 55.69 | % |
| Risk-free interest rate | 2.12 | % | | 1.29 | % | | 1.74 | % |
| Expected life | 6.0 years |
| | 5.8 years |
| | 6.0 years |
|
| Dividend yield | — | % | | — | % | | — | % |
PMI granted 10,164,480 performance-based stock options with an exercise price of $0.11 per share during 2014. The contractual term of these options is 10 years. Since the performance targets were achieved, 9,624,480 performance-based stock options became fully vested and 540,000 performance-based stock options were forfeited on the termination of employment. The aggregate expense recognized during 2014 related to these performance-based stock options was $587 thousand. PMI did not grant any performance-based options in
2015.2015, 2016, or 2017.
Restricted Stock Unit Activity
During the
yearyears ended December 31, 2015,
2016 and 2017, PMI began granting restricted stock units (“RSUs”) to certain employees
that are subject to three-year vesting terms or a four yearfour-year vesting terms and the occurrence of a liquidity event.The aggregate fair value of the RSUs granted was
$13.3 million.$3 thousand. The following table summarizes the activities for PMI’s RSUs during
2015:2017: | | Number of Shares | | | Weighted-Average Grant Date Fair Value | |
Unvested at January 1, 2015 | | | - | | | | | |
Granted | | | 2,407,060 | | | $ | 5.52 | |
Vested | | | (190,517 | ) | | $ | 5.52 | |
Forfeited | | | (381,033 | ) | | | | |
Unvested - December 31, 2015 | | | 1,835,510 | | | $ | 5.52 | |
|
| | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Unvested at January 1, 2017 | 1,995,159 |
| | 2.16 |
|
| Granted | 12,500 |
| | 0.22 |
|
| Vested | — |
| | — |
|
| Forfeited | (608,479 | ) | | 2.18 |
|
| Unvested - December 31, 2017 | 1,399,180 |
| | 2.16 |
|
The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s consolidated statements of operations during the periods presented (in thousands):
| | December 31, | |
| | 2015 | | | 2014 | |
Origination and Servicing | | $ | 1,231 | | | $ | 104 | |
Sales and Marketing | | | 2,561 | | | | 767 | |
General and Administrative | | | 9,219 | | | | 1,150 | |
Total stock based compensation | | $ | 13,011 | | | $ | 2,021 | |
|
| | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
| Origination and Servicing | $ | 996 |
| | $ | 2,004 |
| | $ | 1,231 |
|
| Sales and Marketing | 553 |
| | 2,914 |
| | 2,561 |
|
| General and Administrative | 10,689 |
| | 14,824 |
| | 9,219 |
|
| Restructuring | — |
| | 45 |
| | — |
|
| Total stock based compensation | $ | 12,238 |
| | $ | 19,787 |
| | $ | 13,011 |
|
During the year ended December 31,
20152017, 2016 and
2014,2015, Prosper capitalized
$623$294 thousand, $718 thousand and
$21$623 thousand, respectively, of stock-based compensation as internal use software and website development costs.
Management modified or accelerated the vesting terms for certain employee options, which resulted in an additional $0.1 million and $0.6 million of stock-based compensation expense for the year ended December 31, 2015 and 2014, respectively. As of December 31,
2015,2017, the unamortized stock-based compensation expense related to Prosper employees’ unvested stock-based awards was approximately
$46.3$13.8 million, which will be recognized over the remaining weighted-average vesting period of approximately
3.21.8 years.
13. Restructuring
On May 3, 2016, Prosper adopted a strategic restructuring of its business. This restructuring was intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location. As a result of this restructuring, Prosper terminated 167 employees across all locations. In December 2016, Prosper shut down its Tel Aviv location, resulting in the termination of 31 employees.
In addition to the employment costs associated with the restructuring, Prosper also subleased, or may sublease in the future, space in our existing office space that is no longer needed due to the reduction in headcount. Other than accretion and changes in sublease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.
The following table summarizes the activities related to Prosper's restructuring plan (in thousands):
|
| | | | | | | | | | | |
| | Severance Related | | Facilities Related | | Total |
| Balance January 1, 2016 | — |
| | — |
| | — |
|
| Adjustments to expense | 7,256 |
| | 8,735 |
| | 15,991 |
|
| Transfer from deferred rent | — |
| | 764 |
| | 764 |
|
| Less: Cash paid | (6,659 | ) | | (3,447 | ) | | (10,106 | ) |
| Balance December 31, 2016 | 597 |
| | 6,052 |
| | 6,649 |
|
| Adjustments to expense | (13 | ) | | 1,227 |
| | 1,214 |
|
| Sublease cash receipts | — |
| | 210 |
| | 210 |
|
| Less: Cash paid | (584 | ) | | (4,245 | ) | | (4,829 | ) |
| Balance December 31, 2017 | $ | — |
| | $ | 3,244 |
| | $ | 3,244 |
|
14. Income Taxes
On December 22, 2017, tax reform legislation (“the Act”) received its final required approval. The Act includes a broad range of tax reform proposals affecting businesses, including corporate tax rates, business deductions, and international tax provisions. Many of these provisions significantly differ from current US tax law, resulting in financial reporting implications. Some of the changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, immediate expensing of certain depreciable assets acquired and placed in service after September 27, 2017, and uncertainties around the tax accounting for debt instrument income under IRC Section 451.
Subsequent to the enactment of the Act, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing Treasury guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the current period net operating loss carryforwards, net servicing rights and immediate expensing of certain depreciable assets acquired and placed in service after
September 27, 2017 to be the most significant provisional items. Upon further guidance from Treasury and the IRS around certain computations within deferred taxes, we will update our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.
The components of income tax are as follows (in thousands):
| | Year Ended December 31, | |
| | 2015 | | | 2014 | |
Current: | | | | | | | | |
Federal | | $ | — | | | $ | — | |
State | | | — | | | | — | |
Foreign | | | (5 | ) | | | — | |
Total Current Income Tax (Benefit) | | | (5 | ) | | | — | |
Deferred: | | | | | | | | |
Federal | | | 320 | | | | — | |
State | | | 25 | | | | — | |
Foreign | | | — | | | | — | |
Total Deferred Income Tax | | | 345 | | | | — | |
Total Income Tax | | $ | 340 | | | $ | — | |
Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2014, Prosper identified errors that affected the effective tax rate reconciliation and our deferred income tax tables as of December 31, 2014. The errors were the result of treating servicing assets and liabilities as permanent differences rather than as temporary differences. The effective tax rate reconciliation and deferred income tax tables below for the year ended December 31, 2014 have been revised to reflect the correction of the errors. There was no effect on Prosper's effective tax rate due to the full valuation allowance and management does not believe these errors were material to the financial statements taken as a whole.
Prosper did not have any current or deferred federal or state income tax expense for the year ended December 31, 2014.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | — |
| | $ | — |
| | $ | — |
|
| State | — |
| | — |
| | — |
|
| Foreign | — |
| | 124 |
| | (5 | ) |
| Total Current Income Tax (Benefit) | — |
| | 124 |
| | (5 | ) |
| Deferred: | |
| | |
| | |
| Federal | (579 | ) | | 394 |
| | 320 |
|
| State | 37 |
| | 28 |
| | 25 |
|
| Foreign | 34 |
| | — |
| | — |
|
| Total Deferred Income Tax | (508 | ) | | 422 |
| | 345 |
|
| Total Income Tax | $ | (508 | ) | | $ | 546 |
| | $ | 340 |
|
The income tax expense (benefit) differed from the amount computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of the following:
| | Year Ended December 31, | |
| | 2015 | | | 2014 | |
Federal tax at statutory rate | | | 34 | % | | | 34 | % |
State tax at statutory rate (net of federal benefit) | | | 12 | % | | | 1 | % |
Change to Uncertain Tax Position | | | 10 | % | | | 0 | % |
Permanent Items | | | (— | )% | | | (11 | )% |
Incentive Stock Options | | | (9 | )% | | | (9 | )% |
Acquisition Related Costs | | | (3 | )% | | | 0 | % |
Change in valuation allowance | | | (46 | )% | | | (25 | )% |
Credits and Reserves | | | (— | )% | | | 9 | % |
Other | | | 1 | % | | | 1 | % |
| | | (1 | )% | | | 0 | % |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Federal tax at statutory rate | 34 | % | | 34 | % | | 34 | % |
| State tax at statutory rate (net of federal benefit) | 7 | % | | 7 | % | | 12 | % |
| Change to Uncertain Tax Position | — | % | | — | % | | 10 | % |
| Permanent Items | — | % | | (1 | )% | | — | % |
Change in U.S. Tax Rate Applied to Deferred Taxes
| (31 | )% | | — | % | | — | % |
| Incentive Stock Options | (1 | )% | | (2 | )% | | (9 | )% |
| Acquisition Related Costs | — | % | | — | % | | (3 | )% |
| Preferred Stock Warrants | (21 | )% | | — | % | | — | % |
| Change in valuation allowance | 11 | % | | (37 | )% | | (46 | )% |
| Credits and Reserves | — | % | | — | % | | — | % |
| Other | 1 | % | | (1 | )% | | 1 | % |
| | — | % | | — | % | | (1 | )% |
Temporary items that give rise to significant portions of deferred tax assets and liabilities at December 31,
20152017 and
20142016 are as follows (in thousands):
| | December 31, | |
| | 2015 | | | 2014 | |
Net operating loss carry forwards | | $ | 44,632 | | | $ | 24,756 | |
Research & other credits | | | 502 | | | | 421 | |
Settlement liability | | | 2,466 | | | | 2,964 | |
Stock compensation | | | 3,193 | | | | 344 | |
Accrued liabilities | | | 5,794 | | | | 2,320 | |
Other | | | 126 | | | | 45 | |
Deferred tax assets | | | 56,713 | | | | 30,850 | |
| | | | | | | | |
Fair value of loans | | | (1,406 | ) | | | (1,160 | ) |
Net servicing rights | | | (5,752 | ) | | | (1,203 | ) |
Fixed assets | | | (721 | ) | | | - | |
Intangible assets | | | (4,246 | ) | | | - | |
Deferred tax liabilities | | | (12,125 | ) | | | (2,363 | ) |
Net deferred tax assets | | | 44,588 | | | | 28,487 | |
Valuation allowance | | | (44,933 | ) | | | (28,487 | ) |
Net deferred tax liabilities | | $ | (345 | ) | | $ | — | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Net operating loss carry forwards | $ | 74,890 |
| | $ | 85,759 |
|
| Research & other credits | 725 |
| | 626 |
|
| Settlement liability | — |
| | 1,230 |
|
| Stock compensation | 7,653 |
| | 7,300 |
|
| Accrued liabilities | 3,028 |
| | 4,884 |
|
| Restructuring liability | 974 |
| | 2,424 |
|
| Other | 21 |
| | 62 |
|
| Deferred tax assets | 87,291 |
| | 102,285 |
|
| Fair value of loans | (493 | ) | | (1,045 | ) |
| Net servicing rights | (3,500 | ) | | (4,895 | ) |
| Fixed assets | (73 | ) | | (1,226 | ) |
| Intangible assets | (2,357 | ) | | (3,226 | ) |
| Foreign Earnings | (187 | ) | | (270 | ) |
| Deferred tax liabilities | (6,610 | ) | | (10,662 | ) |
| Net deferred tax assets | 80,681 |
| | 91,623 |
|
| Valuation allowance | (80,906 | ) | | (92,389 | ) |
| Net deferred tax liabilities | $ | (225 | ) | | $ | (766 | ) |
Prosper has determined that its net deferred tax asset did not satisfy the recognition criteria set forth in ASC Topic 740 and, accordingly, established a full valuation allowance against the net deferred tax asset. The valuation allowance as of December 31, 2015, increased2017, decreased by $16.4$11.5 million to ($44.9)$80.9 million from ($28.5)$92.4 million in the prior fiscal year, an increase of 58%.year. Under ASC 740,Accounting for Income Taxes(“ (“ASC Topic 740”), a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The amount of valuation allowance would be based upon management’s best estimate of Prosper’s ability to realize the net deferred tax assets. A valuation allowance can subsequently be reduced when management believes that the assets are realizable on a more-likely-than-not basis. The Internal Revenue Code imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation. Accordingly, Prosper’s ability to utilize net operating losses and credit carryforwards may be limited in the future as the result of such an “ownership change.”
Prosper files Federal and various state income tax returns. Prosper has net operating loss carryforwards for both federal and state income tax purposes of approximately
$144.4$282.2 million and
$161.6$305.4 million respectively as of December 31,
2015,2017, available to reduce future income subject to income taxes.
Prosper has $10.8 million of net operating losses that will be credited to additional paid in capital when realized related to equity compensation. The federal net operating loss carryforwards will begin to expire in 2025. The state net operating loss carryforwards
will begin to expirebegan expiring in
2016.2017. Prosper has federal and California research and development tax credits of approximately
$429$428 thousand and $450 thousand, respectively. The federal research credits will begin to expire in
20252034 and the California research credits have no expiration date. Prosper also has California enterprise zone credits of $1.1 million that will begin to expire in 2024.
Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2014, Prosper identified an error that affected the disclosure of Unrecognized Tax Benefits as of December 31, 2014. The error was the result of presenting a portion of the unrecognized tax benefit gross of the application of the applicable tax rate. The amount of unrecognized tax benefits as of January 1, 2014 has been revised to reflect the correction of the error. All unrecognized tax benefits are netted against deferred tax assets with a full valuation allowance. Management does not believe this error was material to the financial statements taken as a whole.
The following table summarizes Prosper’s activity related to its unrecognized tax benefits (in thousands):
| | December 31, | | | December 31, | |
| | 2015 | | | 2014 | |
Balance at January 1, | | $ | 4,927 | | | $ | 4,927 | |
Decrease related to current year tax position | | | (4,014 | ) | | | - | |
Balance at December 31, | | $ | 913 | | | $ | 4,927 | |
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Balance at January 1, | $ | 913 |
| | $ | 913 |
|
| Decrease related to current year tax position | (801 | ) | | — |
|
| Balance at December 31, | $ | 112 |
| | $ | 913 |
|
None of the unrecognized tax benefits would affect Prosper’s effective tax rate if these amounts are recognized due to the full valuation allowance.
Prosper’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31,
2015,2017, Prosper has not incurred any interest or penalties.
All tax returns will remain open for examination by the federal and most state taxing authorities for
three3 years and
four4 years, respectively, from the date of utilization of any net operating loss carryforwards or research and development credits.
16.
| Commitments and Contingencies
|
15. Consortium Purchase Agreement
On February 27, 2017, Prosper entered into a series of agreements with a consortium of investors (the "Consortium"), pursuant to which the Consortium has agreed to purchase borrower loans in an aggregate principal amount of up to $5.0 billion (including certain loans purchased by one of the investors prior to the date of the Consortium Agreement). PFL will be obligated to offer for purchase minimum monthly volumes of eligible loans to the Consortium, for the Consortium to elect to purchase.
In connection with the Consortium Purchase Agreement, PMI issued to the Consortium, three warrant certificates to purchase up to an aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share.
The Consortium’s right to exercise the Series F Warrant is subject to monthly vesting during the term of the Consortium Purchase Agreement based upon the volume of loans the Consortium elects to purchase (if any) in each month, subject to certain cure rights such as offering additional loans for sale in subsequent periods. Pursuant to these cure rights, if the Consortium fails to respond to offers for allocation, purchase or funding, the Consortium can take advantage of a designated period of time to cure such failure. There have been no such failures by the Consortium to date. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI, insolvency of PMI or PFL, certain breaches of contract by PMI or PFL that are not cured within a defined cure period and upon the occurrence of certain other events set forth in the Warrant Agreement.
On vesting of the Series F warrants, Prosper records a liability as "Convertible Preferred Stock Warrant Liability" on the Consolidated Balance Sheet at fair value and a corresponding amount as "Fair Value of Warrants Vested on Sale of Borrower Loans" on the Consolidated Statement of Operations. Subsequent changes in the fair value of the vested warrants are recorded in "Other Expenses" on the Consolidated Statement of Operations. Additionally, in connection with the execution of the Consortium Purchase Agreement, certain previously issued rebates were settled by an issuance of vested Series F Convertible Preferred Stock Warrants. The difference in fair value of these warrants over the cash settlement price is recorded in "Change in Fair Value of Convertible Preferred Stock Warrants" on the Consolidated Statement of Operations.
The following represents the loans purchased and warrants vested under the Consortium Purchase Agreement:
|
| | | | | | |
| | Loans Acquired (in thousands) | | Warrants Vested |
| On signing of the Consortium Purchase Agreement | $ | — |
| | 9,830,494 |
|
| Loans Purchased by the Consortium during the year ended December 31, 2017 | 1,826,527 |
| | 65,355,508 |
|
| Total as of December 31, 2017 | $ | 1,826,527 |
| | 75,186,002 |
|
In addition to the $1.8 billion above, the warrants vested on signing of the Consortium Purchase Agreement were issued to settle certain rebates on $0.3 billion of whole loan purchases by members of the Consortium prior to the signing of the Consortium Purchase Agreement. This $0.3 billion also reduces the up to $5.0 billion aggregate amount under the Consortium Purchase Agreement.
16. Commitments and Contingencies
In the normal course of its operations, Prosper becomes involved in various legal actions. Prosper maintains provisions it considers to be adequate for such actions. Prosper does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper's financial condition, results of operations or cash flows.
Future Minimum Lease Payments
Prosper has entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2022 and 2027. Prosper recognized total rental expenses under operating leases of $4.1$4.7 million, $6.9 million and $2.0$4.1 million during the years ended December 31, 2017, 2016 and 2015, respectively. We have subleases related to certain of our operating leases. Income from existing subleases are offset against future minimum rental payments. Sublease income under all operating subleases for the years ended December 31, 2017, 2016and 2014,2015 is $0.4 million, $0, and $0 respectively.Future
The table below presents future minimum rental payments, under thesenet of minimum sublease rentals of $7.1 million, for the remaining terms of the operating leases (in thousands):
|
| | | |
| 2018 | $ | 4,529 |
|
| 2019 | 5,046 |
|
| 2020 | 5,534 |
|
| 2021 | 5,492 |
|
| 2022 | 5,377 |
|
| Thereafter | 5,602 |
|
| Total | $ | 31,580 |
|
The payments in the above table include amounts that have been accrued for as
part of
the restructuring liability in Note 13 Restructuring. Restructuring accrual balances related to operating facility leases were $3.2 million at December 31,
2015 are as follows (in thousands):2017. 2016 | | $ | 6,352 | |
2017 | | | 9,408 | |
2018 | | | 10,199 | |
2019 | | | 10,556 | |
2020 | | | 11,065 | |
Thereafter | | | 43,122 | |
Total future operating lease obligations | | $ | 90,702 | |
Operating Commitments
Prosper
amended and restated has entered into an agreement with WebBank, under which all Borrower Loans originated through the platformmarketplace are made by WebBank under its bank charter. The arrangement allowsPursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for Borrower Loans to be offered to borrowers at uniform nationwide terms. the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the greater of a monthly minimum fee or a fee calculated based on a certain percentage of monthly Borrower Loan origination volume. The minimum annual fee for the year ended December 31, 20162018 is $1.4$1.7 million. The minimum fee is $0.9 million in 2019. Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash and Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At December 31, 2017 the Company was in compliance with the covenant.
Loan Purchase Commitments
Prosper
has entered into an agreement with WebBank to purchase $32.7$29.3 million of Borrower Loans that WebBank originated during the last two business daydays of fiscal 2015the year ended December 31, 2017 and the first business day of fiscal 2016. the quarter ending March 31, 2018. Prosper will purchase these Borrower Loans within the first twothree business days of fiscal 2016.the quarter ending March 31, 2018.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the
outstanding balances of the Borrower Loans sold through the Whole Loan channels, which at December 31,
20152017 is
$3,804 million. $3.7 billion. Prosper had accrued
$510 thousand$0.8 million and
$171 thousand$0.6 million as of December 31,
20152017 and
20142016 respectively in regard to this obligation.
Securities Law Compliance
From inception
In 2017, Prosper made the final annual installment of
Prosper through October 16, 2008, Prosper sold approximately $178.0$3 million
of Borrower Loansregarding a settlement to
investors through the old platform structure, whereby Prosper assigned promissory notes directly to investors. Prosper did not register the offer and sale of the promissory notes corresponding to these Borrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws. Prosper believes that the question of whether or not the operation of the platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, Prosper would have failed to comply with the registration and qualification requirements of federal and state laws.In 2008, plaintiffs filed a class action lawsuit against Prosper and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suitthat was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation agreed to enter into a settlement to resolve all claims related thereto (the “Settlement”). In connection with the Settlement, Prosper agreed to pay an aggregate amount of $10 million into a settlement fund, split into four annual installments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order and judgment entered by the Superior Court on April 16, 2014. Pursuant to the final order and judgment, the claims in the class action were dismissed, and at the effective time of the Settlement (June 16, 2014), the defendants will have been released by the plaintiffs from all claims that were or could have been asserted concerning the issues alleged in the class action lawsuit. The reserve for the class action settlement liability is $5.9 million in the Consolidated Balance Sheets as of December 31, 2015.
2013. 17. Related Parties
Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers and certain affiliates participate on Prosper’s marketplace by purchasing Notes. The aggregate amount of the Notes purchased and the income earned by parties deemed to be affiliates and related parties of Prosper as of December 31,
20152017 and
20142016 are summarized below (in thousands):
| | Aggregate Amount of | | | Interest Earned on | |
Related Party | | Notes Purchased | | | Notes | |
| | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Executive officers and management | | $ | 1,361 | | | $ | 1,127 | | | $ | 206 | | | $ | 163 | |
Directors | | | 244 | | | | 42 | | | | 9 | | | | 10 | |
Total | | $ | 1,605 | | | $ | 1,169 | | | $ | 215 | | | $ | 173 | |
| | Related Party | | Notes balance as of December 31, | | | Aggregate Amount of Notes Purchased | | Interest Earned on Notes |
| | 2015 | | | 2014 | | | 2017 | | 2016 | | 2017 | | 2016 |
Executive officers and management | | $ | 1,912 | | | $ | 1,614 | | | $ | 29 |
| | $ | 1,065 |
| | $ | 109 |
| | $ | 225 |
|
Directors | | | 325 | | | | 76 | | | 366 |
| | 508 |
| | 40 |
| | 34 |
|
| | $ | 2,237 | | | $ | 1,690 | | |
| Total | | | $ | 395 |
| | $ | 1,573 |
| | $ | 149 |
| | $ | 259 |
|
18.
| Postretirement Benefit Plans
|
|
| | | | | | | | |
| Related Party | | Notes balance as of December 31, |
| | | 2017 | | 2016 |
| Executive officers and management | | $ | 38 |
| | $ | 1,620 |
|
| Directors | | 553 |
| | 537 |
|
| | | $ | 591 |
| | $ | 2,157 |
|
18. Postretirement Benefit Plans
Prosper has a 401(k) plan that covers all employees meeting certain eligibility requirements. The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may defer up to 90% of eligible compensation up to the annual maximum as determined by the Internal Revenue Service. Prosper’s contributions to the plan are discretionary. During the years ended December 31,
20152017, 2016 and
2014,2015, Prosper has contributed
$2.2 million, $2.6 million and $1.9 million,
and $0.66 millionrespectively to the 401(k) plan, respectively.
19.
| Significant Concentrations
|
19. Significant Concentrations
Prosper is dependent on third party funding sources such as banks,
assets managers and investment funds to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the year ended December 31,
2015, 37%, 19% and 11% were2017, the largest party purchased
by three different parties.a total of 70% of those loans. This compares to
37%20%,
22%16% and
13%9% for the three largest parties for the year ended December 31,
2014.2016. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which
95%93% and
89%90% of Borrower Loans were
fundedoriginated through the Whole Loan Channel in the years
endingended December 31,
20152017 and
2014,2016, respectively.
Prosper receives all of its transaction fee revenue from WebBank. Prosper earns a transaction fee from WebBank for our services in facilitating originations of Borrower Loans issued by WebBank. The rate of the transaction fee for each individual
Borrower Loan
is based on the term and credit grade of the Borrower Loan.
No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented. 20. Segments
Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, we have a single reporting
segment and operating
unit structure.On February 16, 2016, PMI amended and restated its Certificate of Incorporation to effect a 5-for-1 forward stock split. The total number of shares of stock which the PMI shall have the authority to issue is 464,214,500, consisting of 286,826,075 shares of Common Stock, $0.01 par value per share, and 177,388,425 Preferred Stock, $0.01 par value per share, 68,558,220 of which are designated as "Series A Preferred Stock," 24,760,915 of which are designated as "Series A-1 Preferred Stock," 35,775,880 of which are designated as "Series B Preferred Stock," 24,404,770 of which are designated as “Series C Preferred Stock” and 23,888,640 of which are designated as “Series D Preferred Stock.” Each share of Common Stock issued and outstanding immediately prior to the effective date shall be split and converted into five shares of Common Stock; each share of Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock issued and outstanding immediately prior to the effective date, shall be converted into five shares of Series A Preferred Stock, Series A- Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively. No fractional shares shall be issued in connection with the forward stock split.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Prosper Funding LLC
San Francisco, CA
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Prosper Funding LLC and
subsidiarysubsidiaries (the "Company") as of December 31,
20152017 and
2014, and2016, the related consolidated statements of operations, member’s equity, and cash flows
, for each of the
twothree years
in the period ended December 31,
2015. These financial statements are2017, and the
responsibility ofrelated notes (collectively referred to as the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)"financial statements"). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidatedthe financial statements present fairly, in all material respects, the financial position of Prosper Funding LLCthe Company as of December 31, 2015,2017 and 2014,2016, and the results of theirits operations and theirits cash flows for each of the twothree years in the period ended December 31, 2015,2017, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of a Matter
As discussed in Note 1 to the consolidated financial statements, the Company earns significant amounts of revenues and incurs significant expenses with a related party, its direct parent company, Prosper Marketplace, Inc.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's Auditor since 2014
Consolidated Balance Sheets
| | December 31, | | | December 31, | |
| | 2015 | | | 2014 | |
Assets | | | | | | | | |
Cash and Cash Equivalents | | $ | 15,026 | | | $ | 23,777 | |
Restricted Cash | | | 139,937 | | | | 73,103 | |
Short Term Investments | | | 1,277 | | | | 1,274 | |
Loans Held for Sale at Fair Value | | | 32 | | | | 8,463 | |
Borrower Loans Receivable at Fair Value | | | 297,273 | | | | 273,243 | |
Property and Equipment, Net | | | 8,419 | | | | 1,125 | |
Related Party Receivable | | | - | | | | 1,135 | |
Servicing Assets | | | 13,605 | | | | 3,116 | |
Other Assets | | | 122 | | | | 4 | |
Total Assets | | $ | 475,691 | | | $ | 385,240 | |
Liabilities and Member's Equity | | | | | | | | |
Accounts Payable and Accrued Liabilities | | $ | 2,122 | | | $ | 612 | |
Payable to Related Party | | | 2,989 | | | | - | |
Payable to Investors | | | 135,661 | | | | 63,809 | |
Notes at Fair Value | | | 297,405 | | | | 273,783 | |
Other Liabilities | | | 1,209 | | | | 745 | |
Total Liabilities | | | 439,386 | | | | 338,949 | |
Member's Equity | | | | | | | | |
Member's Equity | | | - | | | | 29,619 | |
Retained Earnings | | | 36,305 | | | | 16,672 | |
Total Member's Equity | | | 36,305 | | | | 46,291 | |
Total Liabilities and Member's Equity | | $ | 475,691 | | | $ | 385,240 | |
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Assets | |
| | |
| Cash and Cash Equivalents | $ | 8,223 |
| | $ | 6,929 |
|
| Restricted Cash | 140,092 |
| | 147,983 |
|
| Short Term Investments | — |
| | 1,280 |
|
| Loans Held for Sale at Fair Value | 49 |
| | 624 |
|
| Borrower Loans Receivable at Fair Value | 293,005 |
| | 315,627 |
|
| Property and Equipment, Net | 7,953 |
| | 10,095 |
|
| Servicing Assets | 14,598 |
| | 12,461 |
|
| Other Assets | 125 |
| | 186 |
|
| Total Assets | $ | 464,045 |
| | $ | 495,185 |
|
| Liabilities and Member's Equity | |
| | |
|
| Accounts Payable and Accrued Liabilities | $ | 745 |
| | $ | 2,223 |
|
| Payable to Related Party | 2,889 |
| | 1,899 |
|
| Payable to Investors | 132,112 |
| | 141,625 |
|
| Notes at Fair Value | 293,948 |
| | 316,236 |
|
| Other Liabilities | 3,985 |
| | 1,877 |
|
| Total Liabilities | 433,679 |
| | 463,860 |
|
| Member's Equity | |
| | |
|
| Member's Equity | 24,904 |
| | 30,704 |
|
| Retained Earnings | 5,462 |
| | 621 |
|
| Total Member's Equity | 30,366 |
| | 31,325 |
|
| Total Liabilities and Member's Equity | $ | 464,045 |
| | $ | 495,185 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Prosper
Consolidated Statements of Operations
| | Year ended December 31, | |
| | 2015 | | | 2014 | |
Revenues | | | | | | | | |
Operating Revenues | | | | | | | | |
Administration Fee Revenue – Related Party | | $ | 57,919 | | | $ | 28,519 | |
Servicing Fees, Net | | | 16,218 | | | | 4,168 | |
Gain on Sale of Borrower Loans | | | 14,151 | | | | 3,733 | |
Other Revenues | | | 1,500 | | | | — | |
Total Operating Revenues | | | 89,788 | | | | 36,420 | |
Interest Income on Borrower Loans | | | 41,380 | | | | 42,370 | |
Interest Expense on Notes | | | (38,174 | ) | | | (38,734 | ) |
Net Interest Income | | | 3,206 | | | | 3,636 | |
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | | | 59 | | | | 209 | |
Total Net Revenues | | | 93,053 | | | | 40,265 | |
Expenses | | | | | | | | |
Administration Fee – Related Party | | | 62,786 | | | | 24,966 | |
Servicing | | | 3,705 | | | | 1,509 | |
General and Administrative | | | 1,227 | | | | 506 | |
Total Expenses | | | 67,718 | | | | 26,981 | |
Total Net Income | | $ | 25,335 | | | $ | 13,284 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues | | | | | |
| Operating Revenues | | | | | |
| Administration Fee Revenue – Related Party | $ | 101,500 |
| | $ | 36,630 |
| | $ | 57,919 |
|
| Servicing Fees, Net | 25,963 |
| | 28,604 |
| | 16,218 |
|
| Gain (Loss) on Sale of Borrower Loans | (48,691 | ) | | 3,637 |
| | 14,151 |
|
| Other Revenues | 170 |
| | 478 |
| | 1,500 |
|
| Total Operating Revenues | 78,942 |
| | 69,349 |
| | 89,788 |
|
| Interest Income on Borrower Loans | 47,208 |
| | 44,649 |
| | 41,380 |
|
| Interest Expense on Notes | (43,954 | ) | | (41,187 | ) | | (38,174 | ) |
| Net Interest Income | 3,254 |
| | 3,462 |
| | 3,206 |
|
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | (514 | ) | | (372 | ) | | 59 |
|
| Total Net Revenues | 81,682 |
| | 72,439 |
| | 93,053 |
|
| Expenses | |
| | |
| | |
|
| Administration Fee – Related Party | 70,359 |
| | 62,203 |
| | 62,786 |
|
| Servicing | 6,103 |
| | 5,395 |
| | 3,705 |
|
| General and Administrative | 379 |
| | 1,321 |
| | 1,227 |
|
| Other Expenses, Net | — |
| | 30,704 |
| | — |
|
| Total Expenses | 76,841 |
| | 99,623 |
| | 67,718 |
|
| Total Net Income (Loss) | $ | 4,841 |
| | $ | (27,184 | ) | | $ | 25,335 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Prosper
Consolidated Statements of Member’s Equity
| | | | | | Retained | | | | | |
| | | | | | Earnings | | | | | |
| | Member’s | | | (Accumulated | | | | | |
| | Equity | | | Deficit) | | | Total | |
Balance as of January 1, 2014 | | $ | 15,836 | | | $ | 3,388 | | | $ | 19,224 | |
Capital Infusion from Parent | | | 15,000 | | | | — | | | | 15,000 | |
Transfer of Servicing Rights to Parent | | | (1,217 | ) | | | — | | | | (1,217 | ) |
Net Income | | | — | | | | 13,284 | | | | 13,284 | |
Balance as of December 31, 2014 | | $ | 29,619 | | | $ | 16,672 | | | $ | 46,291 | |
Distributions to Parent | | | (29,370 | ) | | | (6,130 | ) | | | (35,500 | ) |
Transfer of Servicing Rights to Parent | | | (249 | ) | | | — | | | | (249 | ) |
Adjustment to Servicing Rights on Transition to Fair Value | | | — | | | | 428 | | | | 428 | |
Net Income | | | — | | | | 25,335 | | | | 25,335 | |
Balance as of December 31, 2015 | | $ | — | | | $ | 36,305 | | | $ | 36,305 | |
|
| | | | | | | | | | | |
| | Member’s Equity | | Retained Earnings (Accumulated Deficit) | | Total |
| Balance as of January 1, 2015 | $ | 29,619 |
| | $ | 16,672 |
| | $ | 46,291 |
|
Distributions to Parent
| (29,370 | ) | | (6,130 | ) | | (35,500 | ) |
Transfer of Servicing Rights to Parent
| (249 | ) | | — |
| | (249 | ) |
Adjustment to Servicing Rights on Transition to Fair Value
| — |
| | 428 |
| | 428 |
|
Net Income
| — |
| | 25,335 |
| | 25,335 |
|
| Balance as of December 31, 2015 | $ | — |
| | $ | 36,305 |
| | $ | 36,305 |
|
| Distributions to Parent | — |
| | (8,500 | ) | | (8,500 | ) |
| Contributions by Parent | 30,704 |
| | — |
| | 30,704 |
|
| Net Income (Loss) | — |
| | (27,184 | ) | | (27,184 | ) |
| Balance as of December 31, 2016 | $ | 30,704 |
| | $ | 621 |
| | $ | 31,325 |
|
| Distributions to Parent | (5,800 | ) | | — |
| | (5,800 | ) |
| Net Income | — |
| | 4,841 |
| | 4,841 |
|
| Balance as of December 31, 2017 | $ | 24,904 |
| | $ | 5,462 |
| | $ | 30,366 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Prosper
Consolidated Statements of Cash Flows
| | For the Twelve Months Ended | |
| | December 31, | |
| | 2015 | | | 2014 | |
Cash flows from operating activities: | | | | | | | | |
Net Income | | $ | 25,335 | | | $ | 13,284 | |
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | | | | | | | | |
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes | | | (59 | ) | | | (596 | ) |
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes | | | (57 | ) | | | - | |
Gain on Sale of Borrower Loans | | | (14,561 | ) | | | (4,034 | ) |
Amortization and Change in Fair Value of Servicing Rights | | | 4,176 | | | | 594 | |
Depreciation and Amortization | | | 3,161 | | | | 1,331 | |
Changes in Operating Assets and Liabilities: | | | | | | | | |
Purchase of Loans Held for Sale at Fair Value | | | (3,517,467 | ) | | | (1,416,715 | ) |
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | | | 3,525,759 | | | | 1,411,531 | |
Restricted Cash Except for those Related to Investing Activities | | | (68,776 | ) | | | (28,125 | ) |
Other Assets | | | (118 | ) | | | 3 | |
Accounts Payable and Accrued Liabilities | | | 1,510 | | | | 405 | |
Payable to Investors | | | 71,852 | | | | 25,788 | |
Net Related Party Receivable/Payable | | | 2,880 | | | | (1,340 | ) |
Other Liabilities | | | 539 | | | | 90 | |
Net Cash Provided by Operating Activities | | | 34,174 | | | | 2,216 | |
Cash Flows From Investing Activities: | | | | | | | | |
Purchase of Borrower Loans Held at Fair Value | | | (197,436 | ) | | | (177,088 | ) |
Principal Payment of Borrower Loans Held at Fair Value | | | 151,893 | | | | 121,081 | |
Purchase of Short Term Investments | | | (1,277 | ) | | | (1,274 | ) |
Maturities of Short Term Investments | | | 1,274 | | | | 1,271 | |
Purchases of Property and Equipment | | | (9,211 | ) | | | (846 | ) |
Changes in Restricted Cash Related to Investing Activities | | | 1,942 | | | | 1,672 | |
Net Cash Used in Investing Activities | | | (52,815 | ) | | | (55,184 | ) |
Cash Flows from Financing Activities: | | | | | | | | |
Proceeds from Issuance of Notes Held at Fair Value | | | 197,228 | | | | 176,865 | |
Payments of Notes Held at Fair Value | | | (151,838 | ) | | | (120,909 | ) |
Cash Distributions to Parent | | | (35,500 | ) | | | - | |
Loan Advances to Parent | | | (10,000 | ) | | | - | |
Loan Repayments from Parent | | | 10,000 | | | | - | |
Member’s Equity Capital Infusion from Parent | | | - | | | | 15,000 | |
Net Cash Provided by Financing Activities | | | 9,890 | | | | 70,956 | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | (8,751 | ) | | | 17,988 | |
Cash and Cash Equivalents at Beginning of the Year | | | 23,777 | | | | 5,789 | |
Cash and Cash Equivalents at End of the Year | | $ | 15,026 | | | $ | 23,777 | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
Cash Paid for Interest | | $ | 38,168 | | | $ | 41,053 | |
Non-Cash Operating Activity - Servicing Rights Fair Value Adjustment | | | 428 | | | | - | |
Non-Cash Investing Activity- Accrual for Property and Equipment, Net | | | 1,436 | | | | 192 | |
Non-Cash Financing Activity, Distribution to Parent | | $ | 249 | | | $ | 1,228 | |
|
| | | | | | | | | | | |
| | For the Twelve Months Ended
December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | |
| | | | |
| Net Income (Loss) | $ | 4,841 |
| | $ | (27,184 | ) | | $ | 25,335 |
|
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |
| | |
| | |
|
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes | 514 |
| | 372 |
| | (59 | ) |
| Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes | 86 |
| | 176 |
| | (57 | ) |
| Gain on Sale of Borrower Loans | (14,138 | ) | | (9,634 | ) | | (14,561 | ) |
| Change in Fair Value of Servicing Rights | 11,862 |
| | 10,620 |
| | 4,176 |
|
| Depreciation and Amortization | 5,853 |
| | 4,083 |
| | 3,161 |
|
| Loss on Contract Termination | — |
| | 30,704 |
| | — |
|
| Other, Net | — |
| | (128 | ) | | — |
|
| Changes in Operating Assets and Liabilities: | |
| | |
| | |
|
| Purchase of Loans Held for Sale at Fair Value | (2,619,130 | ) | | (1,979,952 | ) | | (3,517,467 | ) |
| Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | 2,619,709 |
| | 1,979,352 |
| | 3,525,759 |
|
| Restricted Cash Except for those Related to Investing Activities | 11,223 |
| | (5,268 | ) | | (68,776 | ) |
| Other Assets | 61 |
| | (64 | ) | | (118 | ) |
| Accounts Payable and Accrued Liabilities | (1,478 | ) | | 101 |
| | 1,510 |
|
| Payable to Investors | (9,513 | ) | | 5,964 |
| | 71,852 |
|
| Net Related Party Receivable/Payable | 2,371 |
| | (1,260 | ) | | 2,880 |
|
| Other Liabilities | 2,247 |
| | 954 |
| | 539 |
|
| Net Cash Provided by Operating Activities | 14,508 |
| | 8,836 |
| | 34,174 |
|
| Cash Flows From Investing Activities: | |
| | |
| | |
|
| Purchase of Borrower Loans Held at Fair Value | (194,887 | ) | | (217,582 | ) | | (197,436 | ) |
| Principal Payment of Borrower Loans Held at Fair Value | 192,054 |
| | 173,710 |
| | 151,893 |
|
| Purchase of Short Term Investments | — |
| | (1,280 | ) | | (1,277 | ) |
| Maturities of Short Term Investments | 1,280 |
| | 1,277 |
| | 1,274 |
|
| Purchases of Property and Equipment | (5,092 | ) | | (5,589 | ) | | (9,211 | ) |
| Changes in Restricted Cash Related to Investing Activities | (3,332 | ) | | (2,778 | ) | | 1,942 |
|
| Net Cash Used in Investing Activities | (9,977 | ) | | (52,242 | ) | | (52,815 | ) |
| Cash Flows from Financing Activities: | |
| | |
| | |
|
| Proceeds from Issuance of Notes Held at Fair Value | 194,391 |
| | 217,767 |
| | 197,228 |
|
| Payments of Notes Held at Fair Value | (191,828 | ) | | (173,958 | ) | | (151,838 | ) |
| Cash Distributions to Parent | (5,800 | ) | | (8,500 | ) | | (35,500 | ) |
| Loan Advances to Parent | — |
| | — |
| | (10,000 | ) |
| Loan Repayments from Parent | — |
| | — |
| | 10,000 |
|
| Net Cash (Used in) Provided by Financing Activities | (3,237 | ) | | 35,309 |
| | 9,890 |
|
| Net Increase (Decrease) in Cash and Cash Equivalents | 1,294 |
| | (8,097 | ) | | (8,751 | ) |
| Cash and Cash Equivalents at Beginning of the Year | 6,929 |
| | 15,026 |
| | 23,777 |
|
| Cash and Cash Equivalents at End of the Year | $ | 8,223 |
| | $ | 6,929 |
| | $ | 15,026 |
|
| Supplemental Disclosure of Cash Flow Information: | |
| | |
| | |
|
| Cash Paid for Interest | $ | 43,776 |
| | $ | 40,597 |
| | $ | 38,168 |
|
| Non-Cash Operating Activity - Servicing Rights Fair Value Adjustment | — |
| | — |
| | 428 |
|
| Non-Cash Investing Activity- Accrual for Property and Equipment, Net | 225 |
| | 1,606 |
| | 1,436 |
|
| Non-Cash Financing Activity, Distribution to Parent | $ | — |
| | $ | — |
| | $ | 249 |
|
| Non-Cash Financing Activity, Contribution by Parent | $ | — |
| | $ | 30,704 |
| | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
Prosper
Notes to Consolidated Financial Statements
1.
| Organization and Business
|
1. Organization and Business
Prosper Funding LLC (“PFL”) was formed in the state of Delaware in February 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”). Except as the context otherwise requires, as used in these Notes to Consolidated Financial Statements of Prosper Funding LLC,
“Prosper“Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis.PFL was formed by PMI to hold Borrower Loans and issue Notes through the marketplace. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and implementing certain formal procedures designed to expressly reinforce its status as a distinct entity from PMI.
Since February 1, 2013, all Notes issued and sold through the marketplace are issued, sold and serviced by PFL. Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the marketplace, as agent of WebBank, in connection with the submission of Borrower Loan applications by potential borrowers, the origination of related Borrower Loans by WebBank and the funding of such Borrower Loans by WebBank. Pursuant to an Administration Agreement between PFL and PMI, PMI manages all other aspects of the marketplace on behalf of PFL.
As a result Prosper Funding earns significant revenues and incurs significant expenses with a related party, its direct parent company, PMI.
A borrower who wishes to obtain a loan through the marketplace must post a loan listing, or listing, on the marketplace. PFL allocates listings to one of two investor funding channels: (i) the “Note Channel,” which allows investors to commit to purchase Notes from PFL, the payments of which are dependent PFL’s receipt of payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows investors to commit to purchase 100% of a Borrower Loan directly from PFL.
All loans requested and obtained through the marketplace are unsecured obligations of individual borrowers with a fixed interest rate and loan terms set at three or five years as of December 31,
2015.2017. All loans made through the marketplace are funded by WebBank, an FDIC-insured, Utah chartered industrial bank. After funding a loan, WebBank sells the loan to PFL, without recourse to WebBank, in exchange for the principal amount of the loan. WebBank does not have any obligation to purchasers of the Notes.
Prosper Funding’s marketplace is designed to allow investors to invest in Borrower Loans in an open transparent marketplace, with the aim of allowing both investors and borrowers to benefit financially as well as socially. Prosper Funding believes marketplace lending represents a new model of consumer lending, where individuals and institutions can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional consumer lender.
As of December 31,
2015,2017, Prosper Funding’s marketplace was open to investors in 30 states and the District of Columbia. Additionally, as of December 31,
20152017, Prosper Funding’s marketplace was open to borrowers in 46 states and the District of Columbia. Currently, the marketplace does not operate internationally.
2.
| Significant Accounting Policies
|
2. Significant Accounting Policies
Prosper Funding’s consolidated financial statements include the accounts of PFL and its wholly-owned subsidiary PAH. All intercompany balances and transactions between PFL and PAH have been eliminated in consolidation. Prosper Funding’s
Funding’s financial statements have been prepared in
accordanceconformity with
U.Saccounting principles generally accepted
accounting principlesin the United States of America (“U.S. GAAP”).
The preparation of Prosper Funding’s 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 consolidated financial 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 Loans Held for Sale, Borrower Loans and associated Notes, valuation of servicing rights,
repurchase and indemnification obligation, and contingent liabilities. Prosper Funding bases its estimates on historical experience from all Borrower Loans, and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ materially from those estimates, and those could be material.
estimates.
In the normal course of its business, Prosper
Funding encounters significant credit risk. Financial instruments that potentially subject Prosper Funding to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
borrower loans held and restricted cash. Prosper Funding places cash
cash equivalents and restricted cash with high-quality financial institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds federally insured amounts. Prosper Funding
also performs periodic evaluationsinvests cash equivalents in highly liquid marketable securities with original maturities of
three months or less at the
relative credit standingtime of
these financial institutionspurchase, including money market funds, commercial paper, US treasury securities and
has not recognized any losses in earnings from instruments held at these financial institutions.US agency securities.
As a lending marketplace, Prosper Funding believes its customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact its customers’ ability or desire to participate on its marketplace as borrowers or investors, and consequently could negatively affect its business and results of operations.
To the extent that Borrower Loan (including Borrower Loans that have been sold) 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, Prosper Funding does not bear the credit risk on such Borrower Loan.
Reclassifications
During the period ended December 31, 2015, Prosper Funding changed the presentation of its revenues in the Consolidated Statements of Operations. A new line called “Gain on Sales of Borrower Loans” was created with the amounts included in this line previously classified as “Other Revenue.” Prior period amounts have been reclassified to conform to the current presentation.
Prosper Funding also changed the presentation of the servicing assets on its Consolidated Balance Sheets by reclassifying them from “Prepaids and Other Assets” to “Servicing Assets.” Prosper also changed the presentation of liabilities by creating “Other Liabilities” and reclassified servicing liabilities from “Accounts Payable and Accrued Liabilities” to “Other Liabilities”. Prior period amounts have been reclassified to conform to the current presentation. Management believes these changes make the financial statements more useful for the readers of the financial statements and comparable with Prosper Funding’s competitors.
Consolidation of Variable Interest Entities
The determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment whether we are the primary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support or (ii) when a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity.
As a result of the nature of the retained servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain special purposes entities that purchase these Borrower Loans. For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a potentially significant economic interest in the VIE. In no case are we the primary beneficiary,
and as a result none oftherefore, we do not consolidate these
entities are consolidated on Prosper Funding’s consolidated financial statements. entities.
Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.
Transfers of Financial Assets
Prosper accounts for transfers of entire financial assets or a participating interest in an entire financial asset as sales when it has surrendered control over the transferred assets. Control is generally considered to have been surrendered when the transferred assets have been legally isolated from Prosper, the transferee has the right to pledge or exchange the assets without any significant constraints, and Prosper has not entered into a repurchase agreement, does not hold significant call options and has not written significant put options on the transferred assets.
Prosper sells loans or participating interests in loans via whole loan sale transactions and the fractional note channel. In certain instances of whole loan sales transactions Prosper will sell whole loans to unconsolidated VIEs that then securitize the whole loans purchased.
Prosper recognizes a gain or loss on the sale of financial assets by comparing the net sales proceeds (including fair value of any servicing asset or liability and recourse obligation recognized) to the carrying amount of the assets sold. Transfers of financial assets that do not qualify for sale accounting are reported as secured borrowings. Accordingly, the related assets remain on Prosper’s Consolidated Balance Sheets and continue to be reported and accounted for as if the transfer had not occurred. Cash proceeds from these transfers are reported as liabilities, with related interest expense recognized over the life of the related assets.
Cash and Cash Equivalents
Cash includes various unrestricted deposits with highly rated financial institutions. Cash equivalents consist of highly liquid marketable securities with original maturities of three months or less at the time of purchase and consist primarily of money market funds, commercial paper, US treasury securities and US agency securities. Cash equivalents are recorded at cost, which approximates fair value.
Such deposits periodically exceed amounts insured by the FDIC. Restricted cash consists primarily of cash deposits and short term certificates of deposit held as collateral as required for loan funding and servicing activities, and cash that investors or
Prosper Funding has on the platform that has not yet been invested in Borrower Loans or disbursed to the investor.
Short term investments consists of certificates of deposit with a term greater than three months but less than a year that are held as collateral as required for loan funding and servicing activities.
Prosper Funding
measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.We define fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs. Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which
the reporting entityProsper Funding would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that
the reporting entityProsper Funding has access to the market as of the measurement date. If no market for the asset exists or if
the reporting entityProsper Funding does not have access to the principal market,
the reporting entity should useProsper Funding uses a hypothetical market.
Under ASC Topic 820, assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow
methodologies,models, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.
Financial instruments consist principally of cash and cash equivalents, restricted cash, Borrower Loans, accounts payable and accrued liabilities, and Notes. Servicing assets and liabilities are also subject to fair value measurement within the financial statements of PFL. The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their carrying values because of their short term nature.
As observable market prices are not available for the Borrower Loans, Loans Held for Sale and Notes, Prosper Funding believes the Borrower Loans, Loans Held for Sale and Notes should be considered Levellevel 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 the Borrower Loans are originated and the principal marketplace in which Prosper Funding might offer those loans may result in differences between the originated amount of the loans and their fair value as of the transaction date. For Borrower Loans and Loans Held for Sale, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including prepayment speeds, default rates and discount rates based on the perceived credit risk within each credit grade.
The obligation to pay principal and interest on any Note is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of our servicing fee which is generally 1.0%
. of the outstanding balance. The fair value election for Notes and Borrower Loans allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to lenders that are dependent upon borrower payments. As such, the fair value of a group of Notes is approximately equal to the fair value of the corresponding Borrower Loan, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to such Note holders. As a result, the valuation of the Notes uses the same methodology and assumptions as the Borrower Loans, except that the Notes incorporate the
1%1.0% servicing fee and any differences in timing of payments. Any unrealized gains or losses on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations. The effective interest rate associated with a group of Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee. See Note 4 for a roll-forward and further discussion of the significant assumptions used to value Borrower Loans and Notes.
Through the Note Channel, Prosper Funding purchases Borrower Loans from WebBank then issues Notes and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans fundedoriginated and Notes issued through the Note Channel are carried on Prosper Funding’s consolidated balance sheets as assets and liabilities, respectively. Prosper Funding has adopted the provisions of ASC Topic 825,Financial Instruments (“ASC Topic 825”). ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper Funding estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for the expected payment, loss, recovery and default rates. The Borrower Loans are not derecognized when a corresponding Note is
issued as Prosper Funding maintains the ability to sell the Borrower Loans without the approval of the holders in the corresponding Notes.
Loan Servicing Assets and Liabilities
Prosper Funding records servicing assets and liabilities at their estimated fair values for servicing rights retained when Prosper Funding sells Borrower Loans to unrelated third-party buyers. The change in fair value of servicing assets and liabilities is recognized in “Servicing Fees” revenue. The gain or loss on a loan sale is recorded in “Gain
(Loss) on Sale of Borrower Loans” while the fair value of the servicing rights, which is based on the degree to which the contractual loan servicing fee is above or below an estimated market loan servicing rate is recorded in servicing assets or liabilities. Servicing assets and liabilities are recorded in “Servicing Assets” and “Other Liabilities,” respectively, on the consolidated balance sheets.
On January 1, 2015, Prosper elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition. ASC Subtopic 860-50, Servicing Assets and Liabilities, allows the adoption of the fair value method at the beginning of any fiscal year. The adoption of the fair value method for a particular class is irrevocable. Prior to January 1, 2015, Prosper measured the servicing assets and liabilities using the amortized cost method. This change resulted in a $428 thousand decrease to accumulated deficit, a $399 thousand increase in net servicing assets and a $29 thousand decrease in net servicing liabilities.
Prosper Funding uses a discounted cash flow model to estimate the fair value of the loan servicing assets or liabilities which considers the contractual projected servicing fee revenue that Prosper Funding earns on the Borrower Loans, estimated market servicing fees to service such loans, prepayment rates, default rates and the current principal balances of the Borrower Loans.
BorrowerLoans Held for Sale
Borrower
Loans Held for Sale are
primarily comprised of Borrower Loans held for short durations and are recorded at fair value. The fair value is estimated using discounted cash flow methodologies based upon a set of valuation assumptions similar to those of other Borrower
Loans. We measure Loans
which are set forth below in Note 6 — Fair Value of Assets and Liabilities. Prosper Funding has adopted the provisions of ASC Topic 825. ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other itemsHeld for Sale at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows for the
Borrower Loans Held for Sale to be measured at fair value similar to Borrower Loans and Notes. The fair value election, with respect to an item, may not be revoked once an election is made.
Software and Website Development
Software and
Website Developmentwebsite development represents the software and website that PMI has transferred to Prosper Funding. Prosper Funding does not develop any of its own software or website. Software and website are included in property and equipment and amortized to expense using the straight-line method over their expected lives which is generally one to five years.
Prosper Funding evaluates its software assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software and website development assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such software and website development assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software and website development asset group.
Payable to Investors primarily represents our obligation to investors related to cash held in an account for the benefit of investors and payments-in-process received from borrowers.
Loan Trailing Fee
On July 1, 2016, Prosper Funding signed a series of agreements with WebBank which, among other things, includes an additional program fee (the "Loan Trailing Fee") paid to WebBank in connection with the performance of each loan sold to Prosper Funding. These agreements are effective as of August 1, 2016. The Loan Trailing Fee is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans, irrespective of whether the loans are sold by Prosper Funding, and gives WebBank an ongoing financial interest in the performance of the loans it originates. This fee is paid by Prosper Funding to WebBank over the term of the respective loans and is a function of the principal and interest payments made by borrowers of such loans. In the event that principal and interest payments are not made with respect to any loan, Prosper Funding is not required to make the related Loan Trailing Fee payment. The obligation to pay the Loan Trailing Fee for any loan sold to Prosper Funding is recorded at fair value at the time of the origination of such loan within Other Liabilities and recorded as a reduction of Transaction Fees, net. Any changes in the fair value of this liability are recorded in Change in Fair Value of
Borrower Loans, Loans Held for Sale and Notes, Net on the statements of operations. The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and defaults rates.
Revenue primarily results from fees, net interest earned and gains on the sale of borrower loans. Fees consist of related party administrative fees and servicing fees paid by investors. We also have other smaller sources of revenue reported as other revenue, which includes fees charged in relation to securitizations by outside investors.
Administration Agreement License Fees
Prosper Funding
primarily generates revenues through license fees it earns through an Administration Agreement with PMI. 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) PMI’s performance of its duties and obligations under the Administration Agreement relating to corporate administration, loan platform services, loan and note servicing and marketing, and (ii) PMI’s performance of its duties and obligations to WebBank in relation to loan origination and funding. The license fees are based on the number of listings that are posted to the platform.Investors who purchase Borrower Loans through the Whole Loan Channel typically pay Prosper Funding a servicing fee which is
generallycurrently set at
1%1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. The servicing fee compensates Prosper Funding for the costs incurred in servicing the related loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios.
Prosper Funding records servicing fees paid by Borrower Loan investors as a component of operating revenue when received.
The amortization and change in fair value of servicing rights are also included in servicing fees.Gain (Loss) on Sale of Borrower Loans
Prosper Funding recognizes gains or losses on the sale of Borrower Loans when it retainsis retained for the servicing assetsof Borrower Loans by WebBank. Additionally, Prosper Funding recognizes gains or liabilities uponlosses on the sale of Borrower Loans.
Loans when it sells Borrower Loans to third parties. Gains or losses on sales of Borrower Loans that are recognized at the time of sale are determined by the difference between the net sales proceeds, fair value of any servicing rights retained and the carrying value of the Borrower Loans sold.
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper Funding recognizes interest income on Borrower Loans fundedoriginated through the Note Channel and interest expense on the corresponding Notes using the accrual method based on the stated interest rate to the extent Prosper Funding believes it to be collectable.
AdministrationAdministration Fee Expense - Related Party
Pursuant to an Administration Agreement between Prosper Funding and PMI, PMI manages the marketplace on behalf of Prosper Funding. Accordingly, each month, Prosper Funding is required to pay PMI an administration fee that is based on PMI’s (a) finance and legal personnel costs, (b) number of Borrower Loans originated through the marketplace, (c) servicing fees collected by or on behalf of Prosper Funding, and (d) nonsufficient funds fees collected by or on behalf of Prosper Funding. In addition, under a second Administration Agreement between PMI and PAH, a wholly owned subsidiary of Prosper Funding, PAH is required to pay PMI an annual fee, for PMI being the administrator of PAH’s operations.
Other Expense
Other expense, net includes contract termination costs that are expected to be non-recurring and not part of restructuring activities.
There is no comprehensive income (loss) other than the net income (loss) disclosed in the consolidated statements of operations.
Recent Accounting PronouncementsIn May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update
(“ASU”No. 2014-09, 2016-08, 2016-10, 2016-12 and 2016-20, collectively implemented as FASB Accounting Standards Codification Topic 606 ("ASC 606")
2014-09, “Revenue from Contracts with Customers,.” provides guidance for revenue recognition. The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.
The standard will be effective for Prosper Funding
plans to adopt ASC 606 on a modified retrospective basis in the first quarter of fiscal 2018.
In August 2015,Our implementation efforts to date related to this standard have included identifying revenue streams that are within the
FASB issued ASU No. 2015-14, which amendedscope of this guidance, the
standard to provide a one-year deferralevaluation of associated contracts and accounting policies, the evaluation of processes and systems of internal control, and the assessment of disclosure requirements of the
effective date, as well as providingstandard. Our scoping analysis indicates that administration fees are included in the
option to early adoptscope of the
standardnew guidance, while servicing fees and gain or loss on the
original effective date. Accordingly, Prosper Funding may adoptsale of borrower loans remain within the
standard in either Prosper Funding’s fiscal year ending December 31, 2017 or 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment asscope of
the date of adoption. Prosper Funding has not yet selected a transition methodASC topic 860, Transfers and
is evaluating theServicing. We believe that ASC 606 will have little, if any, impact
of adopting this new accounting standard update on the
consolidated financial statementstiming and
related disclosures. In November 2014,amount of revenue recognition as compared to the FASB issued ASU 2014-16, Derivativescurrent standard and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity to eliminate the use of different methods in practice and thereby reduce existing diversity in the accounting for hybrid financial instruments issued in the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument. The existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standardthat there will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Prosper Funding is currently assessing the potentialno material impact on its financial statements from adopting this new guidance.
In February 2015, the FASB issued ASU 2015-02, "upon adoption.
Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for periods beginning after December 15, 2015 with early adoption permitted. Prosper Funding has decided to early adopt this guidance effective January 1, 2015, and the adoption of this standard had no impact on Prosper Funding’s consolidated financial statements.In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which will be effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a
software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper Funding is currently assessing the potential impact on its consolidated financial statements from adopting this new guidance.
In January 2016, the FASB issued ASU 2016-01, 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial LiabilitiesLiabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. We areProsper Funding is currently evaluating the impact that this guidance will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper Funding is currently evaluating the impacts the adoption of this accounting standard will have on Prosper Funding's cash flows, however we do not expect a material impact.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18)", which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for us in the first quarter of 2018 and early adoption is permitted. Prosper Funding will adopt this standard on January 1, 2018, and we believe the impact will change the presentation of restricted cash within the Statement of Cash Flows.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
| | December 31, | |
| | 2015 | | | 2014 | |
Property and equipment: | | | | | | | | |
Internal-use software and web site development costs | | $ | 10,990 | | | $ | 4,042 | |
Property and equipment | | | 10,990 | | | | 4,042 | |
Less accumulated depreciation and amortization | | | (2,571 | ) | | | (2,917 | ) |
Total property and equipment, net | | $ | 8,419 | | | $ | 1,125 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Property and equipment: | |
| | |
|
| Internal-use software and web site development costs | $ | 19,911 |
| | $ | 16,749 |
|
| Property and equipment | 19,911 |
| | 16,749 |
|
| Less accumulated depreciation and amortization | (11,958 | ) | | (6,654 | ) |
| Total property and equipment, net | $ | 7,953 |
| | $ | 10,095 |
|
Depreciation and amortization expense for 2017, 2016, and 2015 and 2014 was $3,161$5,853 thousand, $4,083 thousand and $1,331$3,161 thousand respectively. Internal-use software and web site development additions of $10.5$3.7 million, $5.8 million and $0.8$10.5 million were purchased from PMI in the years ended December 31, 2017, 2016, and 2015 respectively.
4. Borrower Loans, Loans Held For Sale and
2014 respectively. Notes Held at Fair Value 4.
| Borrower Loans, Loans Held For Sale and Notes Held at Fair Value
|
The fair value of the Borrower Loans fundedoriginated and Notes issued through the Note Channel is estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used to value such Borrower Loans and Notes include default rates derived from historical performance, market conditions and discount rates applied to each credit grade based on the perceived credit risk. The obligation to pay principal and interest on any series of Notes is equal to the payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the Notes is approximately equal to the fair value of the Borrower Loans fundedoriginated through the Note Channel, adjusted for the servicing fee and the timing of borrower payments subsequently disbursed to the Note holders. The effective interest rate associated with a series of Notes will be less than the interest rate earned on the corresponding Borrower Loan due to the servicing fee.
At December 31,
20152017 and
2014,2016, Borrower Loans, Notes and Loans Held for Sale (in thousands) were:
| | Borrower Loans | | | Notes | | | Loans Held for Sale | |
| | December 31, 2015 | | | December 31, 2014 | | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2015 | | | December 31, 2014 | |
Aggregate principal balance outstanding | | $ | 296,945 | | | $ | 268,598 | | | $ | (294,331 | ) | | $ | (272,269 | ) | | $ | 42 | | | $ | 8,295 | |
Fair value adjustments | | | 328 | | | | 4,645 | | | | (3,074 | ) | | | (1,514 | ) | | | (10 | ) | | | 168 | |
Fair value | | $ | 297,273 | | | $ | 273,243 | | | $ | (297,405 | ) | | $ | (273,783 | ) | | $ | 32 | | | $ | 8,463 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Borrower Loans | | Notes | | Loans Held for Sale |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 | | December 31, 2017 | | December 31, 2016 |
Aggregate principal balance outstanding | $ | 296,668 |
| | $ | 319,143 |
| | $ | (300,922 | ) | | $ | (323,358 | ) | | $ | 59 |
| | $ | 641 |
|
| Fair value adjustments | (3,663 | ) | | (3,516 | ) | | 6,974 |
| | 7,122 |
| | (10 | ) | | (17 | ) |
| Fair value | $ | 293,005 |
| | $ | 315,627 |
| | $ | (293,948 | ) | | $ | (316,236 | ) | | $ | 49 |
| | $ | 624 |
|
At December 31,
2015,2017, outstanding Borrower Loans had original maturities between 36 and 60 months, had monthly payments with fixed interest rates ranging from
5.32%5.31% to
33.04%32.32% and had various maturity dates through December
2020.2022. At December 31,
2014,2016, Borrower Loans and Loans Held for Sale had original terms between 36 months and 60 months, had monthly payments with fixed interest rates ranging from
5.77%5.32% to 33.04% and had various maturity dates through
December 2019.2021.
Within the change in fair value of Borrower Loans, Prosper Funding recorded a
gainloss of approximately
$2.8$1.7 million that is attributable to changes in the credit risks
associated withrelated to Borrower Loans during the
instrument.year ending December 31, 2017.
As of December 31,
20152017 the Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of
$2.3$3.5 million and a fair value of
$0.9$1.3 million. As December 31,
20142016 the Borrower Loans that were 90 days or more delinquent, had an
aggregate principal amount of $1.5$3.2 million and a fair value of $0.14$1.0 million. As of December 31, 20152017 and 2014,2016, Borrower Loans in non-accrual status had a fair value of $0.1$0.3 million and zero,$0.5 million, respectively.
5.
| Loan Servicing Assets and Liabilities
|
5. Loan Servicing Assets and Liabilities
Prosper Funding initially records servicing assets and liabilities at their estimated fair values when Prosper Funding sells whole loans to unrelated third-party buyers. The
initial fair value of such servicing assets or liabilities is amortized in proportion to the estimated servicing income or loss and is amortized over the period of servicing income or loss. The total
gainslosses recognized on the sale of the whole loans were
$14.2$48.7 million for the year ended December 31, 2017, and the total gains recognized were $3.6 million and
$4.0$14.2 million for the years ended December 31,
2016 and 2015
and 2014 respectively.
For the year ended December 31, 2014 no impairment was recorded. For the year ended December 31, 2015, servicing assets and liabilities were measured at fair value subsequent to the initial recognitionAt December 31,
2015,2017, loans that were sold but for which we retained servicing rights had a total outstanding principal balance of
$3.6$3.7 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from
5.32%5.31% to
31.90%35.52% and
Maturitymaturity dates through December
2020.2021. At December 31,
2014,2016, loans that were sold but for which we retained servicing rights had a total outstanding principal balance of
$1.0$3.4 billion, original terms between 36 and 60 months and had monthly payments with fixed interest rates ranging from
6.05%5.32% to
31.34%35.52% and Maturity dates through December
2019.2020.
$
20.438.5 million, $38.2 million and
$4.8$20.4 million of contractually specified servicing fees, late charges and ancillary fees are included on our Statement of Operations in Servicing Fees, Net for the years ended December 31,
2017, 2016, and 2015
and 2014 respectively.
Valuation method – Discounted cash flow valuation methodology generally consistconsists of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount. Significant unobservable inputs presented in the table presented below within Note 6 are those that Prosper Funding considers significant to the estimated fair values of the
Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.
Prepayment of the loans has historically been insignificant and therefore does not currently have a material impact on the fair value of servicing assets and liabilities. Market servicing rate – Prosper Funding estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper Funding estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper Funding sells and services and information from a backup service provider. Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper Funding’s servicing assets. Default Rate – The default rate presented in Note 6 is an annualized, average estimate considering all loan categories (i.e. Prosper ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or loan category. Each point on a particular loan category’s 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 revenues received is based on the amount collected each period. Prepayment Rate – The prepayment rate presented in Note 6 is an annualized, average estimate considering all Borrower Loan categories (i.e. Prosper ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues. 6. Fair Value of Assets and Liabilities
For a description of the fair value hierarchy and Prosper Funding’sFunding’s fair value methodologies, see Note 2 - Summary of Significant Accounting Policies. Prosper Funding did not transfer any assets or liabilities in or out of level 3 during the year ended December 31, 2015.
2017.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk.
Investments held at fair value consists of available for sale investments. The available for sale investments consist of corporate and government bonds. When available, Prosper Funding uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper Funding uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper Funding uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper Funding generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper Funding's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the
same or similar securities. Prosper Funding compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper Funding does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value
except for servicing assets and liabilities at December 31, 2014, which were measured at amortized cost and presented below at fair value for comparison purposes (in thousands):
| | Level 1 | | | Level 2 | | | Level 3 | | | | | |
December 31, 2015 | | Inputs | | | Inputs | | | Inputs | | | Fair Value | |
Assets | | | | | | | | | | | | | | | | |
Borrower Loans | | $ | — | | | $ | — | | | $ | 297,273 | | | $ | 297,273 | |
Servicing Assets | | | — | | | | — | | | | 13,605 | | | $ | 13,605 | |
Loans Held for Sale | | | — | | | | — | | | | 32 | | | | 32 | |
Total Assets | | | — | | | | — | | | | 310,910 | | | | 310,910 | |
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Notes | | $ | — | | | $ | — | | | $ | 297,405 | | | $ | 297,405 | |
Servicing Liabilities | | | — | | | | — | | | | 484 | | | | 484 | |
Total Liabilities | | $ | — | | | $ | — | | | $ | 297,889 | | | $ | 297,889 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | | | | |
December 31, 2014 | | Inputs | | | Inputs | | | Inputs | | | Fair Value | | |
| | December 31, 2017 | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Fair Value |
Assets | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Borrower Loans | | | — | | | | — | | | | 273,243 | | | | 273,243 | | $ | — |
| | $ | — |
| | $ | 293,005 |
| | $ | 293,005 |
|
| Servicing Assets | | — |
| | — |
| | 14,598 |
| | $ | 14,598 |
|
Loans Held for Sale | | | — | | | | — | | | | 8,463 | | | | 8,463 | | — |
| | — |
| | 49 |
| | 49 |
|
Total Assets | | | — | | | | — | | | | 281,706 | | | | 281,706 | | — |
| | — |
| | 307,652 |
| | 307,652 |
|
| | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Notes | | $ | — | | | $ | — | | | $ | 273,783 | | | $ | 273,783 | | $ | — |
| | $ | — |
| | $ | 293,948 |
| | $ | 293,948 |
|
| Servicing Liabilities | | — |
| | — |
| | 59 |
| | 59 |
|
| Loan Trailing Fee Liability | | — |
| | — |
| | 2,595 |
| | 2,595 |
|
Total Liabilities | | $ | — | | | $ | — | | | $ | 273,783 | | | $ | 273,783 | | $ | — |
| | $ | — |
| | $ | 296,602 |
| | $ | 296,602 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Fair Value |
| Assets | |
| | |
| | |
| | |
|
| Borrower Loans | $ | — |
| | $ | — |
| | $ | 315,627 |
| | $ | 315,627 |
|
| Servicing Assets | — |
| | — |
| | 12,461 |
| | 12,461 |
|
| Loans Held for Sale | — |
| | — |
| | 624 |
| | 624 |
|
| Total Assets | — |
| | — |
| | 328,712 |
| | 328,712 |
|
| Liabilities | |
| | |
| | |
| | |
|
| Notes | $ | — |
| | $ | — |
| | $ | 316,236 |
| | $ | 316,236 |
|
| Servicing Liabilities | — |
| | — |
| | 198 |
| | 198 |
|
| Loan Trailing Fee Liability | — |
| | — |
| | 665 |
| | 665 |
|
| Total Liabilities | — |
| | — |
| | 317,099 |
| | 317,099 |
|
As Prosper Funding’sFunding’s Borrower Loans, Loans Held for Sale, Notes, Servicing Assets, Servicing Liabilities and loan servicing rightsLoan Trailing Fee Liability do not trade in an active market with readily observable prices, Prosper Funding uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for
Prosper Funding’sFunding’s level 3 fair value measurements at December 31,
2015:2017:
Borrower Loans, Loans Held for Sale and Notes:
| | Range
|
| | | | |
| | Range |
| Unobservable Input | | December 31, 2015 2017 | | December 31, 2014 2016 |
Discount rate | | 4.3%4.0% - 14.5%
14.4% | | 3.2%4.0% - 10.6%
15.9% |
Default rate | | 1.4%2.0% - 14.4%
15.4% | | 2.6%1.7% - 19.7%
14.9% |
Servicing
Rights:Assets and Liabilities: |
| | | | | | |
| | | Range |
| Unobservable Input | | December 31, 2017 | | December 31, 2016 |
| Discount rate | | 15% - 25% |
| | 15% - 25% |
|
| Default rate | | 1.5% - 16.1% |
| | 1.5% - 15.2% |
|
| Prepayment rate | | 13.5% - 30.2% |
| | 13.6% - 26.6% |
|
Market servicing rate (1) | | 0.625 | % | | 0.625 | % |
(1) Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of December 31, 2017 and 2016, the market rate for collection fees and non-sufficient funds fees was assumed to be 7 basis points and 7 basis points for a weighted-average total market servicing rate of 69.5 basis points and 69.5 basis points respectively.
Loan Trailing Fee Liability:
| | Range
| |
| | | | |
| | Range |
| Unobservable Input | | December 31, 2015 2017 | | | December 31, 2014 | 2016 |
Discount rate | | 15% - 25% | | | 15% - 25% | |
Default rate | | 1.2%1.5% - 14.7%
16.1% | | | 2.6%1.5% - 26.3%
| 15.2% |
Prepayment rate | | 14.3%13.5% - 25.6%
30.2% | | | 8.0%13.6% - 25.8%
| |
Market servicing rate
| | | 0.625
| %
| | 0.625% - 0.70%
| 26.6% |
At December 31,
2015,2017 and 2016, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
The following tables present additional information about level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring
basis: basis (in thousands): Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | Loans | | | | | |
| | | | | | | | | | Held for | | | | | |
| | Borrower Loans | | | Notes | | | Sale | | | Total | |
Balance at January 1, 2015 | | $ | 273,243 | | | $ | (273,783 | ) | | $ | 8,463 | | | $ | 7,923 | |
Originations | | | 197,436 | | | | (197,228 | ) | | | 3,517,467 | | | | 3,517,675 | |
Principal repayments | | | (151,038 | ) | | | 151,025 | | | | (552 | ) | | | (565 | ) |
Borrower loans sold to third parties | | | (855 | ) | | | 813 | | | | (3,525,207 | ) | | | (3,525,249 | ) |
Other changes | | | 81 | | | | (6 | ) | | | (18 | ) | | | 57 | |
Change in fair value | | | (21,594 | ) | | | 21,774 | | | | (121 | ) | | | 59 | |
Balance at December 31, 2015 | | $ | 297,273 | | | $ | (297,405 | ) | | $ | 32 | | | $ | (100 | ) |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | | | | | | | | Loans | | | | | | | Borrower Loans | | Notes | | Loans Held for Sale | | Total |
| | | | | | | | | | Held for | | | | | | |
| | Borrower Loans | | | Notes | | | Sale | | | Total | | |
Balance at January 1, 2014 | | $ | 233,105 | | | $ | (234,218 | ) | | $ | 3,206 | | | $ | 2,093 | | |
Originations | | | 177,088 | | | | (176,865 | ) | | | 1,416,715 | | | | 1,416,938 | | |
| Balance at January 1, 2017 | | | $ | 315,627 |
| | $ | (316,236 | ) | | $ | 624 |
| | $ | 15 |
|
| Purchase of Borrower Loans/Issuance of Notes | | | 194,887 |
| | (194,391 | ) | | 2,619,130 |
| | 2,619,626 |
|
Principal repayments | | | (121,081 | ) | | | 120,909 | | | | - | | | | (172 | ) | | (188,199 | ) | | 191,828 |
| | (89 | ) | | 3,540 |
|
Borrower loans sold to third parties | | | - | | | | - | | | | (1,411,531 | ) | | | (1,411,531 | ) | | (3,855 | ) | | — |
| | (2,619,620 | ) | | (2,623,475 | ) |
| Other changes | | | 97 |
| | (180 | ) | | (3 | ) | | (86 | ) |
Change in fair value | | | (15,868 | ) | | | 16,391 | | | | 73 | | | | 596 | | | (25,552 | ) | | 25,031 |
| | 7 |
| | (514 | ) |
Balance at December 31, 2014 | | $ | 273,244 | | | $ | (273,783 | ) | | $ | 8,463 | | | $ | 7,924 | | |
| Balance at December 31, 2017 | | | $ | 293,005 |
| | $ | (293,948 | ) | | $ | 49 |
| | $ | (894 | ) |
|
| | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | Borrower Loans | | Notes | | Loans Held for Sale | | Total |
| Balance at January 1, 2016 | | $ | 297,273 |
| | $ | (297,405 | ) | | $ | 32 |
| | $ | (100 | ) |
| Purchase of Borrower Loans/Issuance of Notes | | 217,582 |
| | (217,767 | ) | | 1,979,952 |
| | 1,979,767 |
|
| Principal repayments | | (171,195 | ) | | 173,958 |
| | (447 | ) | | 2,316 |
|
| Borrower loans sold to third parties | | (2,515 | ) | | — |
| | (1,978,905 | ) | | (1,981,420 | ) |
| Other changes | | 416 |
| | (591 | ) | | (1 | ) | | (176 | ) |
| Change in fair value | | (25,934 | ) | | 25,569 |
| | (7 | ) | | (372 | ) |
| Balance at December 31, 2016 | | $ | 315,627 |
| | $ | (316,236 | ) | | $ | 624 |
| | $ | 15 |
|
The following table presents additional information about level 3 servicing assets and liabilities measured at fair value on a recurring
basis: | | Servicing | | | Servicing | |
| | Assets | | | Liabilities | |
Amortized Cost at January 1, 2014 | | $ | 436 | | | $ | 167 | |
Additions | | | 4,700 | | | | 662 | |
Less: Transfers to PMI | | | (1,221 | ) | | | | |
Less: Amortization | | | (799 | ) | | | (205 | ) |
Amortized Cost at December 31, 2014 | | | 3,116 | | | | 624 | |
Adjustment to adopt fair value measurement | | | 399 | | | | (29 | ) |
Fair Value at Janaury 1, 2015 | | $ | 3,515 | | | $ | 595 | |
Additions | | | 14,909 | | | | 283 | |
Less: Transfers to PMI | | | (249 | ) | | | - | |
Less: Changes in fair value | | | (4,570 | ) | | | (394 | ) |
Fair Value at December 31, 2015 | | $ | 13,605 | | | $ | 484 | |
|
| | | | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair Value at January 1, 2016 | $ | 13,605 |
| | $ | 484 |
|
| Additions | 9,833 |
| | 9 |
|
| Less: Changes in fair value | (10,977 | ) | | (295 | ) |
| Balance at December 31, 2016 | $ | 12,461 |
| | $ | 198 |
|
| Additions | 14,138 |
| | — |
|
| Less: Changes in fair value | (12,001 | ) | | (139 | ) |
| Fair Value at December 31, 2017 | $ | 14,598 |
| | $ | 59 |
|
The following table presents additional information about level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
|
| | | |
| Balance at January 1, 2016 | $ | — |
|
| Issuances | 647 |
|
| Cash payment of Loan Trailing Fee | (21 | ) |
| Change in fair value | 39 |
|
| Balance at December 31, 2016 | $ | 665 |
|
| Issuances | 2,631 |
|
| Cash payment of Loan Trailing Fee | (956 | ) |
| Change in fair value | 255 |
|
| Balance at December 31, 2017 | $ | 2,595 |
|
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at December 31,
20152017 for Borrower Loans, Loans Held for Sale and Notes
fundedoriginated through the Note Channel are presented in the following table (in thousands, except percentages):
| | Borrower Loans | | | Notes | | |
Discount rate assumption: | | | 6.97 | % | * | | 6.97 | % | * |
Resulting fair value from: | | | | | | | | | |
100 basis point increase | | $ | 294,179 | | | $ | 294,305 | | |
200 basis point increase | | | 291,165 | | | | 291,284 | | |
Resulting fair value from: | | | | | | | | | |
100 basis point decrease | | $ | 300,449 | | | $ | 300,589 | | |
200 basis point decrease | | | 303,710 | | | | 303,858 | | |
Default rate assumption: | | | 10.11 | % | * | | 10.11 | % | * |
Resulting fair value from: | | | | | | | | | |
100 basis point increase | | $ | 294,480 | | | $ | 294,601 | | |
200 basis point increase | | | 291,741 | | | | 291,851 | | |
Resulting fair value from: | | | | | | | | | |
100 basis point decrease | | $ | 300,090 | | | $ | 300,235 | | |
200 basis point decrease | | | 302,931 | | | | 303,088 | | |
| |
| * Represents weighted average assumptions considering all credit grades.
|
|
| | | | | | | | |
| | Borrower Loans / Loans Held for Sale | | Notes | |
| Fair value at December 31, 2017 | $ | 293,054 |
| | $ | 293,948 |
| |
| Discount rate assumption: | 7.15 | % | * | 7.15 | % | * |
| Resulting fair value from: | |
| | |
| |
| 100 basis point increase | $ | 290,116 |
| | $ | 290,948 |
| |
| 200 basis point increase | 287,206 |
| | 288,024 |
| |
| Resulting fair value from: | |
| | |
| |
| 100 basis point decrease | $ | 296,169 |
| | $ | 297,028 |
| |
| 200 basis point decrease | 299,319 |
| | 300,192 |
| |
| | | | | |
| Default rate assumption: | 13.52 | % | * | 13.52 | % | * |
| Resulting fair value from: | |
| | |
| |
| 100 basis point increase | $ | 289,386 |
| | $ | 290,202 |
| |
| 200 basis point increase | 285,792 |
| | 286,581 |
| |
| Resulting fair value from: | |
| | |
| |
| 100 basis point decrease | $ | 296,868 |
| | $ | 297,742 |
| |
| 200 basis point decrease | 300,679 |
| | 301,584 |
| |
* Represents weighted average assumptions considering all credit grades.
The following table presents the estimated impact on
Prosper Funding’sFunding’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates, prepayment rates and different default rates as of December 31,
20152017 (in thousands, except percentages).
| | Servicing Assets | | | Servicing Liabilities | |
Weighted average market servicing rate assumptions | | | 0.625 | % | | | 0.625 | % |
Resulting fair value from: | | | | | | | | |
Servicing rate increase to 0.65% | | | 12,878 | | | | 533 | |
Servicing rate decrease to 0.60% | | | 14,880 | | | | 435 | |
Weighted average prepayment assumptions | | | 18.9 | % | | | 18.9 | % |
Resulting fair value from: | | | | | | | | |
Applying a 1.1 multiplier to default rate | | | 14,061 | | | | 458 | |
Applying a 0.9 multiplier to default rate | | | 14,460 | | | | 476 | |
Weighted average default assumptions | | | 11.00 | % | | | 11.00 | % |
Resulting fair value from: | | | | | | | | |
Applying a 1.1 multiplier to default rate | | | 13,415 | | | | 484 | |
Applying a 0.9 multiplier to default rate | | | 13,796 | | | | 484 | |
|
| | | | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair value at December 31, 2017 | $ | 14,598 |
| | $ | 59 |
|
| Weighted average market servicing rate assumptions | 0.625 | % | | 0.625 | % |
| Resulting fair value from: | |
| | |
|
| Servicing rate increase to 0.65% | 13,670 |
| | 65 |
|
| Servicing rate decrease to 0.60% | 15,525 |
| | 53 |
|
| | | | |
| Weighted average prepayment assumptions | 19.80 | % | | 19.80 | % |
| Resulting fair value from: | |
| | |
|
| Applying a 1.1 multiplier to prepayment rate | 14,414 |
| | 59 |
|
| Applying a 0.9 multiplier to prepayment rate | 14,784 |
| | 60 |
|
| | | | |
| Weighted average default assumptions | 13.00 | % | | 13.00 | % |
| Resulting fair value from: | |
| | |
|
| Applying a 1.1 multiplier to default rate | 14,403 |
| | 59 |
|
| Applying a 0.9 multiplier to default rate | 14,796 |
| | 59 |
|
These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
7. Income Taxes
Prosper Funding incurred no income tax provision for the year ended December 31,
20152017, 2016 and
2014.2015. Prosper Funding is a US disregarded entity and the loss is included in the return of its parent, PMI. Since PMI is in a loss position, not currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.
8.
| Commitments and Contingencies
|
Operating
8. Commitments
and Contingencies
In the normal course of its operations, Prosper Funding amended and restatedbecomes involved in various legal actions. Prosper Funding maintains provisions it considers to be adequate for such actions. Prosper Funding does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper Funding's financial condition, results of operations or cash flows.
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the
platformmarketplace are made by WebBank under its bank charter.
The arrangement allowsPursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for
Borrower Loans to be offered to borrowers at uniform nationwide terms.the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper
Funding is required to pay
WebBank an amount equal to such deficiency. Accordingly, the
greater of a monthly minimum fee
or a fee calculated based on a certain percentage of monthly Borrower Loan origination volume. The minimum annual fee for
the year ended December 31,
20162018 is
$1.4$1.7 million.
The minimum fee is $0.9 million in 2019. Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At December 31, 2017 the Company was in compliance with the covenant.
Loan Purchase Commitments
Prosper Funding has entered into an agreement with WebBank to purchase
$32.7$29.3 million of Borrower Loans that WebBank originated during the
during the last
two business
daydays of
fiscal 2015the year ended December 31, 2017 and
the first business day of
fiscal 2016.the quarter ending March 31, 2018. Prosper
Funding will purchase these Borrower Loans within the first
twothree business days of
fiscal 2016.the quarter ended March 31, 2018.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper Funding and investors that participate in the Whole Loan Channel, Prosper Funding may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper Funding recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans sold through the Whole Loan Channel, which at December 31,
20152017 is
$3.6$3.7 billion. Prosper Funding had accrued
$460 thousand$0.8 million and
$171 thousand$0.6 million as of December 31,
20152017 and
20142016 respectively in regard to this obligation.
9. Related Parties
Since inception, Prosper Funding has engaged in various transactions with its directors and executive officers, sole member, and immediate family members and other affiliates of its directors, executive officers and sole member. Prosper Funding believes that all of the transactions described below were made on terms no less favorable to Prosper Funding than could have been obtained from unaffiliated third parties.
Prosper Funding’s executive officers, directors who are not executive officers and certain affiliates participate on Prosper Funding’s lending platform by placing bids and purchasing Notes. The aggregate amount of the Notes purchased and the income earned by parties deemed to be affiliates and related parties of Prosper Funding as of December 31,
20152017 and
20142016 are summarized below (in thousands):
| | | | | | |
| | | | | | |
| | Aggregate Amount of | | | Interest Earned on | |
Related Party | | Notes Purchased | | | Notes | |
| | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Executive officers and management | | $ | 1,361 | | | $ | 1,127 | | | $ | 206 | | | $ | 159 | |
Directors | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 1,361 | | | $ | 1,127 | | | $ | 206 | | | $ | 159 | |
Related Party | | Notes balance as of December 31, | |
| | 2015 | | | 2014 | |
Executive officers and management | | $ | 1,912 | | | $ | 1,614 | |
Directors | | | — | | | | — | |
Total | | $ | 1,912 | | | $ | 1,614 | |
10.
| Significant Concentrations
|
|
| | | | | | | | | | | | | | | | |
| | | Aggregate Amount of | | Interest Earned on |
| Related Party | | Notes Purchased | | Notes |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Executive officers and management | | $ | 29 |
| | $ | 1,065 |
| | $ | 109 |
| | $ | 225 |
|
| Directors | | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 29 |
| | $ | 1,065 |
| | $ | 109 |
| | $ | 225 |
|
|
| | | | | | | | |
| Related Party | | Notes balance as of December 31, |
| | | 2017 | | 2016 |
| Executive officers and management | | $ | 38 |
| | $ | 1,620 |
|
| Directors | | — |
| | — |
|
| Total | | $ | 38 |
| | $ | 1,620 |
|
10. Significant Concentrations
Prosper Funding is dependent on third party funding sources such as banks,
asset managers and investment funds to provide the
fundsfunding to allow WebBank to originate loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the year ended December 31,
2015, 37%, 19% and 11% were2017, the largest party purchased
by three different parties.a total of 70% of those loans. This compares to
37%20%,
22%16% and
13%9% for the year ended December 31,
2014.2016. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel.
95%93% and
89%90% of Borrower Loans were
fundedoriginated through the Whole Loan Channel in the years ending December 31,
20152017 and
2014,2016, respectively.
EXHIBIT INDEX
|
| | |
Exhibit Number | | Description |
| | |
| | Asset Transfer Agreement, dated January 22, 2013, between Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 2.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) |
| | |
| | Agreement and Plan of Merger dated as of January 23, 2015 by and among Prosper Marketplace, Inc., American HealthCare Lending, LLC (“AHL”), Prosper Healthcare Lending, LLC and Shaun Sorensen, solely in his capacity as agent for AHL’s members and option holders (incorporated by reference to Exhibit 2.1 of PMI’s Current Report on Form 8-K, filed on January 27, 2015) |
| | |
| | Agreement and Plan of Merger, dated as of September 23, 2015, by and among Prosper Marketplace, Inc., BillGuard, Inc., Beach Merger Sub, Inc. and Shareholder Representative Services LLC, solely in its capacity as the Stockholders’ Representative (incorporated by reference to Exhibit 2.1 of PMI’s Current Report on Form 8-K, filed on October 15, 2015) |
| | |
| | Fifth Amended and Restated Limited Liability Company Agreement of Prosper Funding LLC, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of Post-Effective Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-179941), filed on October 23, 2013 by PFL and PMI) |
| | |
| | Amended and Restated Certificate of Incorporation of PMI (incorporated by reference to Exhibit 3.2 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on November 13, 2017) |
| | |
| | PFL Certificate of Formation (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1/A, filed April 23, 2012 by PFL) |
| | |
| | Bylaws of PMI, dated March 22, 2005 (incorporated by reference to Exhibit 3.2 of PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed October 30, 2007) |
| | |
| | Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5)
|
| | |
| | Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4)
|
|
| | |
Exhibit Number | | Description |
| | |
| | |
| | Supplemental Indenture, dated January 22, 2013, between Prosper Marketplace, Inc., Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) |
| | |
| | Indenture, dated June 15, 2009, between Prosper Marketplace, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed on June 26, 2009) |
| | |
| | Amended and Restated Indenture, dated January 22, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K filed on January 28, 2013) |
| | |
| | Form of PFL Borrower Registration Agreement (2) |
| | |
| | Form of PFL Investor Registration Agreement (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Annual Report on Form 10-K, filed on March 20, 2017)
|
| | |
| | Form of PMI Borrower Registration Agreement (incorporated by reference to Exhibit 10.1 of Pre-Effective Amendment No. 1 to PMI’s Registration Statement on Form S-1 (File No. 333-182599), filed on November 19, 2012) |
| | |
| | Asset Sale Agreement, dated July 1, 2016, between PFL and WebBank (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1)
|
| | |
| | Marketing Agreement, dated July 1, 2016, between PMI and WebBank (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1)
|
| | |
| | Amendment No. 1 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 10-Q filed on May 14, 2014) |
| | |
| | Amendment No. 2 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of PMI and PFL’s Annual Report on Form 10-K filed on April 6, 2015) |
| | |
| | Amendment No. 3 to Administration Agreement between PFL and PMI, dated as of November 8, 2016 and made effective as of July 1, 2016 (incorporated by reference to Exhibit 10.8 of PMI and PFL's Annual Report on Form 10-K, filed on March 20, 2017)
|
| | |
| | Services and Indemnity Agreement, dated March 1, 2012, between Global Securitization Services, LLC, Kevin Burns, Bernard Angelo, Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.8 of Pre-Effective Amendment No. 3 to PFL and PMI’s Registration Statement on Form S-1 (File Nos. 333-179941 and 333-179941-01), filed on November 21, 2012) |
| | |
| | Second Amended and Restated Loan Sale Agreement, dated January 25, 2013, between WebBank, Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.5 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) |
| | |
| | Second Amended and Restated Loan Account Program Agreement, dated January 25, 2013, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.6 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) |
| | |
| | Stand By Loan Purchase Agreement, dated January 25, 2013, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) |
| | |
| | Amended and Restated Loan Sale Agreement, dated September 14, 2010, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.4 of PMI’s Quarterly Report on Form 10-Q, filed on November 12, 2010) (1) |
| | |
| | Amended and Restated Loan Account Program Agreement, dated September 14, 2010, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.3 of PMI’s Quarterly Report on Form 10-Q, filed on November 12, 2010) (1) |
| | |
| | Indemnification Agreement, dated January 15, 2013, between Prosper Marketplace, Inc. and Patrick Grady (incorporated by reference to Exhibit 10.20 of PMI and PFL’s Annual Report on Form 10-K, filed on March 31, 2014) (3) |
| | |
|
| | |
Exhibit Number | | Description |
| | |
| | Form of Indemnification Agreement for PMI’s directors (other than Patrick Grady), officers and key employees (3) |
| | |
| | Form of PMI interim Borrower Registration Agreement (incorporated by reference to Exhibit 10.12 to Post-Effective Amendment No. 1 to PMI's Registration Statement on Form S-1 (File No. 333-182599) filed on January 7, 2013) |
| | |
| | Form of PMI interim Lender Registration Agreement (incorporated by reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to PMI's Registration Statement on Form S-1 (File No. 333-182599) filed on January 7, 2013) |
| | |
| | Back-Up Servicing Agreement (Note Channel), dated as of February 24, 2017, among PFL, PMI, and First Associates Loan Servicing, LLC (incorporated by reference to Exhibit 10.10 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on May 15, 2017) (1)
|
| | |
| | Amended and Restated Services and Indemnity Agreement, dated May 30, 2013, between Prosper Funding LLC, Prosper Marketplace, Inc., Global Securititization Services, LLC, Bernard J. Angelo and David V. DeAngelis (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K, filed on June 5, 2013) (3) |
| | |
| | Second Amendment to Second Amended and Restated Loan Sale Agreement, dated October 27, 2015, between PMI, PFL and WebBank (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Quarterly Report on Form 10-Q filed on November 9, 2015) |
| | |
| | Amended and Restated Prosper Marketplace, Inc. 2005 Stock Plan (incorporated by reference to Exhibit 4.2 of PMI’s Registration Statement on Form S-8 filed on May 29, 2014) (3) |
| | |
| | Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed on May 12, 2015) (3) |
| | |
| | Amendment No. 1 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed on April 13, 2016) (3) |
| | |
| | Amendment No. 2 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed on August 15, 2016) (3)
|
| | |
| | Form of Stock Option Agreement under the Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.29 of PMI and PFL’s Annual Report on Form 10-K, filed on March 18, 2016) (3) |
| | |
| | Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.30 of PMI and PFL’s Annual Report on Form 10-K, filed on March 18, 2016) (3) |
| | |
| | Asset Sale Agreement, dated July 1, 2016, between WebBank and Prosper Funding LLC (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1) |
| | |
| | Marketing Agreement, dated July 1, 2016, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1) |
| | |
| | Stand By Purchase Agreement, dated July 1, 2016, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Current Report on Form 8-K, filed on July 8, 2016) (1) |
| | |
| | Warrant Agreement, dated as of February 27, 2017, among PMI, PF WarrantCo Holdings, LP, and, for certain limited purposes, New Residential Investment Corp (incorporated by reference to Exhibit 10.9 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on May 15, 2017) (1)
|
| | |
| | Amendment No. 4 to Administration Agreement between PFL and PMI, dated as of January 25, 2018 (2) |
| | |
| | Subsidiaries of Prosper Marketplace, Inc. (2) |
| | |
| | Subsidiaries of Prosper Funding LLC (2) |
| | |
| | Consent of Independent Registered Accounting Firm (2) |
| | |
| | Certification of Chief Executive Officer of PMI Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) |
| | |
|
| | |
Exhibit Number | | Description |
| | |
| | Certification of Principal Financial Officer of PMI pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) |
| | |
| | Certification of Chief Executive Officer of PFL Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| | Certification of Treasurer of PFL Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) |
| | |
| | Certification of Principal Executive Officer and Principal Financial Officer of PMI pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) |
| | |
| | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Annual Report on Form 10-K for the year ended December 31, 2017. (2)
|
| | |
| |
| (1) | Certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act. |
| |
| (3) | Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this
17th23th day of March,
2016.2018. |
| | |
| PROSPER MARKETPLACE, INC. |
By:
| | /s/ Aaron Vermut
|
| By: | Aaron Vermut
/s/ David Kimball |
| | David Kimball |
| | Chief Executive Officer (Principal Executive Officer) Director |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
John HiestandUsama Ashraf and Sachin Adarkar, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
| | Title
| | Date
|
| | | | |
| Name | | Title | | Date |
| | | | |
/s/ Aaron Vermut David Kimball | | Chief Executive Officer (Principal Executive Officer); Director | | March 17, 2016 23, 2018 |
Aaron Vermut
David Kimball | | | | |
| | | | |
/s/ John Hiestand Usama Ashraf | | Vice President, FinanceChief Financial Officer (Principal Financial and Accounting Officer)
| | March 17, 2016 23, 2018 |
John Hiestand
Usama Ashraf | | | | |
/s/ Stephan P. Vermut
| | Executive Chairman; Director
| | March 17, 2016
|
Stephan P. Vermut
/s/ Claire A. Huang | | Director | | March 23, 2018 |
/s/ Christopher M. Bishko
Claire A. Huang | | Director
| | March 17, 2016
|
Christopher M. Bishko
| | | | |
/s/ Rajeev V. Date | | Director | | March 17, 2016 23, 2018 |
Rajeev V. Date | | | | |
| | | | |
| /s/ Patrick W. Grady | | Director | | March 17, 2016 23, 2018 |
Patrick W. Grady | | | | |
| | | | |
| /s/ David R. Golob | | Director | | March 17, 2016 23, 2018 |
David R. Golob | | | | |
| | | | |
| /s/ Nigel W. Morris | | Director | | March 17, 2016 23, 2018 |
Nigel W. Morris | | | | |
| | | | |
| /s/ Mason D. Haupt | | Director | | March 23, 2018 |
Mason D. Haupt
| | | | |
| | | | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this
17th23th day of March,
2016.2018. |
| | |
| PROSPER FUNDING LLC |
By:
| | /s/ Aaron Vermut
|
| By: | Aaron Vermut
/s/ David Kimball |
| | David Kimball |
| | Chief Executive Officer (Principal Executive Officer); Director |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
John HiestandUsama Ashraf and Sachin Adarkar, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
| | Title
| | Date
|
| | | | |
| Name | | Title | | |
| | | | |
/s/ Aaron Vermut David Kimball | | Chief Executive Officer (Principal Executive Officer); Director | | March 17, 2016 23, 2018 |
Aaron Vermut
David Kimball | | | | |
| | | | |
/s/ John Hiestand Usama Ashraf | | Chief Financial Officer, Treasurer (Principal Financing and Accounting Officer) ; Director | | March 17, 2016 23, 2018 |
John Hiestand
Usama Ashraf
| | | | |
/s/ Stephan P. Vermut
| | Executive Chairman; Director
| | March 17, 2016
|
Stephan Vermut
| | | | |
/s/ Ronald Suber
| | President; Director
| | March 17, 2016
|
Ronald Suber
| | | | |
/s/ Bernard J. Angelo | | Director | | March 17, 2016 23, 2018 |
Bernard J. Angelo | | | | |
| | | | |
| /s/ David V. DeAngelis | | Director | | March 17, 2016 23, 2018 |
David V. DeAngelis | | | | |
EXHIBIT INDEX
Exhibit
Number
| | Description
|
2.1
| | Asset Transfer Agreement, dated January 22, 2013, between Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 2.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
|
2.2
| | Agreement and Plan of Merger dated as of January 23, 2015 by and among Prosper Marketplace, Inc., American HealthCare Lending, LLC (“AHL”), Prosper Healthcare Lending, LLC and Shaun Sorensen, solely in his capacity as agent for AHL’s members and option holders (incorporated by reference to Exhibit 2.1 of PMI’s Current Report on Form 8-K, filed on January 27, 2015)
|
2.3
| | Agreement and Plan of Merger, dated as of September 23, 2015, by and among Prosper Marketplace, Inc., BillGuard, Inc., Beach Merger Sub, Inc. and Shareholder Representative Services LLC, solely in its capacity as the Stockholders’ Representative (incorporated by reference to Exhibit 2.1 of PMI’s Current Report on Form 8-K, filed on October 15, 2015)
|
3.1
| | Fifth Amended and Restated Limited Liability Company Agreement of Prosper Funding LLC, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of Post-Effective Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-179941), filed October 23, 2013 by PFL and PMI)
|
3.2
| | Amended and Restated Certificate of Incorporation of Prosper Marketplace, Inc. (2)
|
3.3
| | Prosper Funding LLC Certificate of Formation (incorporated by reference to Exhibit 3.2 of Pre-Effective Amendment No. 1 to PFL and PMI’s Registration Statement on Form S-1 (File No. 333-179941), filed on April 23, 2012)
|
3.4
| | Bylaws of PMI, dated March 22, 2005 (incorporated by reference to Exhibit 3.2 of PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed October 30, 2007)
|
4.1
| | Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5, incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K filed on January 28, 2013)
|
4.2
| | Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4, incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed June 26, 2009)
|
4.3
| | Supplemental Indenture, dated January 22, 2013, between Prosper Marketplace, Inc., Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
|
4.4
| | Indenture, dated June 15, 2009, between Prosper Marketplace, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed June 26, 2009)
|
4.5
| | Amended and Restated Indenture, dated January 22, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K filed on January 28, 2013)
|
10.1
| | Form of PFL Borrower Registration Agreement (2)
|
10.2
| | Form of PFL Investor Registration Agreement (2)
|
10.3
| | Form of PMI Borrower Registration Agreement (incorporated by reference to Exhibit 10.1 of Pre-Effective Amendment No. 1 to PMI’s Registration Statement on Form S-1 (File No. 333-182599), filed on November 19, 2012)
|
Exhibit
Number
| | Description
|
10.4
| | Form of PMI Lender Registration Agreement (Note Commitment, Purchase and Sale Agreement) (incorporated by reference to Exhibit 10.2 of Pre-Effective Amendment No. 1 to PMI’s Registration Statement on Form S-1 (File No. 333-182599) filed on November 19, 2012)
|
10.5
| | Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
|
10.6
| | Amendment No. #1 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 10-Q filed on May 14, 2014)
|
10.7
| | Amendment No. #2 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of PMI and PFL’s Annual Report on Form 10-K filed April 6, 2015)
|
10.8
| | Services and Indemnity Agreement, dated March 1, 2012, between Global Securitization Services, LLC, Kevin Burns, Bernard Angelo, Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.8 of Pre-Effective Amendment No. 3 to PFL and PMI’s Registration Statement on Form S-1 (File Nos. 333-179941 and 333-179941-01), filed November 21, 2012)
|
10.9
| | Second Amended and Restated Loan Sale Agreement, dated January 25, 2013, between WebBank, Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.5 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1)
|
10.10
| | Second Amended and Restated Loan Account Program Agreement, dated January 25, 2013, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.6 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1)
|
10.11
| | Stand By Loan Purchase Agreement, dated January 25, 2013, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1)
|
10.12
| | Amended and Restated Loan Sale Agreement, dated September 14, 2010, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.4 of PMI’s Quarterly Report on Form 10-Q, filed November 12, 2010) (1)
|
10.13
| | Amended and Restated Loan Account Program Agreement, dated September 14, 2010, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.3 of PMI’s Quarterly Report on Form 10-Q, filed November 12, 2010) (1)
|
10.14
| | Amended and Restated Hosting Services Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
|
10.15
| | Amended and Restated Services Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
|
10.16
| | Amended and Restated License Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.4 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
|
10.17
| | Hosting Services Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.5 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)
|
10.18
| | Prosper-Folio Services Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.6 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)
|
Exhibit
Number
| | Description
|
10.19
| | Prosper-Folio Software License Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)
|
10.20
| | Indemnification Agreement, dated January 15, 2013, between Prosper Marketplace, Inc. and Patrick Grady (incorporated by reference to Exhibit 10.20 of PMI and PFL’s Annual Report on Form 10-K, filed March 31, 2014) (3)
|
10.21
| | Form of Indemnification Agreement for PMI’s directors (other than Patrick Grady), officers and key employees (2) (3)
|
10.22
| | Form of PMI interim Borrower Registration Agreement (2)
|
10.23
| | Form of PMI interim Lender Registration Agreement (2)
|
10.24
| | Backup Servicing Agreement, dated January 9, 2014, between Prosper Funding LLC and First Associates Loan Servicing, LLC (incorporated by reference to Exhibit 10.25 of PMI and PFL’s the Annual Report on Form 10-K, filed March 31, 2014)
|
10.25
| | Amended and Restated Services and Indemnity Agreement, dated May 30, 2013, between Prosper Funding LLC, Prosper Marketplace, Inc., Global Securititization Services, LLC, Bernard J. Angelo and David V. DeAngelis (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K, filed June 5, 2013) (3)
|
10.26
| | Second Amendment to Second Amended and Restated Loan Sale Agreement, dated October 27, 2015, between PMI, PFL and WebBank (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Quarterly Report on Form 10-Q filed November 9, 2015)
|
10.27
| | Amended and Restated Prosper Marketplace, Inc. 2005 Stock Plan (incorporated by reference to Exhibit 4.2 of PMI’s Registration Statement on Form S-8 filed May 29, 2014) (3)
|
10.28
| | Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed May 12, 2015) (3)
|
10.29
| | Form of Stock Option Agreement under the Prosper Marketplace, Inc. 2015 Equity Incentive Plan (2) (3)
|
10.30
| | Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the Prosper Marketplace, Inc. 2015 Equity Incentive Plan (2) (3)
|
21.1
| | Subsidiaries of Prosper Marketplace, Inc. (2)
|
21.2
| | Subsidiaries of Prosper Funding LLC (incorporated by reference to Exhibit 21.2 of PMI and PFL’s Annual Report on Form 10-K, filed March 31, 2013)
|
23.1
| | Consent of Independent Registered Accounting Firm (2)
|
31.1
| | Certification of Chief Executive Officer of PMI Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
|
31.2
| | Certification of Principal Financial Officer of PMI pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
|
31.3
| | Certification of Chief Executive Officer of PFL Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
|
31.4
| | Certification of Principal Financial Officer of PFL pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)
|
Exhibit
Number
| | Description
|
32.1
| | Certification of Principal Executive Officer and Principal Financial Officer of PMI pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
|
32.2
| | Certification of Principal Executive Officer and Principal Financial Officer of PFL pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
|
99.1
| | Unaudited Pro Forma Condensed Combined Financial Information (2)
|
(1)
| Certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act.
|
(3)
| Management contract or compensatory plan or arrangement.
|
S-2