SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2016March 31, 2017 |
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File Number | | Exact Name of Registrant as Specified in its Charter | | Identification Number |
333-204880 | | PROSPER MARKETPLACE, INC. 221 Main Street, 3rd3rd Floor Telephone: (415)593-5400 | | 73-1733867 |
| | | | |
333-204880-01 | | a Delaware limited liability company 221 Main Street, 3rd3rd Floor Telephone: (415)593-5479 | | 45-4526070 |
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
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| |
Prosper Marketplace, Inc. | Yesx No ¨ |
Prosper Funding LLC | Yesx No ¨ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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| |
Prosper Marketplace, Inc. | Yesx No ¨ |
Prosper Funding LLC | Yesx No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large
Accelerated
Filer
| | Accelerated
Filer
| | Non-
Accelerated
Filer
| | Smaller
Reporting
Company
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| | | | | | | | | |
| Large Accelerated Filer | | Accelerated Filer | | Non- Accelerated Filer | | Smaller Reporting Company | | Emerging Growth Company |
Prosper Marketplace, Inc. | o | | o | | x | | o | | o |
Prosper Funding LLC | o | | o | | o x | | x o | | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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| |
Prosper Marketplace, Inc. | Yes¨ No x |
Prosper Funding LLC | Yes¨ No x |
Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
As of
August 4, 2016,May 5, 2017, there were
69,744,20169,718,933 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.
THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PROSPER MARKETPLACE, INC. AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.
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PART I. | | FINANCIAL INFORMATION | | |
Item 1. | | | | 4
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Item 2. | | | | 41
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Item 3. | | | | 53
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Item 4. | | | | 54
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PART II. | | | | 55
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Item 1. | | | | 55
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Item 1A. | | | | 55
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Item 2. | | | | 55
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Item 3. | | | | 55
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Item 4. | | | | 55
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Item 5. | | | | 55
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Item 6. | | | | 55
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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 Healthcare Lending LLC (“PHL”), a Delaware limited liability company, and Prosper Capital Management LLC, a Delaware limited liability company, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned
subsidiary,subsidiaries, Prosper Asset Holdings LLC (“PAH”),
a Delaware limited liability company, and Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis. In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” Further, investors currently invest in Borrower Loans through two channels: (i) the “Note Channel”, which allows investors to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel”, which allows accredited and institutional investors to purchase Borrower Loans in their entirety directly from PFL. Finally, although historically we have referred to investors as “lender members,” we call them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace. All share and per share numbers presented in this Form 10-Q have been adjusted to reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and
2
expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
| ·
| the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
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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; | ·
| 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; | ·
| credit risks posed by the credit worthiness of borrowers and the effectiveness of our credit rating systems;
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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; | ·
| our limited operational history and lack of significant historical performance data about borrower performance;
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credit risks posed by the credit worthiness of borrowers, including the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes, 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; | ·
| our compliance with applicable local, state and federal law, including the Securities Act, Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
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our compliance with applicable regulations and regulatory developments or court decisions affecting our business; | ·
| potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace;
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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; | ·
| 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 Securities Act, 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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potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace; | ·
| the 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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the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI; | ·
| the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and
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the lack of a public trading market for the Notes and the lack of any trading platform on which investors can resell the Notes; | ·
| our ability to prevent security breaches, disruptions in service,the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our marketplace or adversely impact our ability to service Borrower Loans.
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our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of our marketplace or adversely impact our ability to service Borrower Loans.
There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of our Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
WHERE YOU CAN FIND MORE INFORMATION
The following filings are available for download free of charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public at the SEC’s Internet site at http://www.sec.gov.
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Item 1. Condensed
ConsolidatedConsolidated Financial StatementsProsper Marketplace, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except for share and per share amounts)
| | June 30, 2016 | | | December 31, 2015 | |
Assets | | | | | | | | |
Cash and Cash Equivalents | | $ | 28,824 | | | $ | 66,295 | |
Restricted Cash | | | 133,216 | | | | 151,223 | |
Available for Sale Investments, at Fair Value | | | 55,713 | | | | 73,187 | |
Accounts Receivable | | | 870 | | | | 2,434 | |
Loans Held for Sale, at Fair Value | | | 4,705 | | | | 32 | |
Borrower Loans, at Fair Value | | | 310,034 | | | | 297,273 | |
Property and Equipment, Net | | | 28,178 | | | | 24,965 | |
Prepaid and Other Assets | | | 6,747 | | | | 6,433 | |
Servicing Assets | | | 14,297 | | | | 14,363 | |
Goodwill | | | 36,368 | | | | 36,368 | |
Intangibles Assets, Net | | | 11,076 | | | | 13,051 | |
Total Assets | | $ | 630,028 | | | $ | 685,624 | |
Liabilities, Convertible Preferred Stock and Stockholders' Deficit | | | | | | | | |
Accounts Payable and Accrued Liabilities | | $ | 13,104 | | | $ | 22,409 | |
Payable to Investors | | | 114,876 | | | | 136,507 | |
Notes at Fair Value | | | 309,530 | | | | 297,405 | |
Other Liabilities | | | 24,416 | | | | 20,735 | |
Total Liabilities | | | 461,926 | | | | 477,056 | |
Commitments and Contingencies (see Note 16) | | | | | | | | |
Convertible Preferred Stock – $0.01 par value; 177,388,425 shares authorized, issued and outstanding as of June 30, 2016 and December 31, 2015. Aggregate liquidation preference of $325,952 as of June 30, 2016 and December 31, 2015. | | | 275,938 | | | | 275,938 | |
Stockholders' Deficit | | | | | | | | |
Common Stock ($0.01 par value; 298,222,103 shares authorized, 70,893,225 issued and 69,957,290 outstanding as of June 30, 2016; and 270,326,075 shares authorized, 70,367,425 shares issued and 69,431,490 outstanding as of December 31, 2015) | | | 174 | | | | 127 | |
Additional Paid-In Capital | | | 115,325 | | | | 102,971 | |
Less: Treasury Stock (5,177,235 common shares at cost, June 30, 2016 and December 31, 2015) | | | (23,417 | ) | | | (23,417 | ) |
Accumulated Deficit | | | (199,996 | ) | | | (146,907 | ) |
Accumulated Other Comprehensive Income/(Loss) | | | 78 | | | | (144 | ) |
Total Stockholders' Deficit | | | (107,836 | ) | | | (67,370 | ) |
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit | | $ | 630,028 | | | $ | 685,624 | |
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| | | | | | | |
| March 31, 2017 | | December 31, 2016 |
Assets | |
| | |
|
Cash and Cash Equivalents | $ | 28,535 |
| | $ | 22,337 |
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Restricted Cash | 133,321 |
| | 163,907 |
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Available for Sale Investments, at Fair Value | 8,004 |
| | 32,769 |
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Accounts Receivable | 882 |
| | 757 |
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Loans Held for Sale, at Fair Value | 109 |
| | 624 |
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Borrower Loans, at Fair Value | 317,536 |
| | 315,627 |
|
Property and Equipment, Net | 23,672 |
| | 24,853 |
|
Prepaid and Other Assets | 8,874 |
| | 4,606 |
|
Servicing Assets | 12,436 |
| | 12,786 |
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Goodwill | 36,368 |
| | 36,368 |
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Intangible Assets, Net | 4,039 |
| | 9,212 |
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Total Assets | $ | 573,776 |
| | $ | 623,846 |
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Liabilities, Convertible Preferred Stock and Stockholders' Deficit | |
| | |
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Accounts Payable and Accrued Liabilities | $ | 8,575 |
| | $ | 15,017 |
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Payable to Investors | 115,051 |
| | 142,644 |
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Notes at Fair Value | 316,944 |
| | 316,236 |
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Other Liabilities | 11,704 |
| | 17,173 |
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Convertible Preferred Stock Warrant Liability | 30,811 |
| | 21,711 |
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Total Liabilities | 483,085 |
| | 512,781 |
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Commitments and Contingencies (see Note 17) |
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| |
|
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Convertible Preferred Stock – $0.01 par value; 407,511,351 shares authorized; 177,388,428 issued and outstanding as of March 31, 2017; and 217,388,425 shares authorized, 177,388,425 issued and outstanding as of December 31, 2016. Aggregate liquidation preference of $325,952 as of March 31, 2017 and December 31, 2016. | 275,938 |
| | 275,938 |
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Stockholders' Deficit | |
| | |
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Common Stock ($0.01 par value; 550,000,000 shares authorized, 70,615,559 issued and 69,679,624 outstanding as of March 31, 2017; and 338,222,103 shares authorized, 70,843,044 shares issued and 69,907,109 outstanding as of December 31, 2016) | 220 |
| | 212 |
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Additional Paid-In Capital | 127,618 |
| | 123,988 |
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Less: Treasury Stock | (23,417 | ) | | (23,417 | ) |
Accumulated Deficit | (289,665 | ) | | (265,648 | ) |
Accumulated Other Comprehensive Loss | (3 | ) | | (8 | ) |
Total Stockholders' Deficit | (185,247 | ) | | (164,873 | ) |
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit | $ | 573,776 |
| | $ | 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 condensed consolidated financial statements.
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Prosper Marketplace, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except for share and per share amounts) | | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Revenues | | | | | | | | | | | | | | | | |
Operating Revenues | | | | | | | | | | | | | | | | |
Transaction Fees, Net | | $ | 19,276 | | | $ | 39,800 | | | $ | 61,100 | | | $ | 65,142 | |
Servicing Fees, Net | | | 7,676 | | | | 3,575 | | | | 14,819 | | | | 6,144 | |
Gain (Loss) on Sale of Borrower Loans | | | (687 | ) | | | 3,696 | | | | 3,104 | | | | 5,618 | |
Other Revenue | | | 816 | | | | 1,630 | | | | 3,589 | | | | 2,685 | |
Total Operating Revenues | | | 27,081 | | | | 48,701 | | | | 82,612 | | | | 79,589 | |
Interest Income | | | | | | | | | | | | | | | | |
Interest Income on Borrower Loans | | | 11,192 | | | | 10,165 | | | | 21,975 | | | | 20,634 | |
Interest Expense on Notes | | | (10,098 | ) | | | (9,448 | ) | | | (19,819 | ) | | | (19,011 | ) |
Net Interest Income | | | 1,094 | | | | 717 | | | | 2,156 | | | | 1,623 | |
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | | | (2 | ) | | | 95 | | | | (79 | ) | | | 21 | |
Total Net Revenue | | | 28,173 | | | | 49,513 | | | | 84,689 | | | | 81,233 | |
Expenses | | | | | | | | | | | | | | | | |
Origination and Servicing | | | 8,833 | | | | 7,126 | | | | 19,282 | | | | 13,982 | |
Sales and Marketing | | | 12,303 | | | | 26,580 | | | | 45,023 | | | | 45,150 | |
General and Administrative | | | 28,499 | | | | 21,832 | | | | 59,145 | | | | 35,329 | |
Restructuring Charges | | | 14,061 | | | | - | | | | 14,061 | | | | - | |
Total Expenses | | | 63,696 | | | | 55,538 | | | | 137,511 | | | | 94,461 | |
Net Loss Before Taxes | | | (35,523 | ) | | | (6,025 | ) | | | (52,822 | ) | | | (13,228 | ) |
Income Tax Expense | | | 105 | | | | 176 | | | | 270 | | | | 249 | |
Net Loss Applicable to Common Stockholders | | $ | (35,628 | ) | | $ | (6,201 | ) | | $ | (53,092 | ) | | $ | (13,477 | ) |
Net Loss Per Share – Basic and Diluted | | $ | (0.56 | ) | | $ | (0.11 | ) | | $ | (0.86 | ) | | $ | (0.25 | ) |
Weighted-Average Shares - Basic and Diluted | | | 63,270,058 | | | | 55,612,485 | | | | 61,813,773 | | | | 54,168,175 | |
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| Three Months Ended March 31, |
| 2017 | | 2016 |
Revenues | |
| | |
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Operating Revenues | |
| | |
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Transaction Fees, Net | $ | 26,869 |
| | $ | 41,824 |
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Servicing Fees, Net | 6,154 |
| | 7,144 |
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Gain (Loss) on Sale of Borrower Loans | (318 | ) | | 3,791 |
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Fair Value of Warrants Vested on Sale of Borrower Loans | (3,307 | ) | | — |
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Other Revenue | 720 |
| | 2,773 |
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Total Operating Revenues | 30,118 |
| | 55,532 |
|
Interest Income | | | |
Interest Income on Borrower Loans | 11,499 |
| | 10,783 |
|
Interest Expense on Notes | (10,678 | ) | | (9,722 | ) |
Net Interest Income | 821 |
| | 1,061 |
|
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | (94 | ) | | (78 | ) |
Total Net Revenue | 30,845 |
| | 56,515 |
|
Expenses | | | |
Origination and Servicing | 8,404 |
| | 10,449 |
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Sales and Marketing | 19,555 |
| | 32,720 |
|
General and Administrative | 20,717 |
| | 30,645 |
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Restructuring Charges, Net | (75 | ) | | — |
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Other Expenses, Net | 6,101 |
| | — |
|
Total Expenses | 54,702 |
| | 73,814 |
|
Net Loss Before Taxes | (23,857 | ) | | (17,299 | ) |
Income Tax Expense | 164 |
| | 165 |
|
Net Loss Applicable to Common Stockholders | $ | (24,021 | ) | | $ | (17,464 | ) |
Net Loss Per Share – Basic and Diluted | $ | (0.35 | ) | | $ | (0.29 | ) |
Weighted-Average Shares - Basic and Diluted | 69,178,049 |
| | 60,357,488 |
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All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016. The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Marketplace, Inc.
Condensed Consolidated Statements of Other Comprehensive
Income (Loss)Loss (Unaudited)
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Net Loss | | $ | (35,628 | ) | | $ | (6,201 | ) | | $ | (53,092 | ) | | $ | (13,477 | ) |
Other Comprehensive Income (Loss), Before Tax | | | | | | | | | | | | | | | | |
Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value | | | 25 | | | | - | | | | 215 | | | | - | |
Realized Gain (Loss) on Sale of Available for Sale Investments, at Fair Value | | | 6 | | | | - | | | | 6 | | | | - | |
Other Comprehensive Income (Loss), Before Tax | | | 31 | | | | - | | | | 221 | | | | - | |
Income tax effect | | | - | | | | - | | | | - | | | | - | |
Other Comprehensive Income (Loss), Net of Tax | | | 31 | | | | - | | | | 221 | | | | - | |
Comprehensive Income (Loss) | | | (35,597 | ) | | | (6,201 | ) | | | (52,871 | ) | | | (13,477 | ) |
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| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Net Loss | $ | (24,021 | ) | | $ | (17,464 | ) |
Other Comprehensive Income, Before Tax | |
| | |
|
Change in Net Unrealized Gain on Available for Sale Investments, at Fair Value | 17 |
| | 191 |
|
Realized (Gain) Loss on Sale of Available for Sale Investments, at Fair Value | (12 | ) | | — |
|
Other Comprehensive Income, Before Tax | 5 |
| | 191 |
|
Income tax effect | — |
| | — |
|
Other Comprehensive Income, Net of Tax | 5 |
| | 191 |
|
Comprehensive Loss | (24,016 | ) | | (17,273 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Marketplace, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| | Six Months Ended June 30, | |
| | 2016 | | | 2015 | |
Cash flows from Operating Activities: | | | | | | | | |
Net Loss | | $ | (53,092 | ) | | $ | (13,477 | ) |
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 | | | 79 | | | | (21 | ) |
Depreciation and Amortization | | | 6,430 | | | | 3,455 | |
Gain on Sales of Borrower Loans | | | (5,690 | ) | | | (5,857 | ) |
Change in Fair Value of Servicing Rights | | | 5,647 | | | | 1,895 | |
Stock-Based Compensation Expense | | | 11,510 | | | | 4,192 | |
Restructuring Liability | | | 8,492 | | | | - | |
Other, Net | | | 227 | | | | 45 | |
Changes in Operating Assets and Liabilities: | | | | | | | | |
Purchase of Loans Held for Sale at Fair Value | | | (1,358,011 | ) | | | (1,402,499 | ) |
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | | | 1,353,338 | | | | 1,409,426 | |
Restricted Cash Except for those Related to Investing Activities | | | 20,621 | | | | (63,254 | ) |
Accounts Receivable | | | 1,564 | | | | 1,956 | |
Prepaid and Other Assets | | | (84 | ) | | | (2,235 | ) |
Accounts Payable and Accrued Liabilities | | | (4,995 | ) | | | 2,754 | |
Payable to Investors | | | (21,631 | ) | | | 70,551 | |
Other Liabilities | | | (7,690 | ) | | | (2,000 | ) |
Net cash (Used in) provided by Operating Activities | | | (43,285 | ) | | | 4,931 | |
Cash Flows from Investing Activities: | | | | | | | | |
Purchase of Borrower Loans Held at Fair Value | | | (109,215 | ) | | | (94,512 | ) |
Principal Payments of Borrower Loans Held at Fair Value | | | 83,514 | | | | 73,457 | |
Purchases of Property and Equipment | | | (8,600 | ) | | | (6,412 | ) |
Maturities of Short Term Investments | | | 1,278 | | | | 1,274 | |
Purchases of Short Term Investments | | | (1,277 | ) | | | (1,275 | ) |
Purchases of Available for Sale Investments, at Fair Value | | | (11,725 | ) | | | - | |
Proceeds from Sale of Available for Sale Investments | | | 9,193 | | | | - | |
Maturities of Available for Sale Investments | | | 20,064 | | | | - | |
Acquisition of Businesses, Net of Cash Acquired | | | - | | | | (19,000 | ) |
Changes in Restricted Cash Related to Investing Activities | | | (2,614 | ) | | | (2,729 | ) |
Net Cash Used in Investing Activities | | | (19,382 | ) | | | (49,197 | ) |
Cash Flows from Financing Activities: | | | | | | | | |
Proceeds from Issuance of Notes Held at Fair Value | | | 109,147 | | | | 94,575 | |
Payments of Notes Held at Fair Value | | | (84,200 | ) | | | (73,509 | ) |
Proceeds from Issuance of Convertible Preferred Stock, Net | | | - | | | | 164,793 | |
Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock | | | 464 | | | | 4,609 | |
Repurchase of Common Stock and Restricted Stock | | | (46 | ) | | | (21,250 | ) |
Taxes Paid for Awards Vested Under Equity Incentive Plans | | | (169 | ) | | | (2,206 | ) |
Net Cash Provided by Financing Activities | | | 25,196 | | | | 167,012 | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | (37,471 | ) | | | 122,746 | |
Cash and Cash Equivalents at Beginning of the Period | | | 66,295 | | | | 50,557 | |
Cash and Cash Equivalents at End of the Period | | $ | 28,824 | | | $ | 173,303 | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
Cash Paid for Interest | | $ | 19,787 | | | $ | 19,147 | |
Non-Cash Investing Activity- Accrual for Property and Equipment, Net | | $ | 346 | | | $ | 26 | |
Non-Cash Investing Activity- Amount Payable for the Acquisition of Business | | $ | - | | | $ | 840 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Cash flows from Operating Activities: | |
| | |
|
Net Loss | $ | (24,021 | ) | | $ | (17,464 | ) |
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 | 94 |
| | 78 |
|
Depreciation and Amortization | 3,443 |
| | 2,971 |
|
Gain on Sales of Borrower Loans | (2,764 | ) | | (3,971 | ) |
Change in Fair Value of Servicing Rights | 3,063 |
| | 2,741 |
|
Stock-Based Compensation Expense | 3,500 |
| | 5,107 |
|
Restructuring Liability | (73 | ) | | — |
|
Fair Value of Warrants Vested | 4,790 |
| | — |
|
Impairment Losses on Assets Held for Sale | 4,321 |
| | — |
|
Other, Net | 416 |
| | (30 | ) |
Changes in Operating Assets and Liabilities: | | | |
Purchase of Loans Held for Sale at Fair Value | (523,997 | ) | | (931,420 | ) |
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | 524,515 |
| | 931,422 |
|
Restricted Cash Except for those Related to Investing Activities | 26,440 |
| | 2,118 |
|
Accounts Receivable | (125 | ) | | (218 | ) |
Prepaid and Other Assets | (4,270 | ) | | (677 | ) |
Accounts Payable and Accrued Liabilities | (5,670 | ) | | (7,414 | ) |
Payable to Investors | (27,593 | ) | | (3,882 | ) |
Other Liabilities | (2,246 | ) | | (4,305 | ) |
Net Cash Used in Operating Activities | (20,177 | ) | | (24,944 | ) |
Cash Flows from Investing Activities: | | | |
Purchase of Borrower Loans Held at Fair Value | (56,680 | ) | | (55,171 | ) |
Principal Payments of Borrower Loans Held at Fair Value | 50,565 |
| | 41,599 |
|
Purchases of Property and Equipment | (1,596 | ) | | (5,976 | ) |
Maturities of Short Term Investments | 1,282 |
| | 1,278 |
|
Purchases of Short Term Investments | (1,280 | ) | | (1,277 | ) |
Purchases of Available for Sale Investments, at Fair Value | — |
| | (11,725 | ) |
Proceeds from Sale of Available for Sale Investments | 16,163 |
| | — |
|
Maturities of Available for Sale Investments | 8,600 |
| | 17,034 |
|
Changes in Restricted Cash Related to Investing Activities | 4,146 |
| | 1,014 |
|
Net Cash Provided by Investing Activities | 21,200 |
| | (13,224 | ) |
Cash Flows from Financing Activities: | | | |
Proceeds from Issuance of Notes Held at Fair Value | 56,814 |
| | 55,273 |
|
Payments of Notes Held at Fair Value | (51,579 | ) | | (42,644 | ) |
Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock | 4 |
| | 251 |
|
Repurchase of Common Stock and Restricted Stock | (64 | ) | | (46 | ) |
Net Cash Provided by Financing Activities | 5,175 |
| | 12,834 |
|
Net (Decrease) Increase in Cash and Cash Equivalents | 6,198 |
| | (25,334 | ) |
Cash and Cash Equivalents at Beginning of the Period | 22,337 |
| | 66,295 |
|
Cash and Cash Equivalents at End of the Period | $ | 28,535 |
| | $ | 40,961 |
|
Supplemental Disclosure of Cash Flow Information: | | | |
Cash Paid for Interest | $ | 11,100 |
| | $ | 9,879 |
|
Non-Cash Investing Activity- Accrual for Property and Equipment, Net | $ | 88 |
| | $ | 478 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Marketplace, Inc.
Notes to Condensed Consolidated Financial Statements
Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005. Except as the context requires otherwise, as used in these notes to the condensed consolidated financial statements of Prosper Marketplace, Inc., “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31,
2015.2016. The balance sheet at December 31,
20152016 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The preparation of Prosper’s condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in Prosper’s financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and
assumptions, and the differences could be material.assumptions.
The accompanying interim condensed consolidated financial statements include the accounts of PMI and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.
On January 23, 2015, PMI acquired all of the outstanding limited liability company units of American HealthCare Lending, LLC (“American HealthCare Lending”), a company that operated a patient financing platform, and merged American HealthCare Lending with and into Prosper Healthcare Lending LLC (“PHL”), a newly established entity surviving the merger. Prosper’s condensed consolidated financial statements include PHL’s results of operations and financial position from the date of acquisition forward.
On October 9, 2015, PMI acquired all of the outstanding stock of BillGuard, Inc. (“BillGuard”), a company incorporated in Delaware in 2010 that developed applications that help consumers manage their identity, finances and credit. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. Prosper’s condensed consolidated financial statements include BillGuard’s results of operations and financial position from the date of acquisition forward.
Reclassifications
During the period ended June 30, 2016, Prosper changed the presentation of its revenue in the condensed 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.
Additionally, due to the early adoption of ASU 2016-09 on January 1, 2016, reclassifications were made to the financing section of the condensed consolidated statements of cash flows to reflect taxes paid for awards vested under equity incentive plans. Prior period amounts have been reclassified to conform to the current presentation.
8
2. Summary of Significant Accounting Policies
Prosper’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2015.2016. There have been no changes to these accounting policies during the first sixthree months of 2016.2017.
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments at Fair Value, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors,
Convertible Preferred Stock Warrant Liability and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
Restructuring Charges
Restructuring charges consist of severance and contract termination related costs. 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.
Borrower Loans, Loans Held for Sale and Notes
Through the Note Channel, Prosper purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s condensed consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.
Assets Held for Sale:
Prosper classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year. The net assets held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.
Recent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper may adopt the standard in either Prosper’s fiscal year ending December 31, 2017 or 2018. Prosper intends to adopt the guidance for Prosper's fiscal year ending December 31, 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In March 2016, April 2016Prosper expects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018. Our evaluation of this ASU is ongoing and May 2016,not complete. The FASB has issued and may issue in the FASB further amendedfuture, interpretative guidance, which may cause our evaluation to change. Our preliminary results indicate that transaction fees are included in the scope of the new guidance, to clarify the implementation on principal versus agent considerations, the identification of performance obligationwhile servicing fees and the licensing implementation guidance, and to provide narrow-scope improvements and practical expedients. Prosper has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard updategain or loss on the consolidated financial statementssale of loans remain within the scope of ASC topic 860, Transfers and related disclosures. Servicing. While we anticipate some changes to revenue recognition for certain customer contracts, Prosper does not currently believe that this ASU will have a material effect on our Consolidated Financial Statements.
In November 2014,January 2016, the FASB issued ASU 2014-16,2016-1, "Financial Instruments - Overall (Subtopic 825-10): DerivativesRecognition and Hedging (Topic 815): Determining Whether the Host Contract in a HybridMeasurement of Financial Instrument Issued in the FormAssets and Financial Liabilities", which addresses certain aspects of a Share Is More Akin to Debt or to Equity to eliminate the userecognition, measurement, presentation, and disclosure 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 single9
term or feature does not necessarily determine the economic characteristics and risks of the host contract.instruments. This standardguidance will be effective for us in the first quarter of our fiscal yearsyear 2019, and interim periods within those fiscal years, beginning after December 15, 2015. early adoption is not permitted. Prosper adoptedis currently evaluating the impact that this guidance will have on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensedits consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which became effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The new guidance simplifies the accounting for measurement period adjustments in connection with 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, and interim periods within those fiscal years, beginning after December 15, 2015. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper will be required to recognize and measure leases atis currently evaluating the beginning off the earliest period presented using a modified retrospective approach. Prosper anticipatesimpact that this standardguidance will have on its consolidated financial statements, however we do expect that this guidance will have a material impact on ourProsper's consolidated financial statements. WhileAs of March 31, 2017 Prosper is continuing to assess all potential impactshas a total of the standard, Prosper currently believes the most significant impact relates to our accounting for office$42.6 million in non-cancelable operating leases.
lease commitments.
In MarchAugust 2016, the FASB issued ASU 2016-09, 2016-15, Improvements“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 Employee Share-Based Payment Accounting (Topic 718). This guidance makes several modifications to Topic 718 related tohow cash receipts and cash payments are classified in 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 statementstatements of cash flows,
presentationwith the objective of reducing diversity in practice. This guidance will be effective for
certain componentsProsper in the first quarter of
share-based awards.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 consolidated financial statements.
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 is currently evaluating the impact that this guidance will have on its consolidated financial statements, however we do not believe the standard to have a material impact on our fiscal year 2017,consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU2016-18)", 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 has decided to early adoptis currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
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,
2016,2017. The standard should be applied on a prospective basis. Prosper is currently evaluating the
adoptionimpact of this
accounting standard
did not have a material impactupdate on
Prosper’s condensedits consolidated financial statements.
3. Property and Equipment, Net
Property and equipment consist of the following (in thousands):
| | June 30, | | | December 31, | |
| | | 2016 | | | 2015 | |
Property and equipment: | | | | | | | | |
Computer equipment | | $ | 14,153 | | | $ | 10,522 | |
Internal-use software and website development costs | | | 14,289 | | | | 10,990 | |
Office equipment and furniture | | | 3,087 | | | | 2,442 | |
Leasehold improvements | | | 7,220 | | | | 5,719 | |
Assets not yet placed in service | | | 1,994 | | | | 3,242 | |
Property and equipment | | | 40,743 | | | | 32,915 | |
Less accumulated depreciation and amortization | | | (12,565 | ) | | | (7,950 | ) |
Total property and equipment, net | | $ | 28,178 | | | $ | 24,965 | |
|
| | | | | | | |
| March 31, 2017 | | December 31, 2016 |
Property and equipment: | |
| | |
|
Computer equipment | $ | 14,164 |
| | $ | 14,107 |
|
Internal-use software and website development costs | 17,821 |
| | 16,750 |
|
Office equipment and furniture | 3,010 |
| | 3,010 |
|
Leasehold improvements | 7,038 |
| | 7,038 |
|
Assets not yet placed in service | 1,396 |
| | 1,222 |
|
Property and equipment | 43,429 |
| | 42,127 |
|
Less accumulated depreciation and amortization | (19,757 | ) | | (17,274 | ) |
Total property and equipment, net | $ | 23,672 |
| | $ | 24,853 |
|
Depreciation and amortization expense for property and equipment for the three months ended
June 30,March 31, 2017 and 2016
and 2015 was
$2.5$2.6 million and
$1.4 million, respectively. Depreciation and amortization expense for property and equipment for the six months ended June 30, 2016 and 2015 was $4.5 million and $3.1$2.0 million, respectively. Prosper capitalized internal-use software and website development costs in the amount of
$1.8$1.1 million and
$2.1$2.2 million for the three months ended
June 30,March 31, 2017 and 2016,
and 2015, respectively.
Prosper capitalized internal-use software and website development costs in the amount of $3.6 million and $3.9 million for the six months ended June 30, 2016 and 2015, respectively. Prosper recorded internal-use software and website development impairment charges of $240 thousand and $0 for the six months ended June 30, 2016 and 2015, respectively, as a result of its decision to10
discontinue several software and website development projects. These charges are included in general and administration expenses on the condensed consolidated statement of operations.
4. Borrower Loans, Loans Held for Sale, and Notes Held at Fair Value
The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale and Notes as of
June 30, 2016March 31, 2017 and December 31,
2015,2016, are presented in the following table (in thousands):
| | Borrower Loans | | | Notes | | | Loans Held for Sale | |
| | June 30, 2016 | | | December 31, 2015 | | | June 30, 2016 | | | December 31, 2015 | | | June 30, 2016 | | | December 31, 2015 | |
Aggregate principal balance outstanding | | $ | 312,725 | | | $ | 296,945 | | | $ | (315,671 | ) | | $ | (294,331 | ) | | $ | 4,715 | | | $ | 42 | |
Fair value adjustments | | | (2,691 | ) | | | 328 | | | | 6,141 | | | | (3,074 | ) | | | (10 | ) | | | (10 | ) |
Fair value | | $ | 310,034 | | | $ | 297,273 | | | $ | (309,530 | ) | | $ | (297,405 | ) | | $ | 4,705 | | | $ | 32 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Borrower Loans | | Notes | | Loans Held for Sale |
| March 31, 2017 | | December 31, 2016 | | March 31, 2017 | | December 31, 2016 | | March 31, 2017 | | December 31, 2016 |
Aggregate principal balance outstanding | $ | 320,670 |
| | $ | 319,143 |
| | $ | (323,672 | ) | | $ | (323,358 | ) | | $ | 120 |
| | $ | 641 |
|
Fair value adjustments | (3,134 | ) | | (3,516 | ) | | 6,728 |
| | 7,122 |
| | (11 | ) | | (17 | ) |
Fair value | $ | 317,536 |
| | $ | 315,627 |
| | $ | (316,944 | ) | | $ | (316,236 | ) | | $ | 109 |
| | $ | 624 |
|
At June 30, 2016,March 31, 2017, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through June 2021.March 2022. At December 31, 2015,2016, outstanding Borrower Loans had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2020.2021.
Approximately
$0.3$1.8 million and
$2.0$2.3 million represents the
gain and loss
respectively, that is attributable to changes in the instrument specific credit risks related to Borrower Loans that were recorded in the change in fair value during the three
and six months ending
June 30, 2016.March 31, 2017 and March 31, 2016, respectively.
As of
June 30,March 31, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.4 million and a fair value of $0.7 million. As of December 31, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of
$2.0$3.2 million and a fair value of
$0.7 million. As of December 31, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.3 million and a fair value of $0.9$1.0 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of
June 30, 2016March 31, 2017 and December 31,
2015,2016, Borrower Loans in non-accrual status had a fair value of
$0.2$0.3 million and
$0.1$0.5 million, respectively.
5. Loan Servicing Assets and Liabilities
Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers 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
was $0.7were $3.6 million
of losses and $3.7 million of gains for the three months ended
June 30, 2016March 31, 2017, which included rebates provided to members of the Consortium prior to the closing of the Consortium transaction and
2015, respectively. The total gaina loss of $3.3 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium after the closing of the Consortium transaction. Total gains recognized on the sale of such Borrower Loans
was $3.1were $3.8 million
and $5.6 million forduring the
sixthree months ended
June 30, 2016 and 2015, respectively.March 31, 2016.
As of
June 30, 2016,March 31, 2017, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of
$4.1$3.5 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through
June 2021.March 2022. At December 31,
2015,2016, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of
$3.8$3.5 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to
31.90%35.52% and various maturity dates through December
2020. 2021.
$
10.49.7 million and
$4.6$9.6 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated
statementstatements of operations in Servicing Fees, Net for the three months ended
June 30,March 31, 2017 and 2016
and 2015 respectively.
$20.0 million and $7.8 million of contractually specified servicing fees and ancillary fees are included on our condensed statement of operations in Servicing Fees, Net for the six months ended June 30, 2016 and 2015 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.11
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.
Market servicing rate – Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider. Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets. Default Rate – The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period. Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues. 6. Available for Sale Investments, at Fair Value
Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired (OTTI).
The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of
June 30, 2016March 31, 2017 and December 31,
2015,2016, are as
follows:follows (in thousands): | | | |
June 30, 2016 | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
Fixed maturity securities: | | | | | | | | | | | | | | | | |
Corporate debt securities | | $ | 37,453 | | | $ | 49 | | | $ | (9 | ) | | $ | 37,493 | |
Commercial paper | | | 3,899 | | | | - | | | | - | | | | 3,899 | |
US Treasury securities | | | 10,533 | | | | 28 | | | | - | | | | 10,561 | |
Agency bonds | | | 2,499 | | | | 11 | | | | - | | | | 2,510 | |
Total fixed maturity securities | | | 54,384 | | | | 88 | | | | (9 | ) | | | 54,463 | |
Short term bond funds | | | 1,250 | | | | - | | | | - | | | | 1,250 | |
Total Available for Sale Investments | | $ | 55,634 | | | $ | 88 | | | $ | (9 | ) | | $ | 55,713 | |
|
| | | | | | | | | | | | | | | |
March 31, 2017 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Fixed maturity securities: | |
| | |
| | |
| | |
|
US Treasury securities | 5,508 |
| | — |
| | (3 | ) | | 5,505 |
|
Agency bonds | 2,500 |
| | — |
| | (1 | ) | | 2,499 |
|
Total Available for Sale Investments | $ | 8,008 |
| | $ | — |
| | $ | (4 | ) | | $ | 8,004 |
|
12
| | | |
December 31, 2015 | | 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, 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
June 30, 2016,March 31, 2017, and December 31,
2015,2016, aggregated by category and period of continuous unrealized loss, is as
follows:follows (in thousands): | | Less than 12 months | | | 12 months or longer | | | Total | | |
June 30, 2016 | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | |
| | | Less than 12 months | | 12 months or longer | | Total |
March 31, 2017 | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
Corporate debt securities | | $ | 9,753 | | | $ | (9 | ) | | $ | - | | | $ | - | | | $ | 9,753 | | | $ | (9 | ) | |
U.S. treasury securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | $ | 5,505 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 5,505 |
| | $ | (3 | ) |
Agency bonds | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | — |
| | — |
| | 2,499 |
| | (1 | ) | | 2,499 |
| | (1 | ) |
Total fixed maturity securities | | | 9,753 | | | | (9 | ) | | | - | | | | - | | | | 9,753 | | | | (9 | ) | |
Short term bond funds | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Total Investments with Unrealized Losses | | $ | 9,753 | | | $ | (9 | ) | | $ | - | | | $ | - | | | $ | 9,753 | | | $ | (9 | ) | $ | 5,505 |
| | $ | (3 | ) | | $ | 2,499 |
| | $ | (1 | ) | | $ | 8,004 |
| | $ | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | | 12 months or longer | | | Total | |
December 31, 2015 | | 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 |
December 31, 2016 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Fixed maturity securities: | |
| | |
| | |
| | |
| | |
| | |
|
Corporate debt securities | $ | — |
| | $ | — |
| | $ | 14,651 |
| | $ | (10 | ) | | $ | 14,651 |
| | $ | (10 | ) |
U.S. treasury securities | $ | — |
| | $ | — |
| | $ | 4,499 |
| | $ | (3 | ) | | $ | 4,499 |
| | $ | (3 | ) |
Total Investments with Unrealized Losses | $ | — |
| | $ | — |
| | $ | 19,150 |
| | $ | (13 | ) | | $ | 19,150 |
| | $ | (13 | ) |
There were no impairment charges recognized during the
sixthree months ended
June 30, 2016.March 31, 2017.
The maturities of available for sale investments at June 30, 2016,March 31, 2017 and December 31, 2015,2016 are as follows:follows (in thousands):
| | | | | | |
June 30, 2016 | | Within 1 year | | | After 1 year through 5 years | | | After 5 years to 10 years | | | After 10 years | | | Total | |
Corporate debt securities | | $ | 28,677 | | | $ | 8,816 | | | $ | - | | | $ | - | | | $ | 37,493 | |
Commercial paper | | | 3,899 | | | | - | | | | - | | | | - | | | | 3,899 | |
US Treasury securities | | | 3,006 | | | | 7,555 | | | | - | | | | - | | | | 10,561 | |
Agency bonds | | | - | | | | 2,510 | | | | - | | | | - | | | | 2,510 | |
Total Fair Value | | $ | 35,582 | | | $ | 18,881 | | | $ | - | | | $ | - | | | $ | 54,463 | |
Total Amortized Cost | | $ | 35,560 | | | $ | 18,824 | | | $ | - | | | $ | - | | | $ | 54,384 | |
|
| | | | | | | | | | | | | | | | | | | |
March 31, 2017 | Within 1 year | | After 1 year through 5 years | | After 5 years to 10 years | | After 10 years | | Total |
US Treasury securities | 5,505 |
| | — |
| | — |
| | — |
| | 5,505 |
|
Agency bonds | 2,499 |
| | — |
| | — |
| | — |
| | 2,499 |
|
Total Fair Value | $ | 8,004 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,004 |
|
Total Amortized Cost | $ | 8,008 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,008 |
|
13
December 31, 2015 | | 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 | |
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2016 | Within 1 year | | After 1 year through 5 years | | After 5 years to 10 years | | After 10 years | | Total |
Corporate debt securities | 21,753 |
| | — |
| | — |
| | — |
| | 21,753 |
|
US Treasury securities | 8,516 |
| | — |
| | — |
| | — |
| | 8,516 |
|
Agency bonds | 2,500 |
| | — |
| | — |
| | — |
| | 2,500 |
|
Total Fair Value | $ | 32,769 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 32,769 |
|
Total Amortized Cost | $ | 32,777 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 32,777 |
|
During the three
and six months ended
June 30, 2016,March 31, 2017, Prosper sold
$9.2$16.2 million of investments which resulted in a realized gain of
$6$12 thousand.
7. Fair Value of Assets and Liabilities Prosper measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
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 and Notes. Servicing Assets and Liabilities are also subject to fair value measurement within the financial statements of Prosper. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
Investments held at fair value consist of available for sale investments. The available for sale investments consist of corporate debt securities, commercial paper, U.S. treasury securities, agency bonds and short term bond funds. When available, Prosper uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper
14
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 12 for further details.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
| | | |
June 30, 2016 | | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total | | |
| March 31, 2017 | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
Assets: | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Borrower Loans | | $ | - | | | $ | - | | | $ | 310,034 | | | $ | 310,034 | | $ | — |
| | $ | — |
| | $ | 317,536 |
| | $ | 317,536 |
|
Loans Held for Sale | | | - | | | | - | | | | 4,705 | | | | 4,705 | | — |
| | — |
| | 109 |
| | 109 |
|
Available for Sale Investments, at Fair Value | | | - | | | | 55,713 | | | | - | | | | 55,713 | | — |
| | 8,004 |
| | — |
| | 8,004 |
|
Servicing Assets | | | - | | | | - | | | | 14,297 | | | | 14,297 | | — |
| | — |
| | 12,436 |
| | 12,436 |
|
Total Assets | | | - | | | | 55,713 | | | | 329,036 | | | | 384,749 | | — |
| | 8,004 |
| | 330,081 |
| | 338,085 |
|
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Notes | | $ | - | | | $ | - | | | $ | 309,530 | | | $ | 309,530 | | $ | — |
| | $ | — |
| | $ | 316,944 |
| | $ | 316,944 |
|
Servicing Liabilities | | | - | | | | - | | | | 324 | | | | 324 | | — |
| | — |
| | 147 |
| | 147 |
|
Contingent Consideration | | | - | | | | - | | | | 4,929 | | | | 4,929 | | |
Convertible Preferred Stock Warrant Liability | | — |
| | — |
| | 123,431 |
| | 123,431 |
|
Loan Trailing Fee Liability | | — |
| | — |
| | 1,104 |
| | 1,104 |
|
Total Liabilities | | $ | - | | | $ | - | | | $ | 314,783 | | | $ | 314,783 | | $ | — |
| | $ | — |
| | $ | 441,626 |
| | $ | 441,626 |
|
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, 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 and loan servicing rights do not trade in an active market with readily observable prices, Prosper uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at June 30, 2016March 31, 2017 and December 31, 2015:2016:
Borrower Loans, Loans Held for Sale and Notes: | | Range
|
| | | | |
| | Range |
Unobservable Input | | June 30, 2016 March 31, 2017 | | December 31, 2015 2016 |
Discount rate | | 4.4%3.8% - 15.0% 14.4% | | 4.3%4.0% - 14.5% 15.9% |
Default rate | | 1.6%1.9% - 14.8% 15.6% | | 1.4%1.7% - 14.4% 14.9% |
| | Range | |
Unobservable Input | | June 30, 2016 | | | December 31, 2015 | |
Discount rate | | 15% - 25% | | | 15% - 25% | |
Default rate | | 1.1% - 15.0% | | | 1.2% - 14.7% | |
Prepayment rate | | 14.8% - 27.6% | | | 14.3% - 25.6% | |
Market servicing rate | | | 0.625 | % | | | 0.625 | % |
|
| | | | | | |
| | Range |
Unobservable Input | | March 31, 2017 | | December 31, 2016 |
Discount rate | | 15% - 25% |
| | 15% - 25% |
|
Default rate | | 1.5% - 16.0% |
| | 1.5% - 15.2% |
|
Prepayment rate | | 14.9% - 27.3% |
| | 13.6% - 26.6% |
|
Market servicing rate | | 0.625 | % | | 0.625 | % |
At
June 30, 2016,March 31, 2017, 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 (in thousands):
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 | | | 109,215 | | | | (109,147 | ) | | | 1,358,011 | | | | 1,358,079 | | |
Principal repayments | | | (82,376 | ) | | | 83,119 | | | | (136 | ) | | | 607 | | |
Borrower Loans sold to third parties | | | (1,138 | ) | | | 1,081 | | | | (1,353,202 | ) | | | (1,353,259 | ) | |
Other changes | | | (6 | ) | | | (33 | ) | | | - | | | | (39 | ) | |
Change in fair value | | | (12,934 | ) | | | 12,855 | | | | - | | | | (79 | ) | |
Balance at June 30, 2016 | | $ | 310,034 | | | $ | (309,530 | ) | | $ | 4,705 | | | $ | 5,209 | | |
| | 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, 2015 | | $ | 273,243 | | | $ | (273,783 | ) | | $ | 8,463 | | | $ | 7,923 | | | |
Balance at January 1, 2016 | | $ | 315,627 |
| | $ | (316,236 | ) | | $ | 624 |
| | $ | 15 |
|
Purchase of Borrower Loans/Issuance of Notes | | | 94,512 | | | | (94,575 | ) | | | 1,402,499 | | | | 1,402,436 | | | 56,680 |
| | (56,814 | ) | | 523,997 |
| | 523,863 |
|
Principal repayments | | | (73,457 | ) | | | 73,509 | | | | (543 | ) | | | (491 | ) | | (49,444 | ) | | 51,579 |
| | (28 | ) | | 2,107 |
|
Borrower Loans sold to third parties | | | - | | | | - | | | | (1,408,883 | ) | | | (1,408,883 | ) | | (1,121 | ) | | — |
| | (524,487 | ) | | (525,608 | ) |
Other changes | | | (130 | ) | | | 136 | | | | (9 | ) | | | (3 | ) | | (1 | ) | | 422 |
| | (3 | ) | | 418 |
|
Change in fair value | | | (9,968 | ) | | | 10,085 | | | | (96 | ) | | | 21 | | | (4,205 | ) | | 4,105 |
| | 6 |
| | (94 | ) |
Balance at June 30, 2015 | | $ | 284,200 | | | $ | (284,628 | ) | | $ | 1,431 | | | $ | 1,003 | | | |
Balance at March 31, 2017 | | $ | 317,536 |
| | $ | (316,944 | ) | | $ | 109 |
| | $ | 701 |
|
|
| | | | | | | | | | | | | | | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Borrower Loans | | Notes | | Loans Held for Sale | | Total |
Balance at January 1, 2016 | $ | 297,273 |
| | $ | (297,405 | ) | | $ | 32 |
| | $ | (100 | ) |
Purchase of Borrower Loans/Issuance of Notes | 55,171 |
| | (55,273 | ) | | 931,420 |
| | 931,318 |
|
Principal repayments | (40,986 | ) | | 42,062 |
| | (4 | ) | | 1,072 |
|
Borrower Loans sold to third parties | (613 | ) | | 582 |
| | (931,418 | ) | | (931,449 | ) |
Other changes | (4 | ) | | 157 |
| | — |
| | 153 |
|
Change in fair value | (7,598 | ) | | 7,520 |
| | — |
| | (78 | ) |
Balance at March 31, 2016 | $ | 303,243 |
| | $ | (302,357 | ) | | $ | 30 |
| | $ | 916 |
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | |
| | Borrower Loans | | | Notes | | | Loans Held for Sale | | | Total | | |
Balance at April 1, 2015 | | $ | 280,404 | | | $ | (280,801 | ) | | $ | 1,599 | | | $ | 1,202 | | |
Purchase of Borrower Loans/Issuance of Notes | | | 46,805 | | | | (46,779 | ) | | | 861,574 | | | | 861,600 | | |
Principal repayments | | | (37,395 | ) | | | 37,440 | | | | (157 | ) | | | (112 | ) | |
Borrower Loans sold to third parties | | | - | | | | - | | | | (861,574 | ) | | | (861,574 | ) | |
Other changes | | | (136 | ) | | | (71 | ) | | | (1 | ) | | | (208 | ) | |
Change in fair value | | | (5,478 | ) | | | 5,583 | | | | (10 | ) | | | 95 | | |
Balance at June 30, 2015 | | $ | 284,200 | | | $ | (284,628 | ) | | $ | 1,431 | | | $ | 1,003 | | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | |
| | Borrower Loans | | | Notes | | | Loans Held for Sale | | | Total | | |
Balance at April 1, 2016 | | $ | 303,243 | | | $ | (302,357 | ) | | $ | 30 | | | $ | 916 | | |
Purchase of Borrower Loans/Issuance of Notes | | | 54,044 | | | | (53,873 | ) | | | 426,591 | | | | 426,762 | | |
Principal repayments | | | (41,390 | ) | | | 41,057 | | | | (131 | ) | | | (464 | ) | |
Borrower Loans sold to third parties | | | (525 | ) | | | 499 | | | | (421,784 | ) | | | (421,810 | ) | |
Other changes | | | (2 | ) | | | (191 | ) | | | - | | | | (193 | ) | |
Change in fair value | | | (5,336 | ) | | | 5,335 | | | | (1 | ) | | | (2 | ) | |
Balance at June 30, 2016 | | $ | 310,034 | | | $ | (309,530 | ) | | $ | 4,705 | | | $ | 5,209 | | |
The following tables present additional information about level 3 servicing assets and liabilities measured at fair value on a recurring basis (in thousands):
| | Servicing Assets | | | Servicing Liabilities | |
Fair Value at January 1, 2016 | | | 14,363 | | | | 484 | |
Additions | | | 5,750 | | | | 9 | |
Less: Changes in fair value | | | (5,816 | ) | | | (169 | ) |
Fair Value at June 30, 2016 | | | 14,297 | | | | 324 | |
| | | | | | | | |
| | Servicing Assets | | | Servicing Liabilities | |
Amortized Cost at January 1, 2015 | | | 4,163 | | | | 624 | |
Adjustment to Adopt Fair Value Measurement | | | 546 | | | | (29 | ) |
Fair Value at January 1, 2015 | | | 4,709 | | | | 595 | |
Additions | | | 5,837 | | | | 193 | |
Less: Changes in fair value | | | (1,864 | ) | | | (182 | ) |
Fair Value at June 30, 2015 | | | 8,682 | | | | 606 | |
|
| | | | | |
| Servicing Assets | | Servicing Liabilities |
Fair Value at January 1, 2017 | 12,786 |
| | 198 |
|
Additions | 2,764 |
| | — |
|
Less: Changes in fair value | (3,114 | ) | | (51 | ) |
Fair Value at March 31, 2017 | 12,436 |
| | 147 |
|
| | Servicing Assets | | | Servicing Liabilities | |
Fair Value at April 1, 2016 | | | 15,548 | | | | 398 | |
Additions | | | 1,729 | | | | - | |
Less: Changes in fair value | | | (2,980 | ) | | | (74 | ) |
Fair Value at June 30, 2016 | | | 14,297 | | | | 324 | |
| | Servicing Assets | | | Servicing Liabilities | | |
Fair Value at April 1, 2015 | | | 6,034 | | | | 668 | | |
| | | Servicing Assets | | Servicing Liabilities |
Fair Value at January 1, 2016 | | 14,363 |
| | 484 |
|
Additions | | | 3,759 | | | | 39 | | 4,021 |
| | 9 |
|
Less: Changes in fair value | | | (1,111 | ) | | | (101 | ) | (2,836 | ) | | (95 | ) |
Fair Value at June 30, 2015 | | | 8,682 | | | | 606 | | |
Fair Value at March 31, 2016 | | 15,548 |
| | 398 |
|
Contingent Consideration:
17
On October 9, 2015, PMI, purchased 100% of the outstanding shares of BillGuard.
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 Loan Trailing Fee 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 Level 3 inputs. Contingent consideration is recorded in the condensed 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 the fair value estimates recorded in the condensed consolidated balance sheets. During the three and six month periods ended June 30, 2016, there were fair value changes of $63 thousand and $128 thousand, respectively, resulting in a fair value of $4.9 million at June 30, 2016 from the opening fair value at January 1, 2016 of $4.8 million.recurring basis (in thousands):
|
| | | |
Balance at January 1, 2017 | | 665 |
|
Issuances | | 552 |
|
Cash payment of Loan Trailing Fee | | (144 | ) |
Change in fair value | | 31 |
|
Balance at March 31, 2017 | | 1,104 |
|
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
June 30, 2016March 31, 2017 for Borrower Loans, Loans Held for Sale and Notes funded through the Note Channel are presented in the following table (in thousands, except percentages):
| | Borrower Loans and Loans Held for Sale | | | Notes | | |
Discount rate assumption: | | | 7.25 | | %* | | 7.25 | | %* |
Resulting fair value from: | | | | | | | | | |
100 basis point increase | | $ | 306,868 | | | $ | 306,363 | | |
200 basis point increase | | | 303,781 | | | | 303,277 | | |
Resulting fair value from: | | | | | | | | | |
100 basis point decrease | | $ | 313,283 | | | $ | 312,780 | | |
200 basis point decrease | | | 316,619 | | | | 316,116 | | |
Default rate assumption: | | 11.02 | | %* | 11.02 | | %* |
Resulting fair value from: | | | | | | | | | |
100 basis point increase | | $ | 306,882 | | | $ | 306,370 | | |
200 basis point increase | | | 303,823 | | | | 303,303 | | |
Resulting fair value from: | | | | | | | | | |
100 basis point decrease | | $ | 313,200 | | | $ | 312,704 | | |
200 basis point decrease | | | 316,399 | | | | 315,913 | | |
| * Represents weighted average assumptions considering all credit grades.
|
|
| | | | | | | | |
| Borrower Loans and Loans Held for Sale | | Notes | |
Discount rate assumption: | 6.91 | % | * | 6.91 | % | * |
Resulting fair value from: | |
| | |
| |
100 basis point increase | $ | 314,431 |
| | $ | 313,731 |
| |
200 basis point increase | 311,299 |
| | 310,600 |
| |
Resulting fair value from: | |
| | |
| |
100 basis point decrease | $ | 320,943 |
| | $ | 320,241 |
| |
200 basis point decrease | 324,329 |
| | 323,626 |
| |
Default rate assumption: | 12.55 | % | * | 12.55 | % | * |
Resulting fair value from: | |
| | |
| |
100 basis point increase | $ | 313,899 |
| | $ | 313,189 |
| |
200 basis point increase | 310,262 |
| | 309,544 |
| |
Resulting fair value from: | |
| | |
| |
100 basis point decrease | $ | 321,406 |
| | $ | 320,715 |
| |
200 basis point decrease | 325,206 |
| | 324,525 |
| |
* 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
June 30, 2016March 31, 2017 (in thousands, except percentages).
| | Servicing Assets | | | Servicing Liabilities | | |
Market servicing rate assumptions | | | 0.625 | | % | | 0.625 | | % |
Resulting fair value from: | | | | | | | | | |
Market servicing rate increase to 0.65% | | | 13,252 | | | $ | 356 | | |
Market servicing rate decrease to 0.60% | | | 15,342 | | | $ | 291 | | |
Weighted average prepayment assumptions | | | 20.44 | | % | | 20.44 | | % |
Resulting fair value from: | | | | | | | | | |
Applying a 1.1 multiplier to prepayment rate | | | 13,918 | | | $ | 303 | | |
Applying a 0.9 multiplier to prepayment rate | | | 14,451 | | | $ | 314 | | |
Weighted average default assumptions | | | 11.39 | | % | | 11.39 | | % |
Resulting fair value from: | | | | | | | | | |
Applying a 1.1 multiplier to default rate | | $ | 14,067 | | | $ | 323 | | |
Applying a 0.9 multiplier to default rate | | $ | 14,530 | | | $ | 323 | | |
18
|
| | | | | | | |
| Servicing Assets | | Servicing Liabilities |
Market servicing rate assumptions | 0.625 | % | | 0.625 | % |
Resulting fair value from: | |
| | |
|
Market servicing rate increase to 0.65% | $ | 11,606 |
| | $ | 162 |
|
Market servicing rate decrease to 0.60% | $ | 13,265 |
| | $ | 132 |
|
Weighted average prepayment assumptions | 21.13 | % | | 21.13 | % |
Resulting fair value from: | |
| | |
|
Applying a 1.1 multiplier to prepayment rate | $ | 12,240 |
| | $ | 144 |
|
Applying a 0.9 multiplier to prepayment rate | $ | 12,633 |
| | $ | 150 |
|
Weighted average default assumptions | 12.05 | % | | 12.05 | % |
Resulting fair value from: | |
| | |
|
Applying a 1.1 multiplier to default rate | $ | 12,247 |
| | $ | 147 |
|
Applying a 0.9 multiplier to default rate | $ | 12,628 |
| | $ | 147 |
|
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.
AcquisitionsOn January 23, 2015, PMI acquired all of the outstanding limited liability company interests of American HealthCare Lending, and merged American HealthCare Lending with and into PHL, with PHL surviving the merger. In January 2015, PMI completed the allocation of the purchase price of the acquisition of American HealthCare Lending to acquired assets and liabilities.
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. 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.
9. Goodwill and Other Intangible Assets
Prosper’s goodwill balance of $36.4 million at
June 30, 2016March 31, 2017 did not change during the
sixthree months ended
June 30, 2016.March 31, 2017. We did not record any goodwill impairment expense for the
sixthree months ended
June 30, 2016.March 31, 2017. A portion of the goodwill balance is considered held for sale, refer to Note 9 for more detail.
The following table presents the detail of other intangible assets for the period presented (dollars in thousands):
| | June 30, 2016 | |
| | Gross Carrying Value | | | Accumulated Amortization | | | Net Carrying Value | | | Remaining Useful Life (In Years) | |
User base and customer relationships | | $ | 6,250 | | | $ | (1,976 | ) | | $ | 4,274 | | | | 8.6 | |
Developed technology | | | 8,310 | | | | (1,508 | ) | | $ | 6,802 | | | | 4.3 | |
Brand name | | | 60 | | | | (60 | ) | | | - | | | | - | |
Total intangible assets subject to amortization | | $ | 14,620 | | | $ | (3,544 | ) | | $ | 11,076 | | | | | |
|
| | | | | | | | | | | | | | |
| March 31, 2017 |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Remaining Useful Life (In Years) |
User base and customer relationships | $ | 5,446 |
| | $ | (3,365 | ) | | $ | 2,081 |
| | 8.1 |
|
Developed technology | 4,793 |
| | (2,835 | ) | | $ | 1,958 |
| | 1.1 |
|
Brand name | 60 |
| | (60 | ) | | — |
| | — |
|
Total intangible assets subject to amortization | $ | 10,299 |
| | $ | (6,260 | ) | | $ | 4,039 |
| | |
|
Prosper’sintangible asset balance was $11.1$4.0 million and $13.1$9.2 million at June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. During the three months ended March 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 $4.3 million impairment loss. Refer to Note 9 for more detail. 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 the three months ended
June 30,March 31, 2017 and 2016
and 2015 was
$1.0$0.9 million and
$0.3 million, respectively. Amortization expense for the six months ended June 30, 2016 and 2015 was $2.0 million and $0.3$1.0 million, respectively. Estimated amortization of purchased intangible assets for future periods
(excluding those held for sale) is as follows (in thousands):
| | | | | | | | |
Year Ending December 31, | | | | | |
2016 | | $ | 1,862 | | |
2017 | | | 3,260 | | $ | 533 |
|
2018 | | | 2,329 | | 379 |
|
2019 | | | 1,779 | | 279 |
|
2020 | | | 1,344 | | 219 |
|
Thereafter | | | 502 | | |
2021 | | 500 |
|
Total | | $ | 11,076 | | $ | 1,910 |
|
9. Assets Held for Sale
As of March 31, 2017, the Company was actively marketing certain assets related to the Prosper Daily application. Through this process, the Company identified the specific assets to be sold and allocated goodwill based on the relative fair values of the assets held for sale and the assets that will be retained by the Company. This resulted in an impairment loss of $4.3 million during the three months ended March 31, 2017, which is recorded in Other Expenses on the Condensed Consolidated Statement of Operations. The Company currently expects to close the sale of the assets during the three months ending June 30, 2017.
Amounts classified as assets held for sale on March 31, 2017, are presented on the Company’s Condensed Consolidated Balance Sheet within their respective accounts, and include the following (in thousands):
|
| | | | |
Intangible Assets | | $ | 2,129 |
|
Goodwill | | 171 |
|
Total Assets Held for Sale | | $ | 2,300 |
|
Other Liabilities includes the following:
| | | |
| | June 30, 2016 | | | December 31, 2015 | |
Class action settlement liability | | $ | 2,973 | | | $ | 5,949 | |
Repurchase liability for unvested restricted stock awards | | | 267 | | | | 473 | |
Contingent consideration | | | 4,929 | | | | 4,801 | |
Deferred revenue | | | 420 | | | | 1,591 | |
Servicing liabilities | | | 324 | | | | 484 | |
Deferred rent | | | 4,647 | | | | 5,240 | |
Restructuring liability | | | 8,492 | | | | - | |
Other | | | 2,364 | | | | 2,197 | |
Total Other Liabilities | | $ | 24,416 | | | $ | 20,735 | |
|
| | | | | | | |
| March 31, 2017 | | December 31, 2016 |
Class action settlement liability | $ | — |
| | $ | 2,996 |
|
Repurchase liability for unvested restricted stock awards | 28 |
| | 118 |
|
Deferred revenue | 196 |
| | 226 |
|
Servicing liabilities | 147 |
| | 198 |
|
Deferred rent | 4,358 |
| | 4,469 |
|
Restructuring liability | 3,143 |
| | 6,052 |
|
Other | 3,832 |
| | 3,114 |
|
Total Other Liabilities | $ | 11,704 |
| | $ | 17,173 |
|
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 condensed consolidated balance sheets 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:
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Numerator: | | | | | | | | | | | | | | | | |
Net loss available to common stockholders for basic and diluted EPS | | $ | (35,628 | ) | | $ | (6,201 | ) | | $ | (53,092 | ) | | $ | (13,477 | ) |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average shares used in computing basic and diluted net loss per share | | | 63,270,058 | | | | 55,612,485 | | | | 61,813,773 | | | | 54,168,175 | |
Basic and diluted net loss per share | | $ | (0.56 | ) | | $ | (0.11 | ) | | $ | (0.86 | ) | | $ | (0.25 | ) |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Numerator: | |
| | |
|
Net loss available to common stockholders for basic and diluted EPS | $ | (24,021 | ) | | $ | (17,464 | ) |
Denominator: | | | |
Weighted average shares used in computing basic and diluted net loss per share | 69,178,049 |
| | 60,357,488 |
|
Basic and diluted net loss per share | $ | (0.35 | ) | | $ | (0.29 | ) |
The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
| | (shares) | | | (shares) | | | (shares) | | | (shares) | |
Excluded securities: | | | | | | | | | | | | | | | | |
Convertible preferred stock issued and outstanding | | | 177,388,425 | | | | 35,477,685 | | | | 177,388,425 | | | | 35,477,685 | |
Stock options issued and outstanding | | | 43,719,604 | | | | 6,982,320 | | | | 41,694,271 | | | | 6,478,422 | |
Unvested stock options exercised | | | 5,345,950 | | | | 3,084,604 | | | | 5,345,950 | | | | 3,084,604 | |
Warrants issued and outstanding | | | 962,113 | | | | 123,467 | | | | 792,449 | | | | 123,467 | |
Total common stock equivalents excluded from diluted net loss per common share computation | | | 227,416,092 | | | | 45,668,076 | | | | 225,221,095 | | | | 45,164,178 | |
20
|
| | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
| (shares) | | (shares) |
Excluded securities: | |
| | |
|
Convertible preferred stock issued and outstanding | 177,388,428 |
| | 177,388,425 |
|
Stock options issued and outstanding | 41,234,189 |
| | 39,088,308 |
|
Unvested stock options exercised | 30,835 |
| | 7,694,370 |
|
Restricted stock units | 351,721 |
| | 2,380,956 |
|
Warrants issued and outstanding | 988,513 |
| | 536,685 |
|
Series E convertible preferred stock warrants | 35,544,141 |
| | — |
|
Series F convertible preferred stock warrants | 177,720,704 |
| | — |
|
Total common stock equivalents excluded from diluted net loss per common share computation | 433,258,531 |
| | 227,088,744 |
|
The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
12. Convertible Preferred Stock,
Warrant Liability and Stockholders’ Deficit
Convertible Preferred Stock
and Warrants
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”).
The Warrant Holders' 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 (except that a certain portion of the Series F Warrant will be immediately exercisable as a result of loans purchased before the signing of the agreement). 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 events set forth in the Warrant Agreement.
The Series F Warrant will be exercisable with respect to vested Warrant Shares, in whole or in part, at any time prior to the tenth anniversary of its date of issuance. The number of shares underlying the Series F Warrant may be adjusted following certain events such as stock splits, dividends, reclassifications, and certain other issuances by PMI.
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of
June 30, 2016March 31, 2017 are disclosed in the table below (amounts in thousands except share and per share amounts):
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 (outstanding shares) |
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 |
| | — |
|
| | |
| | 407,511,351 |
| | 177,388,428 |
| | $ | 325,952 |
|
The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Dividends
Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2 and Series F 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 Series A, Series B, Series C, Series D, Series E-1, Series E-2 and Series F convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series E-1, Series E-2 and Series F 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.
Conversion
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), provided that (i) the Series A-1 convertible preferred stock shall not be converted without at least 14% of the voting power of the outstanding Series A-1 convertible preferred 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; and (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F. In addition, if a holder of the Series A convertible preferred stock has converted any of the 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 Series A, Series B, Series C, Series D, Series E-1, Series E-2 and the Series F 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
Liquidation Rights
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 its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of Series E-1, Series E-2 and Series F convertible preferred stock is entitled to receive 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 and Series A-1 preferred stock or common stock, an amount per share for (i) each share of Series E-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 Series E-1, Series E-2, and Series F convertible preferred stock, each holder of Series A, Series B, Series C and Series D, Series E-2 and Series F 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 and Series D convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2 and Series F 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 Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F convertible preferred stock and Series A-1 preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of Series A preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the 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 Series A convertible preferred stock which the holders of Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the Series A convertible preferred stock.
At present, the liquidation preferences are equal to $0.29 per share for the Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the Series B convertible preferred stock, $2.87 per share for the Series C convertible preferred stock, $6.91 for the Series D convertible preferred stock, $0.84 for the Series E-1 convertible preferred stock, $0.84 for the Series E-2 convertible preferred stock, and $0.84 for the Series F convertible preferred stock.
Voting
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 were 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 three months ended March 31, 2017,
Prosper recognized $401 thousand of expense from the re-measurement of the fair value of the warrants. The expense is recorded through other expenses in the 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 valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the probability weighted expected return method (“PWERM”) was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The concluded per share value for the Series E-1 convertible preferred stock was utilized as an input to the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding convertible Series E-1 preferred stock warrants utilizing the following assumptions as of the following dates:
|
| | | | |
| March 31, 2017 | | December 31, 2016 |
Volatility | 40 | % | | 40% |
Risk-free interest rate | 2.40 | % | | 2.45% |
Remaining contractual term | 9.79 years |
| | 9.96 years |
Dividend yield | — | % | | —% |
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.
Series F
In connection with the Consortium Purchase Agreement (as described in Note 16), 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 three months ended March 31, 2017, Prosper recognized $0 of expense from the remeasurement 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 convertible preferred stock, the Company first derived the business enterprise value (“BEV”) of the Company using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the probability weighted expected return method (“PWERM”) was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The concluded per share value for the Series F convertible preferred stock warrants utilized the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding convertible Series F preferred stock warrants utilizing the following assumptions as of March 31, 2017:
|
| | |
| March 31, 2017 |
Volatility | 40 | % |
Risk-free interest rate | 2.40 | % |
Remaining contractual term (in years) | 9.91 |
|
Dividend yield | — | % |
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 for the three months ended March 31, 2017 is as follows (in thousands):
|
| | | |
Balance at January 1, 2017 | $ | 21,711 |
|
Warrants Vested | 8,699 |
|
Change in Fair Value | 401 |
|
Balance at March 31, 2017 | $ | 30,811 |
|
PMI, through its amended and restated certificate of incorporation, as amended, is the sole issuer of common stock and related options, RSUs and warrants. On February 16, 2016, PMI amended and restated its certificate of incorporation to, among other things, effect a 5-for-1 forward stock split. On May 31, 2016, PMI further amended its amended and restated certificate of incorporation to increase the number of shares of common stock authorized for issuance. The total number of shares of stock which PMI has the authority to issue is 475,610,528,957,511,351, consisting of 298,222,103550,000,000 shares of common stock, $0.01 par value per share, and 177,388,425407,511,351 shares of preferred stock, $0.01 par value per share. As of June 30, 2016, 70,893,225March 31, 2017, 70,615,559 shares of common stock were issued and 69,957,29069,679,624 shares of common stock were outstanding. As of December 31, 2015, 70,367,4252016, 70,843,044 shares of common stock were issued and 69,431,49069,907,109 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held. Common Stock Issued upon Exercise of Stock Options
During the
sixthree months ended
June 30, 2016,March 31, 2017, PMI issued
334,47534,475 shares of common stock upon the exercise of vested options for cash proceeds of
$0.3 million.$4 thousand. 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
June 30, 2016March 31, 2017 and December 31,
2015,2016, there were
5,345,95030,835 and
9,806,1701,126,210 shares, respectively, of restricted stock outstanding that remain unvested and subject to Prosper’s right of repurchase.
For the
sixthree months ended
June 30, 2016,March 31, 2017, PMI repurchased
51,105261,960 shares of restricted stock for
$46$64 thousand upon termination of employment of various
employees.Common Stock Issued upon Exercise of Warrants
For the six months ended June 30, 2016, PMI issued 51,915 shares of common stock upon the exercise of warrants for aggregate proceeds of $11 thousand.
employees
13. Share Based Incentive Plan and 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 Amended and Restated 2005 Stock Plan (the “2005 Plan”). The 2005 Plan expired during the year ending December 31, 2015 and PMI’s stockholders approved the adoption of the 2015 Equity Incentive Plan. On February 15, 2016, PMI’s stockholders approved the adoption of an Amendment No. 1 to the 2015 Equity Incentive Plan, and on May 31, 2016, PMI’s
21
stockholders approved the adoption of an Amendment No. 2 to the 2015 Equity Incentive Plan (as amended to date, the “2015 Plan”). As of June 30, 2016In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan upprior to 59,388,480 shares of common stock are reserved and may be issuedits expiration remain in effect pursuant to employees, directors, and consultants by PMI’s board of directors and stockholders to promote the success of Prosper’s business.their terms. As of June 30, 2016March 31, 2017 under the 2015 Plan, up to 51,850,91860,241,343 shares of 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% one year from the vesting date and 1/48 per month thereafter or vest 50% two years from the vesting commencement date and 1/4848t thh per month thereafter or vest 1/3636tth per month from the vesting commencement date. In no event are options exercisable more than ten years after the date of grant. At
June 30, 2016,March 31, 2017, there were
11,402,606858,395 shares available for grant under the 2015 Plan and zero shares available for grant under the 2005 Plan.
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.
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “Reprice”“2016 Reprice”) authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have 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 have exercise prices above the current fair market value of PMI’s common stock. The repricing was effected on March 17, 2017 for eligible directors and employees.
Prosper believes that the repricingRepricings of such stock options will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of this repricing. the Repricings.
The financial statement impact of
this repricingthe above Repricings is
$1.2$0.8 million in the
3three months ended
June 30, 2016March 31, 2017 and
$4.2$1.1 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of
2.82.1 years.
Early Exercised Stock Options
The
activitybalance of
stock options that were early exercised under the 2005 Plan
for the six months ended June 30, 2016 is below: | | Early exercised options, unvested | | | Weighted average exercise price | | |
Balance as of January 1, 2016 | | | 9,806,170 | | | $ | 0.05 | | |
Repurchase of restricted stock | | | (51,105 | ) | | | 0.90 | | |
Restricted stock vested | | | (4,409,115 | ) | | | 0.04 | | |
Balance as of June 30, 2016 | | | 5,345,950 | | | $ | 0.05 | | |
Additional information regarding the unvested early exercised stock options outstanding as of June 30, 2016March 31, 2017 is as follows:
not material. | | | | Options Outstanding | |
Range of | | | | | | | | | | | | | |
Exercise | | | Number | | | Weighted –Avg. | | | Weighted –Avg. | |
Prices | | | Outstanding | | | Remaining Life | | | Exercise Price | |
| 0.02 | | | | 4,847,590 | | | | 0.7 | | | $ | 0.02 | |
| 0.11 | | | | 387,010 | | | | 1.6 | | | | 0.11 | |
| 1.13 | | | | 111,350 | | | | 2.1 | | | | 1.13 | |
$0.02 - $1.13 | | | | 5,345,950 | | | | 0.8 | | | $ | 0.05 | |
22
Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized for the
sixthree months ended
June 30, 2016March 31, 2017 below:
| | Options Issued and Outstanding | | | Weighted- Average Exercise Price | |
Balance as of January 1, 2016 | | | 40,425,605 | | | $ | 2.64 | |
Options issued | | | 19,655,338 | | | $ | 2.14 | |
Options exercised – vested | | | (334,475 | ) | | | 0.85 | |
Options forfeited | | | (4,725,406 | ) | | | 1.38 | |
Balance as of June 30, 2016 | | | 55,021,062 | | | | 1.54 | |
| | | | | | | | |
Options vested and/or exercisable at June 30, 2016 | | | 26,856,397 | | | | 1.15 | |
|
| | | | | | |
| Options Issued and Outstanding | | Weighted- Average Exercise Price |
Balance as of January 1, 2017 | 41,395,719 |
| | $ | 1.48 |
|
Options issued | 30,388,611 |
| | 0.22 |
|
Options exercised – vested | (34,475 | ) | | 0.11 |
|
Options forfeited | (7,744,759 | ) | | 1.25 |
|
Balance as of March 31, 2017 | 64,005,096 |
| | $ | 0.25 |
|
Options vested and expected to vest as of March 31, 2017 | 50,420,436 |
| | 0.25 |
|
Options vested and exercisable at March 31, 2017 | 22,463,217 |
| | 0.25 |
|
Due to the timing of the
2017 Reprice, the ending weighted average exercise price shown above reflects repriced options while the opening weighted average exercise price does not.
Other Information Regarding Stock Options
Additional information regarding common stock options outstanding as of
June 30, 2016March 31, 2017 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 - 0.99 | | | 13,462,825 | | | | 7.41 | | | $ | 0.12 | | | | 13,462,110 | | | $ | 0.12 | |
| 1.00 - 2.99 | | | 38,325,717 | | | | 9.34 | | | | 2.04 | | | | 11,565,657 | | | | 1.91 | |
| 3.00 - 4.99 | | | 1,586,875 | | | | 8.63 | | | | 3.62 | | | | 1,586,875 | | | | 3.62 | |
| 5.00 - 5.52 | | | 1,645,645 | | | | 9.14 | | | | 5.49 | | | | 241,755 | | | | 5.46 | |
$ | 0.02 - 5.52 | | | 55,021,062 | | | | 8.84 | | | $ | 1.72 | | | | 26,856,397 | | | $ | 1.15 | |
|
| | | | | | | | | | | | | | | | | |
| | | 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 | | 8,379,510 |
| | 6.81 | | $ | 0.11 |
| | 8,373,336 |
| | $ | 0.11 |
|
| 0.20 - 0.50 | | 53,457,105 |
| | 9.50 | | 0.22 |
| | 11,921,400 |
| | 0.22 |
|
| 0.50 - 2.14 | | 2,168,481 |
| | 8.41 | | 1.65 |
| | 2,168,481 |
| | 1.64 |
|
$ | 0.02 - 2.14 | | 64,005,096 |
| | 9.11 | | $ | 0.25 |
| | 22,463,217 |
| | $ | 0.25 |
|
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.
23
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 options that do not vest.
The fair value of PMI’s stock option awards granted during the three months ended
June 30,March 31, 2017 and 2016
and 2015 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
| Three Months Ended | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Volatility of common stock | | | 50.88 | % | | | 52.75 | % | | | 50.88 | % | | | 57.26 | % |
Risk-free interest rate | | | 1.29 | % | | | 1.80 | % | | | 1.29 | % | | | 1.72 | % |
Expected life | | 5.8 years | | | 6.0 years | | | 5.8 years | | | 6.1 years | |
Dividend yield | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
|
| | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Volatility of common stock | 50.28 | % | | N/A |
Risk-free interest rate | 2.12 | % | | N/A |
Expected life | 5.7 years |
| | N/A |
Dividend yield | 0 | % | | N/A |
Restricted Stock Unit Activity
During the
sixthree months ended
June 30, 2016,March 31, 2017, PMI granted restricted stock units (“RSUs”) to certain employees that are subject to three-year vesting terms or four year vesting terms and the occurrence of a liquidity event.
The aggregate fair value of the RSUs granted was $10.7 million.$3 thousand. The following table summarizes the activities for PMI’s RSUs during the sixthree months ending June 30, 2016:ended March 31, 2017:
| | | | | | | | |
| | Number of Shares | | | Weighted-Average Grant Date Fair Value | |
Unvested - December 31, 2015 | | | 1,835,510 | | | $ | 5.52 | |
Granted | | | 3,580,220 | | | | 2.14 | |
Vested | | | - | | | | - | |
Forfeited | | | (1,274,920 | ) | | | 2.14 | |
Unvested - June 30, 2016 | | | 4,140,810 | | | $ | 2.59 | |
|
| | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
Unvested - December 31, 2016 | 1,995,159 |
| | $ | 2.16 |
|
Granted | 12,000 |
| | 0.22 |
|
Vested | — |
| | — |
|
Forfeited | (434,750 | ) | | 2.18 |
|
Unvested - March 31, 2017 | 1,572,409 |
| | $ | 2.14 |
|
The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations during the three months ended June 30,March 31, 2017 and 2016 and 2015 (in thousands):
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Origination and servicing | | $ | 579 | | | $ | 292 | | | $ | 1,018 | | | $ | 436 | |
Sales and marketing | | | 896 | | | | 676 | | | | 1,632 | | | | 1,065 | |
General and administrative | | | 4,884 | | | | 1,784 | | | | 8,815 | | | | 2,691 | |
Restructuring | | | 45 | | | | - | | | | 45 | | | | - | |
Total stock based compensation | | $ | 6,404 | | | $ | 2,752 | | | $ | 11,510 | | | $ | 4,192 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Origination and servicing | $ | 217 |
| | $ | 439 |
|
Sales and marketing | 171 |
| | 736 |
|
General and administrative | 3,112 |
| | 3,932 |
|
Total stock based compensation | $ | 3,500 |
| | $ | 5,107 |
|
During the three months ended
June 30,March 31, 2017 and 2016,
and 2015, Prosper capitalized
$225$108 thousand and
$175 thousand respectively, of stock-based compensation as internal use software and website development costs. During the six months ended June 30, 2016 and 2015, Prosper capitalized $436 thousand and $297$210 thousand respectively, of stock-based compensation as internal use software and website development costs. As of
June 30, 2016,March 31, 2017, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to Prosper’s employees’ unvested stock-based awards was approximately
$58.6$26.9 million, which will be recognized over the remaining weighted-average vesting period of approximately
2.772.26 years.
Management modified or accelerated the vesting terms for certain employee options, which resulted in an additional $0.7 million and $0.1 million of stock-based compensation expense for the three months ended June 30, 2016 and 2015, respectively.
Summary of Restructuring Plan
24
On May 3, 2016, Prosper adopted a strategic restructuring of its business. This restructuring is 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
will terminateterminated 167 employees across all locations. In
connection with the restructuring,December 2016, Prosper
has recognized employee severance and benefits charges of approximately $5.4 millionshut down its Tel Aviv location, resulting in the
second quarter which were included in “Restructuring Charges” within the condensed consolidated statementtermination of
operations, and expects to incur $0.2 million in the third quarter of 2016 related to these charges. The actions associated with this restructuring are expected to be fully completed by the third quarter of 2016.31 employees.
In addition to the employment costs associated with the restructuring, Prosper is also
engaged in marketing for sublease
space in our existing office space that is no longer needed due to the reduction in headcount.
In total, the losses incurred on the leasesOther than accretion and changes in
San Francisco, Salt Lake City and Phoenix totaled $8.7 million which has been included in “Restructuring Charges” within the condensed consolidated statement of operations.sublease loss estimates, Prosper
expects to incur andoes not expect any additional
$0.2 million in the third quarter of 2016restructuring charges related to
the facilities related charges. this restructuring.
The following table summarizes the activities related to Prosper's restructuring plan (in thousands)
: | | | Severance Related * | | | Facilities Related | | | Total | |
Balance April 1, 2016 | | | $ | - | | | $ | - | | | $ | - | |
Additions to expense | | | | 5,400 | | | | 8,661 | | | | 14,061 | |
Transfer from deferred rent | | | | - | | | | 764 | | | | 764 | |
Less: Cash paid | | | | (3,362 | ) | | | (933 | ) | | | (4,295 | ) |
Balance June 30, 2016 | | | $ | 2,038 | | | $ | 8,492 | | | $ | 10,530 | |
|
| | | | | | | | | | | |
| Severance Related | | Facilities Related | | Total |
Balance January 1, 2017 | $ | 597 |
| | $ | 6,052 |
| | $ | 6,649 |
|
Adjustments to expense | (1 | ) | | (73 | ) | | (74 | ) |
Less: Cash paid | (474 | ) | | (2,836 | ) | | (3,310 | ) |
Balance March 31, 2017 | $ | 122 |
| | $ | 3,143 |
| | $ | 3,265 |
|
* Severance related restructuring costs excludes non-cash charges related to vesting of equity incentives for fully-vested employees terminated as part of the Restructuring of $45 thousand
For the three months ended
June 30,March 31, 2017 and 2016,
and 2015, Prosper recognized
$105$164 thousand and
$176 thousand of income tax expense, respectively. For the six months ended June 30, 2016 and 2015, Prosper recognized $270 thousand and $249$165 thousand of income tax expense, respectively. The income tax expense relates to state income tax expense and the amortization of tax deductible goodwill which gives rise to an indefinite-lived deferred tax liability. No other income tax expense or benefit was recorded for the
sixthree month periods ended
June 30,March 31, 2017 and 2016
and 2015 due to a full valuation allowance recorded against our deferred tax assets.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, it is not more likely than not that our deferred tax assets will be realized and therefore a full valuation allowance has been recorded.
16. Consortium Purchase Agreement
On February 27, 2017, Prosper entered into series of agreements (the "Consortium Purchase Agreement") with a consortium of investors (the "Consortium"). Under the Consortium Purchase Agreement 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 above agreement to purchase 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”).
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 Purchaser elects to purchase (if any) in each month, subject to certain cure rights such as offering additional loans for sale in subsequent periods (except that a certain portion of the Series F Warrant will be immediately exercisable as a result of loans purchased before the signing of the agreement). 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 Condensed Consolidated Balance Sheet at fair value and a corresponding amount as "Fair Value of Warrants Vested on Sale of Borrower Loans" on the Condensed Consolidated Statement of Operations. Subsequent changes in the fair value of the vested warrants are recorded in "Other Expenses" on the Condensed Consolidated Statement of Operations. Additionally as part of the Consortium Purchase Agreement certain rebates previously issued were settled by the 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 "Other Expense" on the Condensed Consolidated Statement of Operations.
17. Commitments and Contingencies
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.
Future minimum rental payments under these leases as of
June 30, 2016March 31, 2017 are as follows (in thousands):
Remaining six months of 2016 | | | 3,674 | |
2017 | | | 8,888 | |
2018 | | | 9,524 | |
2019 | | | 9,732 | |
2020 | | | 10,225 | |
2021 | | | 10,313 | |
Thereafter | | | 26,102 | |
Total future operating lease obligations | | $ | 78,458 | |
25
|
| | | |
Remaining nine months of 2017 | 3,977 |
|
2018 | 5,690 |
|
2019 | 6,026 |
|
2020 | 6,193 |
|
2021 | 6,170 |
|
2022 | 6,076 |
|
Thereafter | 8,480 |
|
Total future operating lease obligations | $ | 42,612 |
|
The payments in the above table include amounts that have been accrued for as part of the restructuring liability in Note 14. Restructuring accrual balances related to operating facility leases were $3.1 million at March 31, 2017.
Rental expense under operating lease arrangements was
$1.9$1.3 million and
$0.9$1.8 million for the three months ended
June 30,March 31, 2017 and 2016,
and 2015, respectively.
Rental expense under operating lease arrangements was $3.7 million and $1.7 million for the six months ended June 30, 2016 and 2015, respectively.Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace 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 the greater of a monthly minimum fee or a fee calculated based on a certain percentage of monthly Borrower Loan origination volume. TheWebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining sixnine months ended December 31, 20162017 is $0.8$1.3 million. The minimum fee is $1.7 million $1.7and $0.9 million and $1.0 million forin each of the years 2017, 2018 and 2019, respectively. 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 March 31, 2017, Prosper was in compliance with the covenant.
Loan Purchase Commitments
Prosper has entered into an agreement with WebBank to purchase
$7.8$26.6 million of Borrower Loans that WebBank originated during the last
two business
daydays of the quarter ended
June 30, 2016March 31, 2017 and the first business day of the quarter ending
SeptemberJune 30,
2016. 2017. Prosper will purchase these Borrower Loans within the first
twothree business days of the quarter
endedending June 30,
2016.2017.
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 issued through the Whole Loan Channel, which at
June 30, 2016March 31, 2017 is
$4,063$3,453 million. Prosper has accrued
$489 thousand$1.0 million and
$510 thousand$0.6 million as of
June 30, 2016March 31, 2017 and December 31,
2015,2016, respectively, in regard to this obligation.
Securities Law Compliance
From inception through October 16, 2008, Prosper sold approximately $178.0 million of Borrower Loans to investors through its 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 suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation agreed to enter into a settlement to resolve all claims related thereto (the “Settlement”). In connection with the Settlement, Prosper agreed to pay an aggregate amount of $10 million into a settlement fund, split into four annual installments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order and judgment entered by the Superior Court on April 16, 2014. Pursuant to the final order and judgment, the claims in the class action were dismissed, and the defendants were released by the plaintiffs from all claims that were or could have been asserted concerning the issues alleged in the class action lawsuit.
The first threeAll annual installments have been made prior to
June 30, 2016 and the reserve for the class action settlement liability is $3.0 million in the condensed consolidated balance sheet as of June 30, 2016.17.March 31, 2017.
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%
26
stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers, and certain affiliates participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the three
and six months ended
June 30,March 31, 2017 and 2016,
and 2015, as well as the Notes and Borrower Loans outstanding as of
June 30, 2016March 31, 2017 and December 31,
20152016 are summarized below (in thousands):
| | Aggregate Amount of Notes and Borrower Loans Purchased | | | Interest Earned on Notes and Borrower Loans | |
| | Six Months Ended June 30, | | | Six Months Ended June 30, | |
Related Party | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Executive officers and management | | $ | 801 | | | $ | 846 | | | $ | 110 | | | $ | 98 | |
Directors (excluding executive officers and management) | | | 350 | | | | 20 | | | | 15 | | | | 4 | |
Total | | $ | 1,151 | | | $ | 866 | | | $ | 125 | | | $ | 102 | |
| | Aggregate Amount of Notes and Borrower Loans Purchased | | | Interest Earned on Notes and Borrower Loans | |
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
Related Party | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Executive officers and management | | $ | 396 | | | $ | 365 | | | $ | 61 | | | $ | 51 | |
Directors (excluding executive officers and management) | | | 114 | | | | - | | | | 9 | | | | 2 | |
Total | | $ | 510 | | | $ | 365 | | | $ | 70 | | | $ | 53 | |
30
| | Notes and Borrower Loans Balance as of | |
Related Party | | June 30, 2016 | | | December 31, 2015 | |
Executive officers and management | | $ | 1,822 | | | $ | 1,912 | |
Directors (excluding executive officers and management) | | | 528 | | | | 325 | |
| | $ | 2,350 | | | $ | 2,237 | |
18. Subsequent Events
On July 1,
|
| | | | | | | | | | | | | | | | |
| | Aggregate Amount of Notes and Borrower Loans Purchased Three Months Ended March 31, | | Interest Earned on Notes and Borrower Loans Three Months Ended March 31, |
Related Party | | 2017 | | 2016 | | 2017 | | 2016 |
Executive officers and management | | $ | 5 |
| | $ | 405 |
| | $ | 93 |
| | $ | 49 |
|
Directors (excluding executive officers and management) | | 88 |
| | 236 |
| | 10 |
| | 6 |
|
Total | | $ | 93 |
| | $ | 641 |
| | $ | 103 |
| | $ | 55 |
|
|
| | | | | | | | |
| | Notes and Borrower Loans Balance as of |
Related Party | | March 31, 2017 | | December 31, 2016 |
Executive officers and management | | $ | 1,277 |
| | $ | 1,620 |
|
Directors (excluding executive officers and management) | | 561 |
| | 537 |
|
| | $ | 1,838 |
| | $ | 2,157 |
|
19. Significant Concentrations
Prosper is dependent on third party funding sources such as banks 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 period ended March 31, 2017, 33%, 24% and 12% were purchased by three different parties. This compares to 36%, 20% and 8% for the period ended March 31, 2016. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which 90% and 94% of Borrower Loans were originated through the Whole Loan Channel in the periods ended March 31, 2017 and 2016, respectively.
Prosper
andreceives all of its transaction fee revenue from WebBank. Prosper earns a transaction fee from WebBank
an FDIC-insured, Utah-chartered industrial bank (“WebBank”), entered into (i) an Asset Sale Agreement between Prosper Funding and WebBank (the “Sale Agreement”), (ii) a Marketing Agreement between PMI and WebBank (the “Marketing Agreement”), and (iii) a Stand By Purchase Agreement between PMI and WebBank (the “Purchase Agreement,” and collectively, the “Origination and Sale Agreements”). Asfor our services in facilitating originations of Borrower Loans issued by WebBank. The rate of the
effective date of August 1, 2016 these agreements replacetransaction fee for each individual Borrower Loan is based on the
existing agreements with WebBank. The Originationterm and Sale Agreements set forth the respective obligationscredit grade of the Registrants and WebBank with respect to the origination and sales activitiesBorrower Loan. No individual borrower or investor accounted for 10% or more of consumer loans originated on or after August 1, 2016. Under the Sale Agreement, WebBank sells and assigns certain consumer loans or related participation rights to Prosper Funding. As considerationconsolidated net revenue for WebBank’s agreement to sell and assign such consumer loans or related participation rights, Prosper Funding agrees to pay WebBank certain fees in addition to the purchase price of such consumer loans or participation rights. Under the Marketing Agreement, PMI identifies customers who qualify for WebBank’s consumer loans, markets such loan programs and provides an online interface and other operational services in support of such consumer loan program. WebBank pays PMI a marketing fee in consideration for PMI’s marketing and other activities under the consumer loan program. Under the Purchase Agreement, PMI has agreed to purchase consumer loans or related participation rights from WebBank in the event that Prosper Funding fails to purchase loans or participation rights that it is obligated to purchase under the Sale Agreement. The initial term of eachany of the Origination and Sale Agreements is three years.
27
As a result of entering into these agreements, on August 1st, 2016 Prosper deposited an additional $5 million into a collateral account. This will reduce Cash and Cash Equivalents while increasing Restricted Cash. Additionally, under this agreement Prosper is required to maintain a minimum liquidity covenant of $15 million.
periods presented.
Condensed Consolidated Balance Sheets (Unaudited)
| | June 30, 2016 | | | December 31, 2015 | |
Assets | | | | | | | | |
Cash and Cash Equivalents | | $ | 6,911 | | | $ | 15,026 | |
Restricted Cash | | | 121,933 | | | | 139,937 | |
Short Term Investments | | | 1,279 | | | | 1,277 | |
Loans Held for Sale at Fair Value | | | 4,705 | | | | 32 | |
Borrower Loans Receivable at Fair Value | | | 310,034 | | | | 297,273 | |
Property and Equipment, Net | | | 9,854 | | | | 8,419 | |
Servicing Assets | | | 13,798 | | | | 13,605 | |
Other Assets | | | 111 | | | | 122 | |
Total Assets | | $ | 468,625 | | | $ | 475,691 | |
Liabilities and Member’s Equity | | | | | | | | |
Accounts Payable and Accrued Liabilities | | $ | 1,371 | | | $ | 2,122 | |
Payable to Related Party | | | 4,202 | | | | 2,989 | |
Payable to Investors | | | 113,610 | | | | 135,661 | |
Notes at Fair Value | | | 309,530 | | | | 297,405 | |
Other Liabilities | | | 1,283 | | | | 1,209 | |
Total Liabilities | | | 429,996 | | | | 439,386 | |
Member's Equity | | | | | | | | |
Retained Earnings | | | 38,629 | | | | 36,305 | |
Total Member's Equity | | $ | 38,629 | | | $ | 36,305 | |
Total Liabilities and Member's Equity | | $ | 468,625 | | | $ | 475,691 | |
|
| | | | | | | |
| March 31, 2017 | | December 31, 2016 |
Assets | | | |
Cash and Cash Equivalents | $ | 8,365 |
| | $ | 6,929 |
|
Restricted Cash | 119,535 |
| | 147,983 |
|
Short Term Investments | 1,282 |
| | 1,280 |
|
Loans Held for Sale at Fair Value | 109 |
| | 624 |
|
Borrower Loans Receivable at Fair Value | 317,536 |
| | 315,627 |
|
Property and Equipment, Net | 9,887 |
| | 10,095 |
|
Servicing Assets | 12,190 |
| | 12,461 |
|
Other Assets | 233 |
| | 186 |
|
Total Assets | $ | 469,137 |
| | $ | 495,185 |
|
Liabilities and Member’s Equity | | | |
Accounts Payable and Accrued Liabilities | $ | 746 |
| | $ | 2,223 |
|
Payable to Related Party | 2,790 |
| | 1,899 |
|
Payable to Investors | 114,339 |
| | 141,625 |
|
Notes at Fair Value | 316,944 |
| | 316,236 |
|
Other Liabilities | 2,545 |
| | 1,877 |
|
Total Liabilities | 437,364 |
| | 463,860 |
|
Member's Equity | | | |
Member's Equity | 30,704 |
| | 30,704 |
|
Retained Earnings | 1,069 |
| | 621 |
|
Total Member's Equity | $ | 31,773 |
| | $ | 31,325 |
|
Total Liabilities and Member's Equity | $ | 469,137 |
| | $ | 495,185 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
29
Condensed Consolidated Statements of Operations (Unaudited)
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | | 2017 | | 2016 |
Revenues | | | | | | | | | | | | | | | | | |
| | |
|
Operating Revenues | | | | | | | | | | | | | | | | | |
| | |
|
Administration Fee Revenue - Related Party | | $ | 6,930 | | | $ | 14,213 | | | $ | 22,348 | | | $ | 23,886 | | $ | 15,153 |
| | $ | 15,417 |
|
Servicing Fees, Net | | | 7,589 | | | | 3,272 | | | | 14,623 | | | | 5,536 | | 5,879 |
| | 7,034 |
|
Gain (Loss) on Sale of Borrower Loans | | | (687 | ) | | | 3,696 | | | | 3,104 | | | | 5,618 | | (3,625 | ) | | 3,791 |
|
Other Revenues | | | 26 | | | | - | | | | 417 | | | | (22 | ) | 32 |
| | 392 |
|
Total Operating Revenues | | | 13,858 | | | | 21,181 | | | | 40,492 | | | | 35,018 | | 17,439 |
| | 26,634 |
|
Interest Income on Borrower Loans | | | 10,988 | | | | 10,209 | | | | 21,496 | | | | 20,723 | | 11,499 |
| | 10,507 |
|
Interest Expense on Notes | | | (10,098 | ) | | | (9,448 | ) | | | (19,819 | ) | | | (19,011 | ) | (10,678 | ) | | (9,722 | ) |
Net Interest Income | | | 890 | | | | 761 | | | | 1,677 | | | | 1,712 | | 821 |
| | 785 |
|
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | | | (2 | ) | | | 94 | | | | (79 | ) | | | 21 | | (94 | ) | | (78 | ) |
Total Net Revenues | | | 14,746 | | | | 22,036 | | | | 42,090 | | | | 36,751 | | 18,166 |
| | 27,341 |
|
Expenses | | | | | | | | | | | | | | | | | |
| | |
|
Administration Fee - Related Party | | | 15,652 | | | | 14,085 | | | | 36,258 | | | | 23,380 | | 15,815 |
| | 20,607 |
|
Servicing | | | 1,536 | | | | 899 | | | | 2,767 | | | | 2,271 | | 844 |
| | 1,227 |
|
General and Administrative | | | 380 | | | | 282 | | | | 737 | | | | 546 | | 1,059 |
| | 357 |
|
Total Expenses | | | 17,568 | | | | 15,266 | | | | 39,762 | | | | 26,197 | | 17,718 |
| | 22,191 |
|
Total Net Income | | $ | (2,822 | ) | | $ | 6,770 | | | $ | 2,328 | | | $ | 10,554 | | $ | 448 |
| | $ | 5,150 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
30
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | Six Months Ended June 30, | |
| | 2016 | | | 2015 | |
Cash flows from operating activities: | | | | | | | | |
Net Income | | $ | 2,328 | | | $ | 10,554 | |
Adjustments to Reconcile Net Income to Net Cash (Used in) Provided by Operating Activities: | | | | | | | | |
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes | | | 79 | | | | 2 | |
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes | | | 39 | | | | (21 | ) |
Gain on Sale of Borrower Loans | | | (5,690 | ) | | | (5,648 | ) |
Change in Fair Value of Servicing Rights | | | 5,387 | | | | 1,291 | |
Depreciation and Amortization | | | 1,864 | | | | 1,896 | |
Changes in Operating Assets and Liabilities: | | | | | | | | |
Purchase of Loans Held for Sale at Fair Value | | | (1,358,011 | ) | | | (1,402,499 | ) |
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | | | 1,353,338 | | | | 1,409,426 | |
Restricted Cash Except for those Related to Investing Activities | | | 21,080 | | | | (62,390 | ) |
Other Assets | | | 11 | | | | (14 | ) |
Accounts Payable and Accrued Liabilities | | | (755 | ) | | | 402 | |
Payable to Investors | | | (22,051 | ) | | | 69,686 | |
Net Related Party Receivable/Payable | | | 2,077 | | | | 1,387 | |
Other Liabilities | | | 184 | | | | | |
Net Cash (Used in) Provided by Operating Activities | | | (120 | ) | | | 24,072 | |
Cash Flows From Investing Activities: | | | | | | | | |
Purchase of Borrower Loans Held at Fair Value | | | (109,215 | ) | | | (94,512 | ) |
Principal Payment of Borrower Loans Held at Fair Value | | | 83,514 | | | | 73,457 | |
Maturities of Short Term Investments | | | 1,277 | | | | 1,274 | |
Purchases of Short Term Investments | | | (1,279 | ) | | | (1,275 | ) |
Purchases of Property and Equipment | | | (4,163 | ) | | | (6,567 | ) |
Changes in Restricted Cash Related to Investing Activities | | | (3,076 | ) | | | (2,725 | ) |
Net Cash Used in Investing Activities | | | (32,942 | ) | | | (30,348 | ) |
Cash Flows from Financing Activities: | | | | | | | | |
Proceeds from Issuance of Notes Held at Fair Value | | | 109,147 | | | | 94,576 | |
Payments of Notes Held at Fair Value | | | (84,200 | ) | | | (73,509 | ) |
Cash Distributions to Parent | | | - | | | | (27,000 | ) |
Net Cash Provided by/(Used in) Financing Activities | | | 24,947 | | | | (5,933 | ) |
Net Decrease in Cash and Cash Equivalents | | | (8,115 | ) | | | (12,209 | ) |
Cash and Cash Equivalents at Beginning of the Year | | | 15,026 | | | | 23,777 | |
Cash and Cash Equivalents at End of the Year | | $ | 6,911 | | | $ | 11,568 | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
Cash Paid for Interest | | $ | 19,787 | | | $ | 19,147 | |
Non-Cash Investing Activity - Accrual for Property and Equipment, Net | | $ | 572 | | | | - | |
Non-Cash Financing Activity, Distribution to Parent | | | - | | | $ | 249 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Cash flows from operating activities: | |
| | |
|
Net Income | $ | 448 |
| | $ | 5,150 |
|
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 | 94 |
| | 78 |
|
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes | (418 | ) | | (153 | ) |
Gain on Sale of Borrower Loans | (2,764 | ) | | (3,971 | ) |
Change in Fair Value of Servicing Rights | 2,984 |
| | 2,602 |
|
Depreciation and Amortization | 1,280 |
| | 883 |
|
Changes in Operating Assets and Liabilities: | |
| | |
|
Purchase of Loans Held for Sale at Fair Value | (523,997 | ) | | (931,420 | ) |
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | 524,515 |
| | 931,422 |
|
Restricted Cash Except for those Related to Investing Activities | 26,166 |
| | 2,511 |
|
Other Assets | (47 | ) | | (387 | ) |
Accounts Payable and Accrued Liabilities | (1,477 | ) | | (610 | ) |
Payable to Investors | (27,286 | ) | | (4,225 | ) |
Net Related Party Receivable/Payable | 850 |
| | 2,111 |
|
Other Liabilities | 719 |
| | 82 |
|
Net Cash Provided by Operating Activities | 1,067 |
| | 4,073 |
|
Cash Flows From Investing Activities: | |
| | |
|
Purchase of Borrower Loans Held at Fair Value | (56,680 | ) | | (55,171 | ) |
Principal Payment of Borrower Loans Held at Fair Value | 50,565 |
| | 41,599 |
|
Maturities of Short Term Investments | 1,280 |
| | 1,277 |
|
Purchases of Short Term Investments | (1,282 | ) | | (1,278 | ) |
Purchases of Property and Equipment | (1,031 | ) | | (1,804 | ) |
Changes in Restricted Cash Related to Investing Activities | 2,282 |
| | 550 |
|
Net Cash Used in Investing Activities | (4,866 | ) | | (14,827 | ) |
Cash Flows from Financing Activities: | |
| | |
|
Proceeds from Issuance of Notes Held at Fair Value | 56,814 |
| | 55,273 |
|
Payments of Notes Held at Fair Value | (51,579 | ) | | (42,644 | ) |
Net Cash Provided by (Used in) Financing Activities | 5,235 |
| | 12,629 |
|
Net Increase in Cash and Cash Equivalents | 1,436 |
| | 1,875 |
|
Cash and Cash Equivalents at Beginning of the Year | 6,929 |
| | 15,026 |
|
Cash and Cash Equivalents at End of the Period | $ | 8,365 |
| | $ | 16,901 |
|
Supplemental Disclosure of Cash Flow Information: | |
| | |
|
Cash Paid for Interest | $ | 11,100 |
| | $ | 9,879 |
|
Non-Cash Investing Activity - Accrual for Property and Equipment, Net | $ | 1,647 |
| | 495 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
31
Notes to Condensed Consolidated Financial Statements
Prosper Funding LLC (“PFL”) was formed in the state of Delaware on February 17, 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”
, "Parent"). Except as the context otherwise requires, as used in these Notes to the condensed consolidated financial statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned
subsidiary,subsidiaries, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company,
and Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31,
2015.2016. The balance sheet at December 31,
20152016 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
Prosper Funding did not have any items of other comprehensive income (loss) during any of the periods presented in the condensed consolidated financial statements as of and for the
sixthree months ended
June 30, 2016March 31, 2017 and
2015.March 31, 2016.
The preparation of Prosper Funding's condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.
Reclassifications
During the period ended June 30, 2016, Prosper Funding changed the presentation of its revenue in the condensed 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”. The gain on sale related to the sale of Borrower Loans was reclassified from “Other Revenues” to a new line called “Gain on Sales of Borrower Loans.”
2. Significant Accounting Policies
Prosper Funding's significant accounting policies are included in
Note 2 – Summary of Significant Accounting Policies in Prosper Funding’s Annual Report on Form 10-K for the year ended December 31,
2015.2016. There have been no changes to these accounting policies during the first
sixthree months of
2016.2017.
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Short Term Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
Borrower Loans, Loans Held for Sale and Notes
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 funded through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes funded through the Note Channel are carried on Prosper Funding’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
32
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 that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper Funding maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.
Recent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with CustomersCustomers.”.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper Funding in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper Funding may adopt 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 as of the date of adoption. Prosper Funding expects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018. Our evaluation of this ASU is ongoing and not complete. The FASB has issued and may issue in the future, interpretative guidance, which may cause our evaluation to change. Our preliminary results indicate that administration fees are included in the scope of the new guidance, while servicing fees and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing. While we anticipate some changes to revenue recognition for certain customer contracts, Prosper Funding does not currently believe that this ASU will have a material effect on our Consolidated Financial Statements.
In March 2016, April 2016 and MayJanuary 2016, the FASB further amendedissued ASU 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the guidance to clarify the implementation on principal versus agent considerations, the identificationfirst quarter of performance obligationour fiscal year 2019, and the licensing implementation guidance, and to provide narrow-scope improvements and practical expedients.early adoption is not permitted. Prosper Funding has not yet selected a transition method and 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 adoptingCash 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 Funding 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 new accounting standard updatewill have on the Prosper Funding's cash flows.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU2016-18)", 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 is currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which became 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 adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper Funding’s condensed consolidated financial statements.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
| | June 30, | | | December 31, | |
| | 2016 | | | 2015 | |
Property and equipment: | | | | | | | | |
Internal-use software and web site development costs | | $ | 14,289 | | | $ | 10,990 | |
Less accumulated depreciation and amortization | | | (4,435 | ) | | | (2,571 | ) |
Total property and equipment, net | | $ | 9,854 | | | $ | 8,419 | |
|
| | | | | | | |
| March 31, 2017 | | December 31, 2016 |
Property and equipment: | |
| | |
|
Internal-use software and web site development costs | $ | 17,821 |
| | $ | 16,749 |
|
Less accumulated depreciation and amortization | (7,934 | ) | | (6,654 | ) |
Total property and equipment, net | $ | 9,887 |
| | $ | 10,095 |
|
Depreciation expense for the three months ended
June 30,March 31, 2017 and 2016
was $1.3 million and
2015 was $981 thousand and $676 thousand,$0.9 million, respectively.
Depreciation expense for the six months ended June 30, 2016 and 2015 was $1,864 thousand and $1,896 thousand, respectively.33
4. Borrower Loans, Loans Held For Sale and Notes Held at Fair Value
The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale and Notes as of
June 30, 2016March 31, 2017 and December 31,
2015,2016, are presented in the following table (in thousands):
| | Borrower Loans | | | Notes | | | Loans Held for Sale | |
| | June 30, 2016 | | | December 31, 2015 | | | June 30, 2016 | | | December 31, 2015 | | | June 30, 2016 | | | December 31, 2015 | |
Aggregate principal balance outstanding | | $ | 312,725 | | | $ | 296,945 | | | $ | (315,671 | ) | | $ | (294,331 | ) | | $ | 4,715 | | | $ | 42 | |
Fair value adjustments | | | (2,691 | ) | | | 328 | | | | 6,141 | | | | (3,074 | ) | | | (10 | ) | | | (10 | ) |
Fair value | | $ | 310,034 | | | $ | 297,273 | | | $ | (309,530 | ) | | $ | (297,405 | ) | | $ | 4,705 | | | $ | 32 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Borrower Loans | | Notes | | Loans Held for Sale |
| March 31, 2017 | | December 31, 2016 | | March 31, 2017 | | December 31, 2016 | | March 31, 2017 | | December 31, 2016 |
Aggregate principal balance outstanding | $ | 320,670 |
| | $ | 319,143 |
| | $ | (323,672 | ) | | $ | (323,358 | ) | | $ | 120 |
| | $ | 641 |
|
Fair value adjustments | (3,134 | ) | | (3,516 | ) | | 6,728 |
| | 7,122 |
| | (11 | ) | | (17 | ) |
Fair value | $ | 317,536 |
| | $ | 315,627 |
| | $ | (316,944 | ) | | $ | (316,236 | ) | | $ | 109 |
| | $ | 624 |
|
At
June 30, 2016,March 31, 2017, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through
June 2021.March 2022. At December 31,
2015,2016, outstanding Borrower Loans had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December
2020.2021.
Approximately
$314 thousand and $2,033 thousand$1.8 million represents the
gain and loss
respectively, that is attributable to changes in the instrument specific credit risks related to Borrower Loans that were recorded in the change in fair value during the three
and six months ended
June 30, 2016.March 31, 2017.
As of
June 30,March 31, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.4 million and a fair value of $0.7 million. As of December 31, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of
$2.0$3.2 million and a fair value of
$0.7 million. As of December 31, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.3 million and a fair value of $0.9$1.0 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of
June 30, 2016March 31, 2017 and December 31,
2015,2016, Borrower Loans in non-accrual status had a fair value of
$0.2$0.3 million and
$0.1$0.5 million, respectively.
5. Loan Servicing Assets and Liabilities
Prosper Funding accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper Funding sells Borrower Loans to unrelated third-party buyers 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
was $0.7were $3.6 million
of losses and $3.7 million of gains for the three months ended
June 30, 2016March 31, 2017, and
2015, respectively. Thethe total
gaingains recognized on the sale of such Borrower Loans
was $3.1were $3.8 million
and $5.6 million forduring the
sixthree months ended
June 30, 2016 and 2015, respectively.March 31, 2016.
At
June 30, 2016,March 31, 2017, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of
$3.9$3.4 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through
June 2021.March 2022. At December 31,
2015,2016, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of
$3.6$3.4 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to
31.90%35.52% and various maturity dates through December 2020.
$
10.38.5 million and
$4.1$9.4 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated
statementstatements of operations in Servicing Fees, Net for the three months ended
June 30,March 31, 2017 and 2016,
and 2015 respectively.
$19.7 million and $6.8 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statement of operations in Servicing Fees, Net for the six months ended June 30, 2016 and 2015 respectively.Valuation method – Prosper Funding 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 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.
34
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 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period. Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues. Prosper Funding incurred no income tax provision for the
sixthree months ended
June 30, 2016March 31, 2017 and
2015.2016. Prosper Funding is a US disregarded entity and its income and loss is included in the return of its parent, PMI. Since PMI is in a loss position, is not currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.
7. Fair Value of Assets and Liabilities
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.
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, Borrower Loans, accounts payable and accrued liabilities, and Notes. Servicing assets and liabilities are also subject to fair value measurement within the financial
35
statements of Prosper Funding. 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.
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 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 (in thousands):
June 30, 2016 | | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
Borrower Loans | | $ | - | | | $ | - | | | $ | 310,034 | | | $ | 310,034 | |
Loans Held for Sale | | | - | | | | - | | | | 4,705 | | | | 4,705 | |
Servicing Assets | | | - | | | | - | | | | 13,798 | | | | 13,798 | |
Total Assets | | | - | | | | - | | | | 328,537 | | | | 328,537 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Notes | | $ | - | | | $ | - | | | $ | 309,530 | | | $ | 309,530 | |
Servicing Liabilities | | | - | | | | - | | | | 324 | | | | 324 | |
Total Liabilities | | $ | - | | | $ | - | | | $ | 309,854 | | | $ | 309,854 | |
December 31, 2015 | | Level 1 Inputs | | | Level 2 Inputs | | | Level 3 Inputs | | | Total | | |
| | March 31, 2017 | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
Assets: | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Borrower Loans | | $ | - | | | $ | - | | | $ | 297,273 | | | $ | 297,273 | | $ | — |
| | $ | — |
| | $ | 317,536 |
| | $ | 317,536 |
|
Servicing Assets | | — |
| | — |
| | 12,190 |
| | 12,190 |
|
Loans Held for Sale | | | - | | | | - | | | | 32 | | | | 32 | | — |
| | — |
| | 109 |
| | 109 |
|
Servicing Assets | | | - | | | | - | | | | 13,605 | | | | 13,605 | | |
Total Assets | | | - | | | | - | | | | 310,910 | | | | 310,910 | | — |
| | — |
| | 329,835 |
| | 329,835 |
|
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Notes | | $ | - | | | $ | - | | | $ | 297,405 | | | $ | 297,405 | | $ | — |
| | $ | — |
| | $ | 316,944 |
| | $ | 316,944 |
|
Servicing Liabilities | | | - | | | | - | | | | 484 | | | | 484 | | — |
| | — |
| | 147 |
| | 147 |
|
Loan Trailing Fee Liability | | | | | | 1,104 |
| | 1,104 |
|
Total Liabilities | | $ | - | | | $ | - | | | $ | 297,889 | | | $ | 297,889 | | $ | — |
| | $ | — |
| | $ | 318,195 |
| | $ | 318,195 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2016 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
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’s Borrower Loans, Loans Held for Sale, Notes and loan servicing rights 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’s level 3 fair value measurements at June 30, 2016March 31, 2017 and December 31, 20152016:
:Borrower Loans, Loans Held for Sale and Notes:
| | Range
|
| | | | |
| | Range |
Unobservable Input | | June 30, 2016 March 31, 2017 | | December 31, 2015 2016 |
Discount rate | | 4.4%3.8% - 15.0% 14.4% | | 4.3%4.0% - 14.5% 15.9% |
Default rate | | 1.6%1.9% - 14.8% 15.6% | | 1.4%1.7% - 14.4% 14.9% |
Servicing Rights
| | Range | |
Unobservable Input | | June 30, 2016 | | | December 31, 2015 | |
Discount rate | | 15% - 25% | | | 15% - 25% | |
Default rate | | 1.1% - 15.0% | | | 1.2% - 14.7% | |
Prepayment rate | | 14.8% - 27.6% | | | 14.3% - 25.6% | |
Market servicing rate | | | 0.625 | % | | | 0.625 | % |
|
| | | | | | |
| | Range |
Unobservable Input | | March 31, 2017 | | December 31, 2016 |
Discount rate | | 15% - 25% |
| | 15% - 25% |
|
Default rate | | 1.5% - 16.0% |
| | 1.5% - 15.2% |
|
Prepayment rate | | 14.9% - 27.3% |
| | 13.6% - 26.6% |
|
Market servicing rate | | 0.625 | % | | 0.625 | % |
The changes in the Borrower Loans, Loans Held for Sale and Notes, which are Level 3 assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | Loans | | | | | |
| | | | | | | | | | Held for | | | | | |
| | Borrower Loans | | | Notes | | | Sale | | | Total | |
Balance at January 1, 2016 | | $ | 297,273 | | | $ | (297,405 | ) | | $ | 32 | | | $ | (100 | ) |
Originations | | | 109,215 | | | | (109,147 | ) | | | 1,358,011 | | | | 1,358,079 | |
Principal repayments | | | (82,376 | ) | | | 83,119 | | | | (136 | ) | | | 607 | |
Borrower Loans sold to third parties | | | (1,138 | ) | | | 1,081 | | | | (1,353,202 | ) | | | (1,353,259 | ) |
Other changes | | | (6 | ) | | | (33 | ) | | | - | | | | (39 | ) |
Change in fair value | | | (12,934 | ) | | | 12,855 | | | | - | | | | (79 | ) |
Balance at June 30, 2016 | | $ | 310,034 | | | $ | (309,530 | ) | | $ | 4,705 | | | $ | 5,209 | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | Loans | | | | | |
| | | | | | | | | | Held for | | | | | |
| | Borrower Loans | | | Notes | | | Sale | | | Total | |
Balance at January 1, 2015 | | $ | 273,243 | | | $ | (273,783 | ) | | $ | 8,463 | | | $ | 7,923 | |
Originations | | | 94,512 | | | | (94,575 | ) | | | 1,402,499 | | | | 1,402,436 | |
Principal repayments | | | (73,457 | ) | | | 73,509 | | | | (543 | ) | | | (491 | ) |
Borrower Loans sold to third parties | | | - | | | | - | | | | (1,408,883 | ) | | | (1,408,883 | ) |
Other changes | | | (130 | ) | | | 136 | | | | (9 | ) | | | (3 | ) |
Change in fair value | | | (9,968 | ) | | | 10,085 | | | | (96 | ) | | | 21 | |
Balance at June 30, 2015 | | $ | 284,200 | | | $ | (284,628 | ) | | $ | 1,431 | | | $ | 1,003 | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | Loans | | | | | |
| | | | | | | | | | Held for | | | | | |
| | Borrower Loans | | | Notes | | | Sale | | | Total | |
Balance at April 1, 2015 | | $ | 280,404 | | | $ | (280,801 | ) | | $ | 1,599 | | | $ | 1,202 | |
Originations | | | 46,805 | | | | (46,779 | ) | | | 861,574 | | | | 861,600 | |
Principal repayments | | | (37,395 | ) | | | 37,440 | | | | (157 | ) | | | (112 | ) |
Borrower Loans sold to third parties | | | - | | | | - | | | | (861,574 | ) | | | (861,574 | ) |
Other changes | | | (136 | ) | | | (71 | ) | | | (1 | ) | | | (208 | ) |
Change in fair value | | | (5,478 | ) | | | 5,583 | | | | (10 | ) | | | 95 | |
Balance at June 30, 2015 | | $ | 284,200 | | | $ | (284,628 | ) | | $ | 1,431 | | | $ | 1,003 | |
| | 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 April 1, 2016 | | $ | 303,243 | | | $ | (302,357 | ) | | $ | 30 | | | $ | 916 | | | |
Purchase of Borrower Loans/Issuance of Notes | | | 54,044 | | | | (53,873 | ) | | | 426,591 | | | | 426,762 | | | |
Balance at January 1, 2017 | | $ | 315,627 |
| | $ | (316,236 | ) | | $ | 624 |
| | $ | 15 |
|
Originations | | 56,680 |
| | (56,814 | ) | | 523,997 |
| | 523,863 |
|
Principal repayments | | | (41,390 | ) | | | 41,057 | | | | (131 | ) | | | (464 | ) | | (49,444 | ) | | 51,579 |
| | (28 | ) | | 2,107 |
|
Borrower Loans sold to third parties | | | (525 | ) | | | 499 | | | | (421,784 | ) | | | (421,810 | ) | | (1,121 | ) | | — |
| | (524,487 | ) | | (525,608 | ) |
Other changes | | | (2 | ) | | | (191 | ) | | | - | | | | (193 | ) | | (1 | ) | | 422 |
| | (3 | ) | | 418 |
|
Change in fair value | | | (5,336 | ) | | | 5,335 | | | | (1 | ) | | | (2 | ) | | (4,205 | ) | | 4,105 |
| | 6 |
| | (94 | ) |
Balance at June 30, 2016 | | $ | 310,034 | | | $ | (309,530 | ) | | $ | 4,705 | | | $ | 5,209 | | | |
Balance at March 31, 2017 | | $ | 317,536 |
| | $ | (316,944 | ) | | $ | 109 |
| | $ | 701 |
|
|
| | | | | | | | | | | | | | | |
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 | ) |
Originations | 55,171 |
| | (55,273 | ) | | 931,420 |
| | 931,318 |
|
Principal repayments | (40,986 | ) | | 42,062 |
| | (4 | ) | | 1,072 |
|
Borrower Loans sold to third parties | (613 | ) | | 582 |
| | (931,418 | ) | | (931,449 | ) |
Other changes | (4 | ) | | 157 |
| | — |
| | 153 |
|
Change in fair value | (7,598 | ) | | 7,520 |
| | — |
| | (78 | ) |
Balance at March 31, 2016 | $ | 303,243 |
| | $ | (302,357 | ) | | $ | 30 |
| | $ | 916 |
|
The following table presents additional information about Level 3 servicing assets and liabilities recorded at fair value for the three months ended
June 30, 2016March 31, 2017 (in thousands).
| | Servicing | | | Servicing | |
| | Assets | | | Liabilities | |
Fair Value at January 1, 2016 | | | 13,605 | | | | 484 | |
Additions | | | 5,750 | | | | 9 | |
Less: Changes in fair value | | | (5,557 | ) | | | (169 | ) |
Fair Value at June 30, 2016 | | | 13,798 | | | | 324 | |
| | Servicing Assets | | | Servicing Liabilities | |
Amortized Cost at January 1, 2015 | | | 3,116 | | | | 624 | |
Adjustment to Adopt Fair Value Measurement | | | 399 | | | | (29 | ) |
Fair Value at January 1, 2015 | | | 3,515 | | | | 595 | |
Additions | | | 5,837 | | | | 193 | |
Less: Transfers to PMI | | | (249 | ) | | | - | |
Less: Changes in fair value | | | (1,469 | ) | | | (182 | ) |
Fair Value at June 30, 2015 | | | 7,634 | | | | 606 | |
|
| | | | | |
| Servicing Assets | | Servicing Liabilities |
Fair Value at January 1, 2017 | 12,461 |
| | 198 |
|
Additions | 2,764 |
| | — |
|
Less: Changes in fair value | (3,035 | ) | | (51 | ) |
Fair Value at March 31, 2017 | 12,190 |
| | 147 |
|
| | Servicing | | | Servicing | |
| | Assets | | | Liabilities | |
Fair Value at April 1, 2016 | | | 14,929 | | | | 398 | |
Additions | | | 1,729 | | | | - | |
Less: Changes in fair value | | | (2,860 | ) | | | (74 | ) |
Fair Value at June 30, 2016 | | | 13,798 | | | | 324 | |
| | Servicing Assets | | | Servicing Liabilities | |
Fair Value at April 1, 2015 | | | 4,782 | | | | 668 | |
Additions | | | 3,759 | | | | 39 | |
Less: Transfers to PMI | | | - | | | | - | |
Less: Changes in fair value | | | (907 | ) | | | (101 | ) |
Fair Value at June 30, 2015 | | | 7,634 | | | | 606 | |
40
|
| | | | | |
| Servicing Assets | | Servicing Liabilities |
Fair Value at January 1, 2016 | 13,605 |
| | 484 |
|
Additions | 4,021 |
| | 9 |
|
Less: Changes in fair value | (2,697 | ) | | (95 | ) |
Fair Value at March 31, 2016 | 14,929 |
| | 398 |
|
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, 2017 | | 665 |
|
Issuances | | 552 |
|
Cash payment of Loan Trailing Fee | | (144 | ) |
Change in fair value | | 31 |
|
Balance at March 31, 2017 | | 1,104 |
|
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
June 30, 2016March 31, 2017 for Borrower Loans, Loans Held for Sale and Notes funded are presented in the following table (in
thousands)thousands, except percentages):
| | | | Borrower Loans and Loans Held for Sale | | | Notes | | | Borrower Loans and Loans Held for Sale | | Notes | |
Discount rate assumption: | | | 7.25 | | %* | | 7.25 | | %* | 6.91 | % | * | 6.91 | % | * |
Resulting fair value from: | | | | | | | | | | |
| | |
| |
100 basis point increase | | $ | 306,868 | | | $ | 306,363 | | | $ | 314,431 |
| | $ | 313,731 |
| |
200 basis point increase | | | 303,781 | | | | 303,277 | | | 311,299 |
| | 310,600 |
| |
Resulting fair value from: | | | | | | | | | | |
| | |
| |
100 basis point decrease | | $ | 313,283 | | | $ | 312,780 | | | $ | 320,943 |
| | $ | 320,241 |
| |
200 basis point decrease | | | 316,619 | | | | 316,116 | | | 324,329 |
| | 323,626 |
| |
Default rate assumption: | | 11.02 | | %* | 11.02 | | %* | 12.55 | % | * | 12.55 | % | * |
Resulting fair value from: | | | | | | | | | | |
| | |
| |
100 basis point increase | | $ | 306,882 | | | $ | 306,370 | | | $ | 313,899 |
| | $ | 313,189 |
| |
200 basis point increase | | | 303,823 | | | | 303,303 | | | 310,262 |
| | 309,544 |
| |
Resulting fair value from: | | | | | | | | | | |
| | |
| |
100 basis point decrease | | $ | 313,200 | | | $ | 312,704 | | | $ | 321,406 |
| | $ | 320,715 |
| |
200 basis point decrease | | | 316,399 | | | | 315,913 | | | 325,206 |
| | 324,525 |
| |
| * Represents weighted average assumptions considering all credit grades. |
Servicing Asset and Liability Fair Value Input Sensitivity:
The following table presents the estimated impact on Prosper Funding’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of June 30, 2016March 31, 2017 (in thousands, except percentages).
| | Servicing Assets | | | Servicing Liabilities | | |
Market servicing rate assumptions | | | 0.625 | | % | | 0.625 | | % |
Resulting fair value from: | | | | | | | | | |
Market servicing rate increase to 0.65% | | | 12,952 | | | | 356 | | |
Market servicing rate decrease to 0.60% | | | 14,995 | | | | 291 | | |
Weighted average prepayment assumptions | | | 20.44 | | % | | 20.44 | | % |
Resulting fair value from: | | | | | | | | | |
Applying a 1.1 multiplier to default rate | | | 13,541 | | | | 303 | | |
Applying a 0.9 multiplier to default rate | | | 14,059 | | | | 314 | | |
Weighted average default assumptions | | | 11.39 | | % | | 11.39 | | % |
Resulting fair value from: | | | | | | | | | |
Applying a 1.1 multiplier to default rate | | | 13,576 | | | | 323 | | |
Applying a 0.9 multiplier to default rate | | | 14,023 | | | | 323 | | |
|
| | | | | |
| Servicing Assets | | Servicing Liabilities |
Market servicing rate assumptions | 0.625 | % | | 0.625 | % |
Resulting fair value from: | |
| | |
|
Market servicing rate increase to 0.65% | 11,377 |
| | 162 |
|
Market servicing rate decrease to 0.60% | 13,003 |
| | 132 |
|
Weighted average prepayment assumptions | 21.13 | % | | 21.13 | % |
Resulting fair value from: | |
| | |
|
Applying a 1.1 multiplier to prepayment rate | 12,946 |
| | 144 |
|
Applying a 0.9 multiplier to prepayment rate | 13,362 |
| | 150 |
|
Weighted average default assumptions | 12.05 | % | | 12.05 | % |
Resulting fair value from: | |
| | |
|
Applying a 1.1 multiplier to default rate | 12,006 |
| | 147 |
|
Applying a 0.9 multiplier to default rate | 12,379 |
| | 147 |
|
These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
8. Commitments and Contingencies
Prosper
Funding has
entered into an agreement with WebBank, under which
all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper
Fundingreceives 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 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 Borrower Loans purchased by Prosper Funding. The minimum fee for the remaining
sixnine months of
20162017 is
$0.8$1.3 million. The minimum fee is $1.7 million
$1.7 million and
$1.0$0.9 million for years
2017, 2018 and 2019, respectively.
Loan Purchase Commitments
Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase
$7.8$26.6 million of Borrower Loans that WebBank originated during the last
two business
daydays of the quarter ended
June 30, 2016March 31, 2017 and first business day of the quarter
ended Septemberending June 30,
2016. 2017. Prosper Funding will purchase these Borrower Loans within the first
twothree business days of the quarter
ended Septemberending June 30,
2016.39
2017.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper Funding and
investor membersinvestors that participate in the Whole Loan Channel, Prosper Funding may, in certain circumstances, become obligated to repurchase a Borrower Loan from an
investor member.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. Prosper Funding recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at
June 30, 2016March 31, 2017 is
$3,911$3,383 million. Prosper Funding had accrued
$439 thousand$1.0 million and
$460 thousand$0.6 million as of
June 30, 2016March 31, 2017 and December 31,
2015,2016, respectively, in regard to this obligation.
Since inception, Prosper Funding has engaged in various transactions with its directors, executive officers and sole member, and immediate family members and other affiliates of its directors, executive officers and sole member. Prosper Funding believes that all of the transactions described below were made on terms no less favorable to Prosper Funding than could have been obtained from unaffiliated third parties.
Prosper Funding’s executive officers and directors who are not executive officers participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be related parties of Prosper Funding as of
June 30, 2016March 31, 2017 and December 31,
20152016 are summarized below (in thousands):
| | Aggregate Amount of Notes and Borrower Loans Purchased | | | Interest Earned on Notes and Borrower Loans | |
| | Six Months Ended June 30, | | | Six Months Ended June 30, | |
Related Party | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Executive officers and management | | $ | 801 | | | $ | 846 | | | $ | 110 | | | $ | 98 | |
Directors (excluding executive officers and management) | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 801 | | | $ | 846 | | | $ | 110 | | | $ | 98 | |
| | | | Aggregate Amount of Notes and Borrower Loans Purchased | | | Interest Earned on Notes and Borrower Loans | | Aggregate Amount of Notes and Borrower Loans Purchased | | Interest Earned on Notes and Borrower Loans |
| | Three Months Ended June 30, | | | Three Months Ended June 30, | | Three Months Ended March 31, | | Three Months Ended March 31, |
Related Party | | 2016 | | | 2015 | | | 2016 | | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
Executive officers and management | | $ | 396 | | | $ | 365 | | | $ | 61 | | | $ | 51 | | $ | 5 |
| | $ | 405 |
| | $ | 49 |
| | $ | 49 |
|
Directors (excluding executive officers and management) | | | - | | | | - | | | | - | | | | - | | — |
| | — |
| | — |
| | — |
|
Total | | $ | 396 | | | $ | 365 | | | $ | 61 | | | $ | 51 | | $ | 5 |
| | $ | 405 |
| | $ | 49 |
| | $ | 49 |
|
| | Note and Borrower Loan Balance as of | |
Related Party | | June 30, 2016 | | | December 31, 2015 | |
Executive officers and management | | $ | 1,822 | | | $ | 1,912 | |
Directors (excluding executive officers and management) | | | - | | | | - | |
| | $ | 1,822 | | | $ | 1,912 | |
40
|
| | | | | | | |
| Note and Borrower Loan Balance as of |
Related Party | March 31, 2017 | | December 31, 2016 |
Executive officers and management | $ | 1,277 |
| | $ | 1,620 |
|
Directors (excluding executive officers and management) | — |
| | — |
|
| $ | 1,277 |
| | $ | 1,620 |
|
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 Prosper’s Annual Report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper’s historical condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” section and elsewhere in Prosper’s Annual Report on Form 10-K.
Prosper is a pioneer of online marketplace lending that connects borrowers and investors. 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,
2015,2016, our marketplace facilitated
$3.7$2.2 billion in Borrower Loan originations, of which
$3.5$2.0 billion were funded through our Whole Loan Channel, representing
95%90% of the total Borrower Loans originated through our marketplace during this period. In the three months ended
June 30, 2016,March 31, 2017, our marketplace facilitated
$445$585.6 million in Borrower Loan originations, of which
$391$528.8 million were funded through our Whole Loan Channel, representing
88% of the total Borrower Loans originated through our marketplace during this period. In the six months ended June 30, 2016, our marketplace facilitated $1.4 billion in Borrower Loan originations, of which $1.3 billion were funded through our Whole Loan Channel, representing 92%90% of the total Borrower Loans originated through our marketplace during this period. From inception through
June 30, 2016,March 31, 2017, our marketplace facilitated
$7.6$8.9 billion in Borrower Loan originations, of which
$6.5$7.6 billion were funded through our Whole Loan Channel, representing
85%86% 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
onin our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
As discussed below, we saw reduced demand from investors who purchase Borrower Loans through the Whole Loan Channel during
2016. Management has since taken actions to increase demand from investors and as a result transaction fee revenues increased when comparing the
secondfourth quarter of 2016 to the first quarter of 2017, however transaction fee revenues have not grown to the levels experienced in the first quarter of 2016.
As a result, we experienced a decline in transaction fee revenue during this period and expect a decrease in transaction fee revenue in the third quarter of 2016 from the third quarter of 2015. Additionally, as described in note 14 of the financial statements, Prosper began a restructuring of its operations during the second quarter of 2016, which resulted in increased expenses during the quarter. We expect some additional non-recurring expenses to be incurred in the third quarter of 2016 as a result of the restructuring. 41
The following table summarizes Prosper’s net
income (loss)loss for the three months ended
June 30,March 31, 2017 and 2016
and 2015 (in
thousands)thousands, except percentages):
| | Three Months Ended | | | | | | | | | |
| | June 30, | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | |
Total Net Revenue | | $ | 28,173 | | | $ | 49,513 | | | | (21,340 | ) | | | -43 | % |
Total Expenses | | | 63,696 | | | | 55,538 | | | | 8,158 | | | | 15 | % |
Net Loss Before Taxes | | | (35,523 | ) | | | (6,025 | ) | | | (29,498 | ) | | | 490 | % |
Income Tax Expense | | | 105 | | | | 176 | | | | (71 | ) | | | -40 | % |
Net Loss | | $ | (35,628 | ) | | $ | (6,201 | ) | | | (29,427 | ) | | | 475 | % |
|
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2017 | | 2016 | | $ Change | | % Change |
Total Net Revenue | $ | 30,845 |
| | $ | 56,515 |
| | (25,670 | ) | | (45 | )% |
Total Expenses | 54,702 |
| | 73,814 |
| | (19,112 | ) | | (26 | )% |
Net Loss Before Taxes | (23,857 | ) | | (17,299 | ) | | (6,558 | ) | | 38 | % |
Income Tax Expense | 164 |
| | 165 |
| | (1 | ) | | (1 | )% |
Net Loss | $ | (24,021 | ) | | $ | (17,464 | ) | | (6,557 | ) | | 38 | % |
Total net revenue for the three months ended
June 30, 2016March 31, 2017 decreased
$21.3$25.7 million, a
43%45% decrease from the three months ended
June 30, 2015,March 31, 2016, primarily due to decreased Borrower Loan originations, which decreased
51%.40% on a dollar basis, $3.3 million of rebates provided to members of the Consortium prior to the closing of the Consortium transaction of which $2.8 million were settled via the issuance of Convertible Preferred Stock Warrants to the Consortium and the vesting, after the closing of the Consortium transaction, of Convertible Preferred Stock Warrants associated with the Consortium Purchase Agreement in the amount of $3.3 million. See below for an explanation of the decrease in origination volume. Total expenses for the three months ended
June 30, 2016 increased $8.2March 31, 2017 decreased $19.1 million, a
15% increase26% decrease from the three months ended
June 30, 2015,March 31, 2016, primarily due to
restructuring costs of $14.1 million (see further details below) and higher fixed costs as Prosper had anticipated higher originations through the marketplace during this period, this was offset by a reduction in sales and marketing
expensescosts of
$14.3$13.2 million. Net loss for the three months ended
June 30, 2016March 31, 2017 increased
$29.4$6.6 million, primarily due to the decrease in our transaction fee revenue resulting from the decline in Borrower Loan originations during the period and
increased expenses incurred in connectionthe vesting of Convertible Preferred Stock Warrants associated with the
restructuring costs. The following table summarizes Prosper’s net income (loss) for the six months ended June 30, 2016 and 2015 (in thousands):
Consortium Purchase Agreement. | | Six Months Ended | | | | | | | | | |
| | June 30, | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | |
Total Net Revenue | | $ | 84,689 | | | $ | 81,233 | | | | 3,456 | | | | 4 | % |
Total Expenses | | | 137,511 | | | | 94,461 | | | | 43,050 | | | | 46 | % |
Net Loss Before Taxes | | | (52,822 | ) | | | (13,228 | ) | | | (39,594 | ) | | | 299 | % |
Income Tax Expense | | | 270 | | | | 249 | | | | 21 | | | | 8 | % |
Net Loss | | $ | (53,092 | ) | | $ | (13,477 | ) | | | (39,615 | ) | | | 294 | % |
Total net revenue for the six months ended June 30, 2016 increased $3.5 million, a 4% increase from the six months ended June 30, 2015, primarily due to increased servicing fee revenues which increased 141% due to a higher servicing base, this was offset by decreases in transaction fee revenues and gain on sale of borrower loans. Total expenses for the six months ended June 30, 2016 increased $43.1 million, a 46% increase from the six months ended June 30, 2015, primarily due to higher compensation costs as Prosper added more staff to support its anticipated business growth, additional facilities related expenses incurred in connection with expansion into Utah, Delaware and Israel, and restructuring costs of $14.1 million. Net loss for the six months ended June 30, 2016 increased $39.6 million, primarily due to these increased expenses.
Origination Volume
From inception through
June 30, 2016,March 31, 2017, a total of
605,715708,048 Borrower Loans, totaling
$7.6$8.9 billion, were originated through Prosper’s marketplace.
During the
secondfirst quarter ended
June 30, 2016, 32,894March 31, 2017, 46,362 Borrower Loans totaling
$445$585.6 million were originated through Prosper’s marketplace, compared to
67,03872,342 Borrower Loans totaling
$912$978.0 million during the
secondfirst quarter ended
June 30, 2015.March 31, 2016. This represented a
“unit” or loan, decrease of
51%36% in terms of the number of loans and a
40% decrease in the dollar
decreaseamount of
51%.loans.
The
origination decreases
aboveexperienced during the quarter ended March 31, 2017 versus the quarter ended March 31, 2016 are
due to the
resultfact that, beginning in the second quarter of
2016, a number of our largest investors
that have paused or significantly reduced their purchases of
whole loans through Prosper’s marketplace. We believe these investors have paused or reduced purchases becauseBorrower Loans. As a result Prosper contracted its operations starting in May of
an increase in the cost of capital for these investors, larger spreads for marketplace lending securitizations, recent negative actions and publicity at competitors and our limited use of investor rebates that have become more prevalent in the industry. 42
It is possible that these investors may not return to Prosper’s marketplace or will not return to previous levels of purchases. If the investors continue to pause or reduce their purchases, 2016.
Prosper
will likely continue to see a significant reduction in Borrower Loans originated through its marketplace. Prosper is takinghas taken a number of actions
to increaseaimed at increasing the amount of capital committed to make purchases
onthrough its marketplace.
These actions include increasingOn February 27, 2017, Prosper signed an agreement with a consortium of investors for the
interest rates onpurchase of up to $5.0 billion of loans
offered through its marketplace, launchingover two years (for more details please see note 16 to our condensed consolidated financial statements). As a
new line of asset management products and improvingresult, the
retail investor experience. We also may enter into strategic agreements with large institutional investors in order to increase thedollar amount of
capital available to purchase loans
on the marketplace. There is no assurance that these actions will resultoriginated through Prosper's marketplace increased in
significant additional capital available on the marketplace.The graph below presents aggregate dollar originations in (millions) through Prosper’s marketplace dating back to the first quarter of 2014:
2017 by $133.2 million or 29% when compared to the fourth quarter of 2016. Prosper currently expects that the dollar amount of loans originated through Prosper's marketplace will continue to increase over the course of 2017.
The following table summarizes Prosper’s revenue for the three months ended
June 30,March 31, 2017 and 2016
and 2015 (in
thousands)thousands, except percentages):
| | Three Months Ended | | | | | | | | | |
| | June 30, | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | |
Operating Revenues | | | | | | | | | | | | | | | | |
Transaction Fees, Net | | $ | 19,276 | | | $ | 39,800 | | | | (20,524 | ) | | | -52 | % |
Servicing Fees, Net | | | 7,676 | | | | 3,575 | | | | 4,101 | | | | 115 | % |
Gain (Loss) on Sale of Borrower Loans | | | (687 | ) | | | 3,696 | | | | (4,383 | ) | | | -119 | % |
Other Revenues | | | 816 | | | | 1,630 | | | | (814 | ) | | | -50 | % |
Total Operating Revenues | | | 27,081 | | | | 48,701 | | | | (21,620 | ) | | | -44 | % |
Interest Income | | | | | | | | | | | | | | | | |
Interest Income on Borrower Loans | | | 11,192 | | | | 10,165 | | | | 1,027 | | | | 10 | % |
Interest Expense on Notes | | | (10,098 | ) | | | (9,448 | ) | | | (650 | ) | | | 7 | % |
Net Interest Income | | | 1,094 | | | | 717 | | | | 377 | | | | 53 | % |
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | | | (2 | ) | | | 95 | | | | (97 | ) | | | (102 | )% |
Total Revenues | | | 28,173 | | | | 49,513 | | | | (21,340 | ) | | | (43 | )% |
43
The following table summarizes Prosper’s revenue for the six months ended June 30, 2016 and 2015 (in thousands):
| | | Six Months Ended | | | | | | | | | | | | | | | | | | |
| | June 30, | | | | | | | | | | Three Months Ended March 31, | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
Operating Revenues | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Transaction Fees, Net | | $ | 61,100 | | | $ | 65,142 | | | | (4,042 | ) | | | -6 | % | $ | 26,869 |
| | $ | 41,824 |
| | (14,955 | ) | | (36 | )% |
Servicing Fees, Net | | | 14,819 | | | | 6,144 | | | | 8,675 | | | | 141 | % | 6,154 |
| | 7,144 |
| | (990 | ) | | (14 | )% |
Gain on Sale of Borrower Loans | | | 3,104 | | | | 5,618 | | | | (2,514 | ) | | | -45 | % | |
Gain (Loss) on Sale of Borrower Loans | | (318 | ) | | 3,791 |
| | (4,109 | ) | | (108 | )% |
Fair Value of Warrants Vested on the Sale of Borrower Loans | | (3,307 | ) | | — |
| | (3,307 | ) | | 100 | % |
Other Revenues | | | 3,589 | | | | 2,685 | | | | 904 | | | | 34 | % | 720 |
| | 2,773 |
| | (2,053 | ) | | (74 | )% |
Total Operating Revenues | | | 82,612 | | | | 79,589 | | | | 3,023 | | | | 4 | % | 30,118 |
| | 55,532 |
| | (25,414 | ) | | (46 | )% |
Interest Income | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Interest Income on Borrower Loans | | | 21,975 | | | | 20,634 | | | | 1,341 | | | | 6 | % | 11,499 |
| | 10,783 |
| | 716 |
| | 7 | % |
Interest Expense on Notes | | | (19,819 | ) | | | (19,011 | ) | | | (808 | ) | | | 4 | % | (10,678 | ) | | (9,722 | ) | | (956 | ) | | 10 | % |
Net Interest Income | | | 2,156 | | | | 1,623 | | | | 533 | | | | 33 | % | 821 |
| | 1,061 |
| | (240 | ) | | (23 | )% |
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | | | (79 | ) | | | 21 | | | | (100 | ) | | | (476 | )% | (94 | ) | | (78 | ) | | (16 | ) | | 21 | % |
Total Revenues | | | 84,689 | | | | 81,233 | | | | 3,456 | | | | 4 | % | 30,845 |
| | 56,515 |
| | (25,670 | ) | | (45 | )% |
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 decreased primarily due to lower origination volume through Prosper’s marketplace during the three months ended
June 30, 2016.March 31, 2017. The average transaction fee
(gross of fees retained by WebBank) was
4.54%4.59% and
4.56%4.28% of the principal amount of originated loans facilitated through Prosper’s marketplace for the three months ended
June 30,March 31, 2017 and 2016,
and 2015, respectively.
Transaction fees decreased primarily This increase was due to lower origination volume through Prosper’s marketplacemarketing fee increases implemented in the second quarter of 2016 for certain Prosper scores. The marketing fee increases were offset by the fair value of the loan trailing fee on loans originated on the platform during the six months ended June 30, 2016. The average transaction fee (gross of fees retained by WebBank) was 4.49% and 4.52% of the principal amount of originated loans facilitated through Prosper’s marketplace for the six months ended June 30, 2016 and 2015, respectively.
period.
Prosper earns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates us for the costs we incur in servicing the Borrower Loan, including managing payments from borrowers and 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
increasedecrease in servicing fees during the three
and six months ended
June 30, 2016March 31, 2017 was due to the
increasedecrease in Borrower Loans being serviced as a result of the
increasedecrease in sales of Borrower Loans through the Whole Loan Channel in the past year.
Gain
(Loss) on Sale of Borrower Loans
Gain (Loss) on Sale of Borrower Loans consists of net gains and losses on Borrower Loans sold through the Whole Loan Channel. The decrease was due to a decrease in volume of such sales and $2.4 million of rebates offered to certain whole loan purchasers during the three months ending June 30,March 31, 2017 due to less loans being originated through the platform as described above and $3.3 million of rebates that were issued to members of the Consortium prior to the closing of the Consortium transaction. $2.8 million of rebates issued to members of the Consortium during the three months ending March 31, 2017 were settled by issuing vested Convertible Preferred Stock Warrants. Only $0.1 million in rebates were issued to whole loan buyers during the three months ended March 31, 2016. The majoritydecrease was offset by a 7.5 basis point higher servicing fee on borrower loans sold, increasing the gain on each loan sold.
Fair Value of these rebates were providedWarrants Vested on the Sale of Borrower Loans
Fair Value of Warrants Vested on the Sale of Borrower Loans relates to
a singlewarrants to purchase Series F Convertible Preferred Stock issued to the Consortium that vest when the Consortium purchases whole
loan purchaser. No such rebates were offered inloans under the
comparative periods. 44
Consortium Purchase Agreement that was signed during the three months ended March 31, 2017. The charge of $3.3 million recognized related to the fair of warrants that vested during the three months ended March 31, 2017.
Other revenues consist primarily of credit referral fees, where partner companies pay us an agreed upon amount for referrals of customers from our website. The decrease in other revenue for the three months ended
June 30, 2016March 31, 2017 was primarily the result of decreased traffic to existing partners. As described below, Prosper decreased its sales and marketing efforts in the three months ending
June 30, 2016March 31, 2017, which resulted in less traffic to the marketplace and as a result less traffic to our existing partners.
The increaseAdditionally in
other revenue for the
sixthree months ended
June 30,March 31, 2016,
was primarily the result ofProsper earned non-recurring revenues of $1.2 million that were earned in the period in relation to work performed for a BillGuard partner.
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper recognizes interest income on Borrower Loans funded through the Note Channel using the accrual method based on the stated interest rate to the extent we believe it to be
collectable.collectible. We record interest expense on the corresponding Notes based on the contractual interest 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 increase in net interest income for the periods above was primarily driven by the increase in volume of Borrower Loans funded through the Note Channel.
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, 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 default rates derived from historical performance, and discount rates. Loans held for sale are primarily comprised of Borrower Loans held for short durations and are valued using the same approach as the Borrower Loans held at fair value.
The following table summarizes the fair value adjustments for the three and six months ended June 30,March 31, 2017 and 2016, and 2015, respectively (in thousands):
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Borrower Loans | | $ | (5,336 | ) | | $ | (5,478 | ) | | $ | (12,934 | ) | | $ | (9,968 | ) |
Loans held for sale | | | (1 | ) | | | (10 | ) | | | - | | | | (96 | ) |
Notes | | | 5,335 | | | | 5,583 | | | | 12,855 | | | | 10,085 | |
Total | | $ | (2 | ) | | $ | 95 | | | $ | (79 | ) | | $ | 21 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Borrower Loans | $ | (4,205 | ) | | $ | (7,598 | ) |
Loans held for sale | 6 |
| | — |
|
Notes | 4,105 |
| | 7,520 |
|
Total | $ | (94 | ) | | $ | (78 | ) |
The following table summarizes Prosper’s expenses for the three months ended
June 30,March 31, 2017 and 2016
and 2015 (in thousands):
| | Three Months Ended June 30, | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | |
Expenses | | | | | | | | | | | | | | | | |
Origination and Servicing | | $ | 8,833 | | | $ | 7,126 | | | | 1,707 | | | | 24 | % |
Sales and Marketing | | | 12,303 | | | | 26,580 | | | | (14,277 | ) | | | -54 | % |
General and Administrative -Research and Development | | | 7,615 | | | | 3,323 | | | | 4,292 | | | | 129 | % |
General and Administrative - Other | | | 20,884 | | | | 18,509 | | | | 2,375 | | | | 13 | % |
Restructuring Charges | | | 14,061 | | | | - | | | | 14,061 | | | | 100 | % |
Total Expenses | | $ | 63,696 | | | $ | 55,538 | | | $ | 8,158 | | | | 15 | % |
The following table summarizes Prosper’s expenses for the six months ended June 30, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| | |
|
| 2017 | | 2016 | | $ Change | | % Change |
Expenses | |
| | |
| | |
| | |
|
Origination and Servicing | $ | 8,404 |
| | $ | 10,449 |
| | (2,045 | ) | | (20 | )% |
Sales and Marketing | 19,555 |
| | 32,720 |
| | (13,165 | ) | | (40 | )% |
General and Administrative -Research and Development | 4,174 |
| | 7,670 |
| | (3,496 | ) | | (46 | )% |
General and Administrative - Other | 16,543 |
| | 22,975 |
| | (6,432 | ) | | (28 | )% |
Other Expenses | 6,101 |
| | — |
| | 6,101 |
| | 100 | % |
Restructuring Charges
| (75 | ) | | — |
| | (75 | ) | | 100 | % |
Total Expenses | $ | 54,702 |
| | $ | 73,814 |
| | $ | (19,112 | ) | | (26 | )% |
45
| | Six Months Ended June 30, | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | |
Expenses | | | | | | | | | | | | | | | | |
Origination and Servicing | | $ | 19,282 | | | $ | 13,982 | | | | 5,300 | | | | 38 | % |
Sales and Marketing | | | 45,023 | | | | 45,150 | | | | (127 | ) | | | 0 | % |
General and Administrative -Research and Development | | | 15,286 | | | | 5,725 | | | | 9,561 | | | | 167 | % |
General and Administrative - Other | | | 43,859 | | | | 29,604 | | | | 14,255 | | | | 48 | % |
Restructuring Charges | | | 14,061 | | | | - | | | | 14,061 | | | | 100 | % |
Total Expenses | | $ | 137,511 | | | $ | 94,461 | | | $ | 43,050 | | | | 46 | % |
| | | | | | | | | | | | | | | | |
As of
June 30, 2016,March 31, 2017, Prosper had
583371 full-time employees compared to
450667 full-time employees as of
June 30, 2015; however, this includes 145 full-time employees who were notified that they would be terminated on July 5, 2016 as part of the restructuring plan.March 31, 2016. The following table reflects full-time employees as of
June 30,March 31, 2017 and 2016
and 2015 by department:
| | | June 30, | | | June 30, | | | | | |
| | | 2016 | | | | 2015 | | March 31, 2017 | | March 31, 2016 |
Origination and Servicing | | | 191 | | | | 177 | | 173 |
| | 225 |
|
Sales and Marketing | | | 112 | | | | 88 | | 25 |
| | 131 |
|
General and Administrative - Research and Development | | | 138 | | | | 93 | | 78 |
| | 149 |
|
General and Administrative - Other | | | 142 | | | | 92 | | 95 |
| | 162 |
|
Total Headcount | | | 583 | | | | 450 | | 371 |
| | 667 |
|
Origination and Servicing
Origination and servicing costs
consistsconsist primarily of salaries, benefits and stock-based compensation expense related to Prosper’s credit, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans. The
increasedecrease in the three months ending March 31, 2017 was primarily
due to an increasethe result of a decrease in compensation costs of $1.5 million. The decrease in compensation costs was the result of the reduction in personnel
related expenses as
Prosper expanded its verification and customer support teams to support the larger numberpart of
loans that were serviced and to support an anticipated future increase in loan application and processing volumes.our May 2016 restructuring. This was offset by increased amortization costs for internal use software of $0.4 million.
Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations, and direct mail marketing, as well as the compensation expenses such as wages, benefits and stock based compensation for the employees who support these activities. For the three months ended
June 30, 2016,March 31, 2017, the decrease 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. These decreases included
a $3.2$3.4 million or 33%19% decrease in direct mailing costs as Prosper reduced the volume of its direct mail campaigns, a $9.3$3.5 million or 93%60% decrease in partnership costs as Prosper significantly reduced partnership activities and negotiated lower rates with existing partners, and a $1.0$0.7 million or 66%35% decrease in online marketing costs as Prosper significantly reduced its efforts in this area.For the six months ended June 30, 2016, Prosper experienced and a slight$3.5 million or 78% decrease in Sales and Marketingcompensation costs mainly due to a $10.6 million or 62% decrease in partnership expenses as Prosper significantly reduced partnership activities and negotiated lower rates with existing partners. This decrease in partnership expenses was largely offset by an increase for the period in compensation and direct mailing expenses. For the six months ended June 30, 2016, there was a $2.6 million or 55% increase inits sales and marketing personnel related expenses as Prosper increasedheadcount with its headcount in this and other areas duringrestructuring, including the second half of 2015 to support anticipated future growth (the substantial decreases in such headcount did not occur until May 2016). Direct mailing costs increased $7.1 million or 41% during the period as Prosper increased the volumeclosing of its direct mail campaigns in the first quarter of 2016 to increase the number of loan listings on the marketplace. Due to lengthy lead times for direct mail campaigns, Prosper was not able to lower the volume of its direct mail campaigns in response to lower than anticipated investor demand until the second quarter of 2016.
Utah office which contained mainly sales employees.
Research and development costs consist primarily of salaries, benefits and stock-based compensation expense related to engineering and product development employees and related vendor costs. The
increasedecrease for the three months ended March 31, 2017 was primarily due to
an increasea decrease in compensation costs of $2.8 million and a decrease of $0.5 million due to lower contractor usage. Compensation costs decreased as a result of the decrease in personnel
related expenses as Prosper expanded its engineering and product development teams to support continued investment in its marketplace.since March 31, 2016. The total
increase isexpenses incurred for the three months ended March 31, 2017 do not
as large asreflect the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are amortized in origination and
servicing. Prosper capitalized internal-use46
software and website development costs in the amount of $1.8 million and $2.1 million for the three months ended June 30, 2016 and 2015, respectively.servicing expense. Prosper capitalized internal-use software and website development costs in the amount of $3.6$1.1 million and $3.9$2.2 million for the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, respectively.
General and Administrative
General and administrative expenses consists primarily of salaries, benefits and stock-based compensation expense related to accounting and finance, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expense. The increasedecrease for the three months ended March 31, 2017 was primarily due to an increasethe result of a decrease in personnelcompensation expense of $3.8 million, decrease in rent and occupancy expenses of $0.6 million. The decrease in compensation expenses is the result of the reduction in head count since March 31, 2016. Rent and occupancy related expenses have decreased as Prosper increased its headcount duringhas ceased the second halfuse of 2015or terminated a number of leases for office space since March 31, 2016.
Other Expenses
Other expenses includes impairment charges on assets held for sale and fair value changes on Convertible Preferred Stock Warrants. During the three months ended March 31, 2017, Prosper management began actively marketing the assets related to
support anticipated future growththe Prosper Daily application and
increased facilities expenses as
a result the related assets were marked down to fair value less costs to sell, resulting in an impairment charge of $4.3 million. Additionally, Prosper
obtained additional spacesettled certain rebates related to
support the
increase in headcount.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.
Restructuring costs
consistsconsist of personnel and facilities related costs related to the strategic restructuring of the business that Prosper announced on May 3, 2016.
ThisFor the three months ended March 31, 2017, Prosper recorded a gain on restructuring
includes thedue to a favorable outcome on lease termination
of employees in 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 lossesthat reversed a previous reserve, offset by accretion expense on the
sublease of properties in Phoenix, Salt Lake City and San Francisco. remaining liability.
Liquidity and Capital Resources
The following table summarizes Prosper’s cash flow activities for the three months ended
June 30,March 31, 2017 and 2016
and 2015 (in thousands):
| | Six Months Ended | |
| | June 30, | |
| | 2016 | | | 2015 | |
Net Loss | | $ | (53,092 | ) | | $ | (13,477 | ) |
| | | | | | | | |
Net cash provided by (used in) operating activities | | $ | (43,285 | ) | | $ | 4,931 | |
Net cash used in investing activities | | | (19,382 | ) | | | (49,197 | ) |
Net cash provided by financing activities | | | 25,196 | | | | 167,012 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (37,471 | ) | | | 122,746 | |
Cash and cash equivalents at the beginning of the period | | | 66,295 | | | | 50,557 | |
Cash and cash equivalents at the end of the period | | $ | 28,824 | | | $ | 173,303 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Net Loss | $ | (24,021 | ) | | $ | (17,464 | ) |
Net cash provided by (used in) operating activities | (20,177 | ) | | (24,944 | ) |
Net cash used in investing activities | 21,200 |
| | (13,224 | ) |
Net cash provided by financing activities | 5,175 |
| | 12,834 |
|
Net increase (decrease) in cash and cash equivalents | 6,198 |
| | (25,334 | ) |
Cash and cash equivalents at the beginning of the period | 22,337 |
| | 66,295 |
|
Cash and cash equivalents at the end of the period | $ | 28,535 |
| | $ | 40,961 |
|
Net cash
decreasedincreased for the
sixthree months ended
June 30, 2016March 31, 2017 primarily due to the
$53.1maturity and sales of $24.8 million in available for sale securities, offset by the $3.3 million loss,
$5.0net of non-cash items, $5.7 million reduction in Accounts Payable and Accrued Liabilities,
$8.6$4.3 million
for purchase of Property and Equipment,increase in prepaid expenses and a
$3$3.0 million scheduled payment to reduce our settlement liability. 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
operationsoperating activities along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans and
$17.5Mthe $24.8 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 six month ended June 30, 2015 cash provided by financing activities consisted primarily of $165 million raised through the issuance of New Series D preferred convertible shares, which was offset by $27 million paid to repurchase common stock from certain employees. In August 2015, we invested in securities classified as
Prosper also has available for
sale.sale securities that are available for its liquidity needs. The fair value of securities available for sale as of
June 30, 2016March 31, 2017 was
$55.7$8.0 million. As a result the total cash, cash equivalents and available for sale investments available to Prosper at March 31, 2017 for its liquidity needs was $36.5 million. At
June 30, 2016, theseMarch 31, 2017, the available for sale securities
include corporate debt securities, commercial paper,included US treasury securities
and agency
bonds, and short-term bond funds.bonds. All securities were rated
or carried implied ratings equal to 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 provided $0.1 million of interest income for the
second quarter of 2016.three months ending March 31, 2017. These securities continue to be available to meet liquidity needs.
47
On July 1, 2016, Prosper and WebBank, an FDIC-insured, Utah-chartered industrial bank (“WebBank”), entered into (i) an Asset Sale Agreement between Prosper Funding and WebBank (the “Sale Agreement”), (ii) a Marketing Agreement between PMI and WebBank (the “Marketing Agreement”), and (iii) a Stand By Purchase Agreement between PMI and WebBank (the “Purchase Agreement,” and collectively, the “Origination and Sale Agreements”). As of the effective date of August 1, 2016 these agreements replace the existing agreements with WebBank. As a result of entering into these agreements, on August 1, 2016 Prosper deposited an additional $5 million into a collateral account. This will reduce Cash and Cash equivalents while increase Restricted Cash. Additionally, under this agreement Prosper is required to maintain a minimum liquidity covenant of $15 million.
Prosper recognizes benefits from uncertain tax positions only if it believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.
Given Prosper’s history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for its net operating loss carry-forwards. Based on the weight of available evidence, which includes historical operating performance and the reported cumulative net losses in prior years, Prosper has recorded a full valuation allowance against its net deferred tax assets.
The income tax expense relates to state income tax expense and the amortization of goodwill from the acquisition of PHL for tax purposes which gives rise to an indefinite-lived deferred tax liability.Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, Prosper is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as Prosper is not the primary beneficiary.
Critical Accounting Policies
Certain of Prosper's accounting policies that involve a higher degree of judgment and complexity are discussed in
Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Estimates in Prosper’s Annual Report on Form 10-K. There have been no significant changes to these critical accounting estimates during the first
sixthree months of
2016. 48
2017.
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in Prosper Funding’s Annual Report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper Funding’s historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper Funding’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” section and elsewhere in Prosper Funding’s Annual Report on Form 10-K. Prosper Funding was formed in the state of Delaware on February 17, 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 Novemberon October 4, 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.
PFL formed Prosper Depositor LLC on March 29, 2017 as a limited liability company with the sole equity member being PFL.
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.
As discussed below, Prosper Funding saw reduced listings on the marketplace as Prosper slowed down marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium. As a result, Prosper Funding experienced a decline in administration fee revenue-related party during
this period and expects a decrease in administration fee revenue-related party in the
third quarter of 2016 fromthree months ended March 31, 2017 when compared to the
third quarter of 2015. three months ended March 31, 2016.
The following table summarizes Prosper Funding’s net income for the three months ended
June 30,March 31, 2017 and 2016
and 2015 (in
thousands)thousands, except percentages):
| | Three Months Ended | | | | | | | | | |
| | June 30, | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | |
Total Net Revenue | | $ | 14,746 | | | $ | 22,036 | | | $ | (7,290 | ) | | | -33 | % |
Total Expenses | | | 17,568 | | | | 15,266 | | | | 2,302 | | | | 15 | % |
Net Income | | $ | (2,822 | ) | | $ | 6,770 | | | $ | (9,592 | ) | | | -142 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2017 | | 2016 | | $ Change | | % Change |
Total Net Revenue | $ | 18,166 |
| | $ | 27,341 |
| | $ | (9,175 | ) | | (34 | )% |
Total Expenses | 17,718 |
| | 22,191 |
| | (4,473 | ) | | (20 | )% |
Net Income | $ | 448 |
| | $ | 5,150 |
| | $ | (4,702 | ) | | (91 | )% |
Total net revenue for the three months ended
June 30, 2016March 31, 2017 decreased
$7.3$9.2 million, a
33%34% decrease from the three months ended
June 30, 2015,March 31, 2016, primarily due to the reduced number of loan listings on the marketplace during the quarter, which resulted in decreased
loan administration fee
revenue.revenue for the listing driven portion of the administration fee. Total expenses for the three months ended
June 30, 2016 increased $2.3March 31, 2017 decreased $4.5 million, a
15% increase20% decrease from the three months ended
June 30, 2015,March 31, 2016, primarily due to
higherlower corporate administration fees
related to the listing driven portion during the
current quarter.
The following table summarizes Prosper Funding’s net income for the six months ended June 30, 2016 and 2015 (in thousands):
49
| | Six Months Ended | | | | | | | | | |
| | June 30, | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | |
Total Net Revenue | | $ | 42,090 | | | $ | 36,751 | | | $ | 5,339 | | | | 15 | % |
Total Expenses | | | 39,762 | | | | 26,197 | | | | 13,565 | | | | 52 | % |
Net Income | | $ | 2,328 | | | $ | 10,554 | | | $ | (8,226 | ) | | | -78 | % |
Total net revenue for the six months ended June 30, 2016 increased $5.3 million, a 15% increase from the six months ended June 30, 2015, primarily due to an increase in Borrower Loan originations in the past year, which resulted in increased servicing fee revenue for the six months ended June 30, 2016. Total expenses for the six months ended June 30, 2016 increased $13.6 million, a 52% increase from the six months ended June 30, 2015, primarily due to higher corporate administration fees during the period.
The following table summarizes Prosper Funding’s revenue for the three months ended
June 30,March 31, 2017 and 2016
and 2015 (in
thousands)thousands, except percentages):
| | Three Months Ended June 30, | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | |
Revenues | | | | | | | | | | | | | | | | |
Operating Revenues | | | | | | | | | | | | | | | | |
Administration Fee Revenue - Related Party | | $ | 6,930 | | | $ | 14,213 | | | | (7,283 | ) | | | -51 | % |
Servicing Fees, Net | | | 7,589 | | | | 3,272 | | | | 4,317 | | | | 132 | % |
Gain (Loss) on Sale of Borrower Loans | | | (687 | ) | | | 3,696 | | | | (4,383 | ) | | | -119 | % |
Other Revenues | | | 26 | | | | - | | | | 26 | | | | 100 | % |
Total Operating Revenues | | | 13,858 | | | | 21,181 | | | | (7,323 | ) | | | -35 | % |
Interest Income on Borrower Loans | | | 10,988 | | | | 10,209 | | | | 779 | | | | 8 | % |
Interest Expense on Notes | | | (10,098 | ) | | | (9,448 | ) | | | (650 | ) | | | 7 | % |
Net Interest Income | | | 890 | | | | 761 | | | | 129 | | | | 17 | % |
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net | | | (2 | ) | | | 94 | | | | (96 | ) | | | -102 | % |
Total Revenue | | $ | 14,746 | | | $ | 22,036 | | | | (7,290 | ) | | | -33 | % |
The following table summarizes Prosper Funding’s revenue for the six months ended June 30, 2016 and 2015 (in thousands):
| | | | Six Months Ended June 30, | | | | | | | | | | Three Months Ended March 31, | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
Revenues | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Operating Revenues | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Administration Fee Revenue - Related Party | | $ | 22,348 | | | $ | 23,886 | | | | (1,538 | ) | | | -6 | % | $ | 15,153 |
| | $ | 15,417 |
| | (264 | ) | | (2 | )% |
Servicing Fees, Net | | | 14,623 | | | | 5,536 | | | | 9,087 | | | | 164 | % | 5,879 |
| | 7,034 |
| | (1,155 | ) | | (16 | )% |
Gain on Sale of Borrower Loans | | | 3,104 | | | | 5,618 | | | | (2,514 | ) | | | -45 | % | |
Gain (Loss) on Sale of Borrower Loans | | (3,625 | ) | | 3,791 |
| | (7,416 | ) | | (196 | )% |
Other Revenues | | | 417 | | | | (22 | ) | | | 439 | | | | 100 | % | 32 |
| | 392 |
| | (360 | ) | | (92 | )% |
Total Operating Revenues | | | 40,492 | | | | 35,018 | | | | 5,474 | | | | 16 | % | 17,439 |
| | 26,634 |
| | (9,195 | ) | | (35 | )% |
Interest Income on Borrower Loans | | | 21,496 | | | | 20,723 | | | | 773 | | | | 4 | % | 11,499 |
| | 10,507 |
| | 992 |
| | 9 | % |
Interest Expense on Notes | | | (19,819 | ) | | | (19,011 | ) | | | (808 | ) | | | 4 | % | (10,678 | ) | | (9,722 | ) | | (956 | ) | | 10 | % |
Net Interest Income | | | 1,677 | | | | 1,712 | | | | (35 | ) | | | -2 | % | 821 |
| | 785 |
| | 36 |
| | 5 | % |
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net | | | (79 | ) | | | 21 | | | | (100 | ) | | | -476 | % | (94 | ) | | (78 | ) | | (16 | ) | | 21 | % |
Total Revenue | | $ | 42,090 | | | $ | 36,751 | | | | 5,339 | | | | 15 | % | $ | 18,166 |
| | $ | 27,341 |
| | (9,175 | ) | | (34 | )% |
| | | | | | | | | | | | | | | | | |
Administration Fee Revenue - Related Party
Prosper Funding primarily generates revenue through license fees it earns under its Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the marketplace for and in
50
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 decreases inamendments included amending the administrationLicense Fee to include a fixed monthly fee revenue werealongside a reduced variable fee and the introduction of a Rebates Fee related to rebates given to investors. The decrease was the result of a reductiondecrease in the numberlisting driven portion of loanadministration fees as a result of lower listings onin the marketplace during 2016.three months ended March 31, 2017. The decrease was offset by the above changes in listingsthe administration agreement, which was the result ofdesigned to compensate Prosper reducing marketing spendingFunding for any rebates offered to reduce demand and maintain marketplace equilibrium.
whole loan investors.
Servicing Fee Revenue, Net
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
increasedecrease in servicing fees was due to the
increasedecrease in Borrower Loans being serviced as a result of the
increasedecrease in loan originations in the past year.
Gain
(Loss) on Sale of Borrower Loans
Gain
(Loss) on Sale of Borrower Loans consists of net gains
(losses) on Borrower Loans sold through the Whole Loan Channel. The decrease
in the three months ended March 31, 2017 was due to a decrease in volume of such sales
during the three months ending March 31, 2017 due to less loans being originated through the platform as described above and
a rebate issueddue to increase in
the second quarter of 2016rebates offered to certain whole
loan purchasers totaling $2.4 million.loans to facilitate the sale of large volumes of Borrower Loans through the Whole Loan Channel. The
majorityincrease in rebates of
$6.5 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. During the three months ended March 31, 2016, only minimal rebates were
provided to a singleoffered as demand from our whole loan
purchaser. buyers was significantly stronger.
Other revenue consists primarily of fees earned from assisting whole loan purchasers with securitizations of their holdings. The
increasedecrease is due to the fees earned by Prosper Funding from assisting whole loan purchasers with securitizations.
No suchLess securitization fees were earned in the
sixthree months ended
June 30, 2015. March 31, 2017 due to no securitizations being completed during the period.
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper Funding recognizes interest income on Borrower Loans funded through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes it to be collectable. Prosper Funding records interest expense on the corresponding Notes based on the contractual interest rates. The interest rate charged on a Borrower Loan is generally 1% higher than the interest rate on the corresponding Notes to compensate Prosper Funding for servicing the Borrower Loan. This is recorded in interest income.
Overall, the increase in net interest income for the periods above was primarily driven by the increase in volume of Borrower Loans funded through the Note Channel.
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, 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 default rates derived from historical performance, and discount rates. Loans Held for Sale are primarily comprised of Borrower Loans held for short durations and are recorded using the same approach as the Borrower Loans held at fair value.
The following table summarizes the fair value adjustments for the three
and six months ended
June 30,March 31, 2017 and 2016,
and 2015, respectively (in thousands):
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Borrower Loans | | $ | (5,336 | ) | | $ | (5,478 | ) | | $ | (12,934 | ) | | $ | (9,968 | ) |
Loans held for sale | | $ | (1 | ) | | $ | (10 | ) | | $ | - | | | $ | (96 | ) |
Notes | | $ | 5,335 | | | $ | 5,583 | | | $ | 12,855 | | | $ | 10,085 | |
Total | | $ | (2 | ) | | $ | 95 | | | $ | (79 | ) | | $ | 21 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
Borrower Loans | $ | (4,205 | ) | | $ | (7,598 | ) |
Loans held for sale | $ | 6 |
| | $ | — |
|
Notes | $ | 4,105 |
| | $ | 7,520 |
|
Total | $ | (94 | ) | | $ | (78 | ) |
The following table summarizes Prosper Funding’s expenses for the three months ended
June 30,March 31, 2017 and 2016
and 2015 (in
thousands)thousands, except percentages):
| | Three Months Ended June 30, | | | | | | | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | | |
Expenses | | | | | | | | | | | | | | | | | |
Administration Fee Expense – Related Party | | $ | 15,652 | | | $ | 14,085 | | | | 1,567 | | | | 11 | % | |
Servicing | | | 1,536 | | | | 899 | | | | 637 | | | | 71 | % | |
General and Administrative | | | 380 | | | | 282 | | | | 98 | | | | 35 | % | |
Total Expenses | | $ | 17,568 | | | $ | 15,266 | | | | 2,302 | | | | 15 | % | |
The following table summarizes Prosper Funding’s expenses for the six months ended June 30, 2016 and 2015 (in thousands):
| | | | Six Months Ended June 30, | | | | | | | | | | Three Months Ended March 31, | | | | |
| | 2016 | | | 2015 | | | $ Change | | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
Expenses | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
|
Administration Fee Expense – Related Party | | $ | 36,258 | | | $ | 23,380 | | | | 12,878 | | | | 55 | % | $ | 15,815 |
| | $ | 20,607 |
| | (4,792 | ) | | (23 | )% |
Servicing | | | 2,767 | | | | 2,271 | | | | 496 | | | | 22 | % | 844 |
| | 1,227 |
| | (383 | ) | | (31 | )% |
General and Administrative | | | 737 | | | | 546 | | | | 191 | | | | 35 | % | 1,059 |
| | 357 |
| | 702 |
| | 197 | % |
Total Expenses | | $ | 39,762 | | | $ | 26,197 | | | | 13,565 | | | | 52 | % | $ | 17,718 |
| | $ | 22,191 |
| | (4,473 | ) | | (20 | )% |
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) of the specified annuala Corporate Administration Fee, which is equal to 50% of PMI’s finance and legal personnel costs, (b) a fee for each Borrower Loan originated through the marketplace, (c) 90%a proportion 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 secondEffective July 1, 2016 the Administration Agreement between PMIwas amended. The amendments included amending the Corporate Administration Fee to a fixed amount of $500,000 per month, increasing the Loan Platform Servicing Fee to $150 per Borrower Loan originated through the marketplace and PAH, a wholly owned subsidiaryreducing the Loan and Note Servicing Fee to 62.5% of Prosper Funding, PAH is required to pay PMI an annualall servicing fee collected by or on behalf of $0.2 million, payable on a monthly basis,Prosper
Funding. The decrease in fees for
PMI being the
administrator of PAH’s operations. The increase in the administration fee expensethree months ended March 31, 2017 was
primarily due to
a higher corporate administration fee and higher servicinglower fees
which increased fees owedpaid on the origination of borrower loans due to
PMI by Prosper Funding.the decrease in origination volume.
Servicing costs consists primarily of vendor costs and depreciation of internal use software costs associated with servicing Borrower Loans. The
increasedecrease was primarily due to an
increasedecrease in
depreciationvendor costs
and fraud losses. due to the lower loan volumes that were serviced by the platform in the three months ended March 31, 2017.
General and Administrative
General and administrative costs consist primarily of bank service charges and professional fees. The increase
for the three months ended March 31, 2017 was primarily due to an increase in outsourced collection fees resulting from enhancements Prosper Funding made to its collection process on delinquent loans that it services.
52
Liquidity and Capital Resources
The following table summarizes Prosper Funding’s cash flow activities for the
sixthree months ended
June 30,March 31, 2017 and 2016
and 2015 (in thousands):
| | | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2016 | | | 2015 | | 2017 | | 2016 |
Net Income | | $ | 2,328 | | | $ | 10,554 | | $ | 448 |
| | $ | 5,150 |
|
| | | | | | | | | |
Net cash provided by operating activities | | $ | (120 | ) | | $ | 24,072 | | 1,067 |
| | $ | 4,073 |
|
Net cash used in investing activities | | | (32,942 | ) | | | (30,348 | ) | (4,866 | ) | | (14,827 | ) |
Net cash provided by financing activities | | | 24,947 | | | | (5,933 | ) | 5,235 |
| | 12,629 |
|
Net increase (decrease) in cash and cash equivalents | | | (8,115 | ) | | | (12,209 | ) | |
Net increase in cash and cash equivalents | | 1,436 |
| | 1,875 |
|
Cash and cash equivalents at the beginning of the period | | | 15,026 | | | | 23,777 | | 6,929 |
| | 15,026 |
|
Cash and cash equivalents at the end of the period | | $ | 6,911 | | | $ | 11,568 | | $ | 8,365 |
| | $ | 16,901 |
|
The net
decreaseincrease in Cash for the
sixthree months ended
June 30, 2016,March 31, 2017, is primarily due to
increased restricted cashnet income of
$3.1 million and purchases of property and equipment of $4.2$0.4 million. 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
operationsoperating activities along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes.
Prosper Funding incurred no income tax expense for the three months ended
June 30, 2016March 31, 2017 and
2015.2016. Prosper Funding is a US disregarded entity for income tax purposes and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses and inability to achieve profitable operations, it is difficult to accurately forecast how Prosper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.
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 purposes entities that purchase these Borrower Loans. None of these special interest entities are consolidated as Prosper Funding is not the primary beneficiary. Otherwise as of
June 30, 2016,March 31, 2017, Prosper Funding has not engaged in any off-balance sheet financing activities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Prosper Marketplace, Inc.
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.
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 (net 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 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
$28.8$28.5 million as of
June 30, 2016,March 31, 2017, and
$66.3$22.3 million as of December 31,
2015.2016. 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
53
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 holds available for sale investments. The fair value of Prosper’s available for sale investment portfolio was
$55.7$8.0 million and
$73.2$32.8 million as of
June 30, 2016March 31, 2017 and December 31,
2015,2016, respectively. These investments consisted of
corporate debt securities, commercial paper, U.S. agency bonds
and U.S. Treasury
securities and short term bonds.securities. 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
$0.4 million$41 thousand in the fair value of Prosper’s available for sale investments as of
June 30, 2016,March 31, 2017, and of approximately
$0.6 million$147 thousand in the fair value of Prosper’s available for sale investments as of December 31,
2015.2016. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately
$0.3 million$39 thousand in the fair value of Prosper’s available for sale investments as of
June 30, 2016,March 31, 2017, and of approximately
$0.6 million$134 thousand in the fair value of Prosper’s available for sale investments as of December 31,
2015.2016. Any realized gains or losses resulting from such interest rate changes would only be recorded if Prosper sold the investments prior to maturity and the investments were not considered other-than-temporarily impaired.
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.
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 (net 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 smaller reporting company, result of changes in interest rates. We do not hold or issue financial instruments for 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 Funding
ishad cash and cash equivalents of $8.4 million as of March 31, 2017, and $6.9 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 Funding believes that it does not
requiredhave any material exposure to
providechanges in the
information required under this Item 3. 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Registrants’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including to each of the Registrant’s Principal Executive Officer (PEO) and the Principal Financial Officer (PFO), to allow timely decisions regarding required disclosures. The management of each Registrant, with the participation of such Registrant’s PEO and PFO, has evaluated the effectiveness of such Registrant’s disclosure controls and procedures as of
June 30, 2016.March 31, 2017. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of
June 30, 2016.March 31, 2017.
Changes in Internal Control Over Financial Reporting
There were no changes in either Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three months ended
June 30, 2016,March 31, 2017, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.
54
PART II. OTHER
INFORMATIONItem 1. Legal Proceedings
Neither
Colchis Arbitration
PMI, PFL nor its subsidiary is currently subjectand Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to any material legal proceedings.the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which PMI and PFL is not awareagreed 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, PMI, PFL 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 on it or its subsidiary.Neither$9 million cash payment by PMI nor anyand PMI’s issuance of its subsidiaries is currently subjectthe warrant to any material legal proceedings. Except for the matters referenced in Note 13 (“Commitments and Contingencies”)purchase shares of Series E-1 Preferred convertible stock representing 7% of PMI’s Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1capitalization on a fully diluted basis as of this Quarterly Report on Form 10-Q, which information is incorporated into this Item by reference, PMI is not awarethe date of any litigation matters that have had, or are expected to have, a material adverse effect on it or anythe issuance of its subsidiaries.
This Item should be read in conjunction with the Legal Proceedings disclosures in the Registrants’ Annual Report on Form 10-Kwarrant for the year ended December 31, 2015 (Part I, Item 3).
an exercise price of $.01 per share.
You should carefully consider the risks and uncertainties described below, together with all information in this Quarterly Report on Form 10-Q, andincluding the condensed consolidated financial statements and related notes, and "Part I - Item 1A - Risk Factors" in our Annual Report on Form 10-K when evaluating10-K.
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.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.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Information for this Item is not required for Prosper Funding because it meets the conditions set forth in General Instruction H(1)(a) and (b) of Form
10-Q and10-Q; Prosper Funding is therefore filing this Form with the reduced disclosure format.
Item 3. Defaults upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference.
55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| |
| PROSPER MARKETPLACE, INC. |
| PROSPER FUNDING LLC |
| |
Date: August 15, 2016 May 12, 2017 | /s/ Aaron Vermut David Kimball |
| Aaron Vermut David Kimball |
| Chief Executive Officer of Prosper Marketplace, Inc. |
| Chief Executive Officer of Prosper Funding LLC |
| (Principal Executive Officer) |
| Director; Treasurer of Prosper Funding LLC |
Date: August 15, 2016
| /s/ David Kimball
|
Date: May 12, 2017 | David Kimball /s/ Usama Ashraf |
| Usama Ashraf |
| Chief Financial Officer of Prosper Marketplace, Inc. |
| Treasurer of Prosper Funding LLC
(Principal Financial Officer and Principal Accounting Officer)
|
56
Exhibit
Number
| | Exhibit Description
|
| | |
3.1
Exhibit Number | | Exhibit Description |
| | |
3.1 | | Fifth Amended and Restated Limited Liability Company Agreement of PFL, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of the Post-Effective Amendment No. 3 to the Registration Statement on Form S-1, filed October 23, 2013 by PFL and PMI) |
| | |
3.2 | | Amended and Restated Certificate of Incorporation of PMI as further amended(incorporated by reference to Exhibit 3.2 of PMI's and PFL's Annual Report on May 31, 2016 Form 10-K, filed on March 17, 2017) |
| | |
3.3 | | PFL Certificate of Formation (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1/A, filed April 23, 2012 by PFL and PMI) |
| | |
3.4 | | Bylaws of PMI, as amended by an Amendment No. 1 dated February 15, 2016 (incorporated by reference to Exhibit 3.2 of PMI's and PFL's Form 10-Q, filed on August 15, 2016) |
| | |
4.1 | | Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5) |
| | |
4.2 | | Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4) |
| | |
4.3 | | Supplemental Indenture, dated January 22, 2013, between PMI, PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) |
| | |
4.4 | | Indenture, dated June 15, 2009, between PMI and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed June 26, 2009) |
| | |
4.5 | | Amended and Restated Indenture, dated January 22, 2013, between PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) |
| | |
10.1 | | Form of PFL Borrower Registration Agreement (2) |
| | |
10.2 | | Form of PFL Investor Registration Agreement (incorporated by reference to Exhibit 10.2 of PMI's and PFL's Annual Report on Form 10-K, filed on March 17, 2017) |
| | |
10.3 | | Amendment No. 2 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Form 10-Q, filed on August 15, 2016) (3) |
| | |
10.4 | | 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-K8-K/A, filed on July 8, 2016) March 7, 2017) (1) |
| | |
10.5 | | 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-K8-K/A, filed on July 8, 2016) March 7, 2017) (1) |
| | |
10.6 | | Stand By Purchase Agreement, dated July 1, 2016, between PMI and WebBank (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Current Report on Form 8-K filed on July 8, 2016) (1) |
| | |
31.1 10.7 | | 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's and PFL's Annual Report on Form 10-K, filed on March 17, 2017) |
| | |
10.8 | | Loan Purchase Agreement, dated as of February 27, 2017, among PFL, PF LoanCo Funding LLC, and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee of PF LoanCo Trust (1) (2) |
| | |
10.9 | | Warrant Agreement, dated as of February 27, 2017, among PMI, PF WarrantCo Holdings, LP, and, for certain limited purposes, New Residential Investment Corp (1)(2) |
| | |
|
| | |
10.10 | | Back-Up Servicing Agreement (Note Channel), dated as of February 24, 2017, among PFL, PMI, and First Associates Loan Servicing, LLC (1)(2) |
| | |
31.1 | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.March 31, 2017. (2) |
| | |
31.2 | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. March 31, 2017. (2) |
| | |
31.3 | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. March 31, 2017. (2) |
| | |
31.4 32.1 | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.
|
| | |
32.1
| | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. March 31, 2017. (2) |
| | |
32.2 | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. March 31, 2017. (2) |
| | |
101.INS | | XBRL Instance Documents |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
57
101.CAL | | Taxonomy Extension Calculation Linkbase Document |
| | |
101.LAB | | Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | Taxonomy Extension Presentation Linkbase Document |
| | |
101.DEF | | Taxonomy Extension Definition Linkbase Document |
58
|
| | |
(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.
|
| | |
(2) | | Filed herewith. |
| | |
(3) | | Management contract or compensatory plan or arrangement. |