Schedule I, Prosper Funding LLC | 12 Months Ended |
Dec. 31, 2013 |
Schedule I, Prosper Funding LLC [Abstract] | ' |
Schedule I, Prosper Funding LLC, A Development Stage Company | ' |
Prosper Funding LLC |
Consolidated Balance Sheets |
(amounts in thousands) |
|
| | December 31, | | | December 31, | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 5,789 | | | $ | 5 | | | | | | | | | |
Restricted cash | | | 12,299 | | | | - | | | | | | | | | |
Loans held for investment | | | 3,917 | | | | - | | | | | | | | | |
Borrower loans receivable at fair value | | | 226,238 | | | | - | | | | | | | | | |
Property and equipment, net | | | 1,980 | | | | - | | | | | | | | | |
Other assets | | | 14 | | | | - | | | | | | | | | |
Total Assets | | $ | 250,237 | | | $ | 5 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Liabilities and Member's Equity | | | | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 3,712 | | | $ | - | | | | | | | | | |
Notes at fair value | | | 226,794 | | | | - | | | | | | | | | |
Repurchase and indemnification obligation | | | 32 | | | | - | | | | | | | | | |
Related party payable | | | 205 | | | | - | | | | | | | | | |
Total Liabilities | | | 230,743 | | | | - | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Member's Equity | | | | | | | | | | | | | | | | |
Member's equity | | | 16,076 | | | | 210 | | | | | | | | | |
Retained earnings (accumulated deficit) | | | 3,418 | | | | (205 | ) | | | | | | | | |
Total Member's Equity | | | 19,494 | | | | 5 | | | | | | | | | |
Total Liabilities and Member's Equity | | $ | 250,237 | | | $ | 5 | | | | | | | | | |
|
The accompanying notes are an integral part of these consolidated financial statements. |
|
Prosper Funding LLC |
Consolidated Statements of Operations |
(amounts in thousands) |
|
| | For the Twelve Months Ended December 31, | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | |
Revenues | | | | | | | | | | | | | | |
Administration fee revenue | | $ | 7,632 | | | $ | - | | | | | | | | | |
Interest income on borrower loans | | | 32,862 | | | | - | | | | | | | | | |
Interest expense on notes | | | (30,564 | ) | | | - | | | | | | | | | |
Total Revenues | | | 9,930 | | | | - | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cost of Revenues | | | | | | | | | | | | | | | | |
Cost of services | | | (1,270 | ) | | | - | | | | | | | | | |
Provision for repurchase and indemnification obligation | | | (83 | ) | | | - | | | | | | | | | |
Net Revenues | | | 8,577 | | | | - | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | |
Administration fee expense | | | 5,053 | | | | - | | | | | | | | | |
Depreciation and amortization | | | 538 | | | | - | | | | | | | | | |
Professional services | | | 26 | | | | 114 | | | | | | | | | |
Other operating expenses | | | 242 | | | | 91 | | | | | | | | | |
Total Operating Expenses | | | 5,859 | | | | 205 | | | | | | | | | |
Income (Loss) Before Other Income and Expenses | | | 2,718 | | | | (205 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | |
Other Income and Expenses | | | | | | | | | | | | | | | | |
Change in fair value on borrower loans, loans held for investment and notes, net | | | 877 | | | | - | | | | | | | | | |
Other income | | | 28 | | | | - | | | | | | | | | |
Total Other Income and Expenses, net | | | 905 | | | | - | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Income (Loss) Before Income Taxes | | $ | 3,623 | | | $ | (205 | ) | | | | | | | | |
Provision for income taxes | | | - | | | | - | | | | | | | | | |
Total Net Income (Loss) | | $ | 3,623 | | | $ | (205 | ) | | | | | | | | |
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The accompanying notes are an integral part of these consolidated financial statements. |
|
Prosper Funding LLC |
Consolidated Statements of Member’s Equity |
(amounts in thousands) |
|
| | Member’s | | | Retained | | | Total | | | | | |
Equity | Earnings | | | | |
| (Accumulated | | | | |
| Deficit) | | | | |
Balance as of December 31, 2011 | | $ | - | | | $ | - | | | $ | - | | | | | |
Capital infusion from parent | | | 210 | | | | - | | | | 210 | | | | | |
Net loss | | | - | | | | (205 | ) | | | (205 | ) | | | | |
Balance as of December 31, 2012 | | $ | 210 | | | $ | (205 | ) | | $ | 5 | | | | | |
Transfer of assets from PMI | | | 5,865 | | | | - | | | | 5,865 | | | | | |
Capital infusion from parent | | | 10,001 | | | | - | | | | 10,001 | | | | | |
Net Income | | | - | | | | 3,623 | | | | 3,623 | | | | | |
Balance as of December 31, 2013 | | $ | 16,076 | | | $ | 3,418 | | | $ | 19,494 | | | | | |
|
The accompanying notes are an integral part of these consolidated financial statements. |
|
Prosper Funding LLC |
Consolidated Statements of Cash Flows |
(amounts in thousands) |
|
| | For the Twelve Months | | | | | | | | | |
Ended December 31, | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | |
Net income (loss) | | $ | 3,623 | | | $ | (205 | ) | | | | | | | | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | | | | | | | | |
Change in fair value of notes | | | (5,734 | ) | | | - | | | | | | | | | |
Change in fair value of borrower loans | | | 4,856 | | | | - | | | | | | | | | |
Depreciation and amortization | | | 538 | | | | - | | | | | | | | | |
Loan loss reserve | | | (9 | ) | | | - | | | | | | | | | |
Change in fair value of loans held for investment | | | 1 | | | | - | | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
Restricted cash | | | (8,155 | ) | | | - | | | | | | | | | |
Other assets | | | (13 | ) | | | - | | | | | | | | | |
Accounts payable and accrued liabilities | | | 2,933 | | | | - | | | | | | | | | |
Net related party payable | | | 205 | | | | - | | | | | | | | | |
Net cash used in operating activities | | | (1,755 | ) | | | (205 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Origination of borrower loans held at fair value | | | (331,353 | ) | | | - | | | | | | | | | |
Repayment of borrower loans held at fair value | | | 99,313 | | | | - | | | | | | | | | |
Proceeds from sale of borrower loans held at fair value | | | 171,290 | | | | - | | | | | | | | | |
Purchases of property and equipment | | | (1,798 | ) | | | - | | | | | | | | | |
Repayment of loans held for investment at fair value | | | 143 | | | | - | | | | | | | | | |
Origination of loans held for investment at fair value | | | (14,296 | ) | | | - | | | | | | | | | |
Proceeds from sale of loans held for investment at fair value | | | 10,410 | | | | - | | | | | | | | | |
Net cash used in investing activities | | | (66,291 | ) | | | - | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Proceeds from issuance of notes held at fair value | | | 159,921 | | | | - | | | | | | | | | |
Payment of notes held at fair value | | | (97,967 | ) | | | - | | | | | | | | | |
Member’s equity capital infusion from parent | | | 10,001 | | | | 210 | | | | | | | | | |
Net cash included in transfer of assets from PMI | | | 1,875 | | | | - | | | | | | | | | |
Net cash provided by financing activities | | | 73,830 | | | | 210 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | 5,784 | | | | 5 | | | | | | | | | |
Cash and cash equivalents at beginning of the period | | | 5 | | | | - | | | | | | | | | |
Cash and cash equivalents at end of the period | | $ | 5,789 | | | $ | 5 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Restricted cash | | $ | 4,144 | | | | | | | | | | | | | |
Loans held for investment | | | 175 | | | | | | | | | | | | | |
Borrower loans at fair value | | | 170,343 | | | | | | | | | | | | | |
Property and equipment, net | | | 721 | | | | | | | | | | | | | |
Accrued liabilities | | | (779 | ) | | | | | | | | | | | | |
Notes at fair value | | | (170,573 | | | | | | | | | | | | | |
Loan repurchase and indemnification obligation | | | (41 | ) | | | | | | | | | | | | |
Non-cash transfer | | | 3,990 | | | | | | | | | | | | | |
Cash transferred | | | 1,875 | | | | | | | | | | | | | |
Total transfer of net non-cash assets from PMI | | $ | 5,865 | | | | | | | | | | | | | |
|
The accompanying notes are an integral part of these consolidated financial statements. |
|
Prosper Funding LLC |
Notes to Consolidated Financial Statements |
|
1. Organization and Business |
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Prosper Funding LLC (“Prosper Funding”) was formed in the state of Delaware in February 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”). |
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Prosper Funding was formed by PMI to hold Borrower Loans and issue Notes through the platform. 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. In these notes to financial statements, the unsecured, consumer loans originated through the platform, which are referred to elsewhere in this Annual Report as “PMI Borrower Loans” and “Prosper Funding Borrower Loans”, are referred to collectively as “Borrower Loans”, and the borrower payment dependent notes issued through the platform, which are referred to elsewhere in this Annual Report as “PMI Notes” and “Prosper Funding Notes”, are referred to collectively as “Notes”. |
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On January 22, 2013, PMI entered into an Asset Transfer Agreement with Prosper Funding pursuant to which PMI transferred substantially all of its remaining assets to Prosper Funding, including (i) all outstanding Notes issued by PMI under the Indenture dated June 15, 2009 between PMI and Wells Fargo Bank, as trustee, (ii) all Borrower Loans held by PMI, (iii) all lender/borrower/group leader registration agreements related to the Notes or the Borrower Loans, and (iv) all documents and information related to the foregoing, effective February 1, 2013. |
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Prosper Funding commenced operations as of February 1, 2013 when PMI transferred ownership of the platform, including all of the rights related to the operation of the platform, to Prosper Funding. Since February 1, 2013, all Notes issued and sold through the platform are issued, sold and serviced by Prosper Funding. Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the platform, as agent of WebBank, in connection with the submission of loan applications by potential borrowers, the making of related loans by WebBank and the funding of such loans by WebBank. Pursuant to an Administration Agreement between Prosper Funding and PMI, PMI manages all other aspects of the platform on behalf of Prosper Funding. |
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All loans requested and obtained through the platform are unsecured obligations of individual borrower members with a fixed interest rate and loan terms set at three or five years as of December 31, 2013. All loans made through the platform are funded by WebBank, an FDIC-insured, Utah chartered industrial bank. After funding a loan, WebBank sells the loan to Prosper Funding, without recourse to WebBank, in exchange for the principal amount of the loan. WebBank does not have any obligation to purchasers of the Notes. |
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Prosper Funding formed Prosper Asset Holdings LLC (“PAH”) in November 2013 as a limited liability company with the sole equity member being Prosper Funding. PAH was formed to purchase Borrower Loans from Prosper Funding and sell the Borrower Loans to third parties. |
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2. Significant Accounting Policies |
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Basis of Presentation |
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Prosper Funding’s consolidated financial statements include the accounts of Prosper Funding and its wholly-owned subsidiary PAH. All intercompany balances and transactions between Prosper Funding and PAH have been eliminated in consolidation. Prosper Funding's financial statements have been prepared in accordance with U.S generally accepted accounting principles (U.S. GAAP). |
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Use of Estimates |
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The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates, judgments and assumptions include but are not limited to the following: valuation of borrower loans receivable and associated member payment dependent notes, valuation of servicing rights, and contingent liabilities. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. |
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Certain Risks and Concentrations |
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In the normal course of its business, Prosper Funding encounters two significant types of risk: credit and regulatory. Financial instruments that potentially subject Prosper Funding to significant concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. Prosper Funding places cash, cash equivalents and restricted cash with high-quality financial institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds federally insured amounts. Prosper Funding also performs periodic evaluations of the relative credit standing of these financial institutions and has not sustained any credit losses from instruments held at these financial institutions. |
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To the extent that Borrower Loan payments are not made, servicing income will be reduced. A group of Notes corresponding to a particular Borrower Loan is wholly dependent on the repayment of such Borrower Loan. As a result, Prosper Funding does not bear the risk on such Borrower Loan. |
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Prosper Funding is subject to various regulatory requirements. The failure to appropriately identify and address these regulatory requirements could result in certain discretionary actions by regulators that could have a material effect on Prosper Funding's financial position and results of operations. |
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Cash and Cash Equivalents |
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Prosper Funding invests its excess cash primarily in highly liquid debt instruments of the U.S. government and its agencies. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents. Cash equivalents are recorded at cost, which approximates fair value. Such deposits periodically exceed amounts insured by the FDIC. Cash and cash equivalents include various unrestricted deposits with highly rated financial institutions in checking, money market and short-term certificate of deposit accounts. |
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Restricted Cash |
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Restricted cash consists primarily of cash deposits held as collateral as required for loan funding and servicing activities. |
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Borrower Loans and Notes |
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Prosper Funding has adopted the provisions of ASC Topic 825, Financial Instrument. ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. The fair value election, with respect to an item, may not be revoked once an election is made. In applying the provisions of ASC Topic 825, Prosper Funding records assets and liabilities measured using the fair value option in a way that separates these reported fair values from the carrying values of similar assets and liabilities measured with a different measurement attribute. Prosper Funding does not record a specific allowance account related to the Borrower Loans and Notes in which it has elected the fair value option, but rather estimate the fair value of the Borrower Loans and Notes using discounted cash flow methodologies adjusted for Prosper Funding’s historical payment, loss and recovery rates. An account is considered to be a loss, or charged-off, when it reaches more than 120 days past due. Prosper Funding has reported the aggregate fair value of the Borrower Loans and Notes as separate line items in the assets and liabilities sections of the accompanying balance sheets using the methods described in ASC Topic 820, Fair Value Measurements and Disclosures—See Fair Value Measurement. |
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Member Loans Sold Directly to Third Party Purchasers |
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For Borrower Loans sold to unrelated third party purchasers on a servicing retained basis, a gain or loss is recorded on the sale date. In order to calculate the gain or loss, Prosper Funding first determines whether the terms of the servicing arrangement with the purchaser results in a net servicing asset (i.e., when contractual/expected servicing revenues adequately compensate Prosper Funding) or a net servicing liability (i.e., when contractual/expected servicing revenues do not adequately compensate Prosper Funding). When contractual/expected servicing revenues do not adequately compensate Prosper Funding, a portion of the gross proceeds of the Borrower Loans sold on a servicing retained basis are allocated to the recording of a net servicing liability. Conversely, when contractual/expected servicing revenues provide more than adequate compensation to Prosper Funding, the excess servicing compensation is allocated to the gross proceeds of the Borrower Loans sold and results in the recording of a net servicing asset. |
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Prosper Funding estimates the fair value of the loan servicing asset or liability considering the contractual servicing fee revenue, adequate compensation for Prosper Funding’s servicing obligation, the current principal balances of the Borrower Loans and projected servicing revenues given projected defaults and prepayments (if significant) over the remaining lives of the Borrower Loans. |
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Loans held for investment |
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Loans held for investment are primarily comprised of loans held for short durations and are recorded at cost which approximates fair value. |
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Internal Use Software and Website Development |
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Prosper Funding accounts for internal use software costs, including website development costs, in accordance with ASC Topic 350-40, Internal Use Software and ASC Topic 350-50, Website Development Costs. In accordance with ASC Topic 350-40 and 350-50, the costs to develop software for the website and other internal uses are capitalized when management has authorized and committed project funding, preliminary development efforts are successfully completed, and it is probable that the project will be completed and the software will be used as intended. Capitalized software development costs primarily include software licenses acquired, fees paid to outside consultants, and salaries and payroll related costs for employees directly involved in the development efforts. |
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Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed. Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are capitalized. Capitalized costs are included in property and equipment and amortized to expense using the straight-line method over their expected lives. Prosper Funding evaluates its software assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such software assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset. |
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Repurchase and Indemnification Obligation |
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Prosper Funding is obligated to indemnify lenders and repurchase certain Notes and member loans sold directly to third party purchasers in the event of violation of applicable federal, state, or local lending laws, or verifiable identify theft. The loan indemnification and repurchase obligation is estimated based on historical experience. Prosper Funding accrues a provision for the repurchase and indemnification obligation when the Notes or member loans are issued. Indemnified or repurchased Notes and member loans associated with federal, state, or local lending laws, or verifiable identity thefts are written off at the time of repurchase or at the time an indemnification payment is made. |
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Revenue Recognition |
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Revenue is recognized in accordance with ASC Topic 605, Revenue Recognition. Under ASC Topic 605, PMI recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the price of the services is fixed and determinable, and collectability is reasonably assured. |
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Administration Agreement License Fees |
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Prosper Funding primarily generates revenues through license fees it earns through an Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the platform for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement relating to corporate administration, loan platform services, loan and note servicing and marketing, and (ii) PMI’s performance of its duties and obligations to WebBank in relation to loan origination and funding. |
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Loan servicing fees |
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Loan servicing revenue includes monthly loan servicing fees and non-sufficient funds (“NSF”) fees. Loan servicing fees are accrued daily based on the current outstanding loan principal balance of the Borrower Loans but are not recognized until payment is received due to the uncertainty of collection of borrower loan payments. NSF fees are charged to borrowers on the first failed payment of each billing period. NSF fees are charged to the customer and collected and recognized immediately. |
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Interest income on Borrower Loans Receivable and Interest Expense on Notes |
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Prosper Funding recognizes interest income on Borrower Loans and interest expense on the corresponding Notes using the accrual method based on the stated interest rate to the extent that is believed it to be collectable. Below is a table which summarizes the gross interest income on Borrower Loans and expense on Notes for the twelve months ended December 31, 2013 and 2012. |
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| | December 31, | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | |
Interest income on borrower loans | | $ | 32,862 | | | $ | - | | | | | | | | | |
Interest expense on notes | | | (30,564 | ) | | | - | | | | | | | | | |
Net interest income | | $ | 2,298 | | | $ | - | | | | | | | | | |
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Fair Value Measurement |
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Prosper Funding follows ASC Topic 820, Fair Value Measurements and Disclosures, which provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. ASC Topic 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. |
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ASC Topic 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. |
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The price used to measure the fair value is not adjusted for transaction costs while the cost basis of certain financial instruments may include initial transaction costs. Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market. |
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Under ASC Topic 820, assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value: |
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Level 1 — The valuation is based on quoted prices in active markets for identical instruments. |
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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 techniques for which all significant assumptions are observable in the market. |
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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 techniques, 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. |
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Fair value of financial instruments are determined based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation techniques 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. |
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Financial instruments consist principally of cash and cash equivalents, restricted cash, Borrower Loans receivable, accounts payable and accrued liabilities, and Notes. 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. |
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The following tables present the assets and liabilities measured at fair value on a recurring basis at December 31, 2013 and 2012: |
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31-Dec-13 | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | |
Inputs | Inputs | Inputs |
Assets | | | | | | | | | | | | |
Borrower loans receivable | | $ | - | | | $ | - | | | $ | 226,238 | | | $ | 226,238 | |
Certificates of deposit and restricted cash | | | 11,028 | | | | 1,271 | | | | - | | | | 12,299 | |
Loans held for investment | | | - | | | | - | | | | 3,917 | | | | 3,917 | |
Liabilities | | | | | | | | | | | | | | | | |
Notes | | $ | - | | | $ | - | | | $ | 226,794 | | | $ | 226,794 | |
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31-Dec-12 | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | |
Inputs | Inputs | Inputs |
Assets | | | | | | | | | | | | |
Short term investments | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Certificates of deposit | | | - | | | | - | | | | - | | | | - | |
Borrower loans receivable | | | - | | | | - | | | | - | | | | - | |
Loans held for investment | | | - | | | | - | | | | - | | | | - | |
Liabilities | | | | | | | | | | | | | | | | |
Notes | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
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As observable market prices are not available for the Borrower Loans and Notes, or for similar assets and liabilities, Prosper Funding believes the Borrower Loans and Notes should be considered Level 3 financial instruments under ASC Topic 820. In a hypothetical transaction as of the measurement date, Prosper Funding believes that differences in the principal marketplace in which the Borrower Loans are originated and the principal marketplace in which Prosper Funding might offer those loans may result in differences between the originated amount of the Borrower Loans and their fair value as of the transaction date. For Borrower Loans, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including prepayment speeds, roll rates, recovery rates and discount rates based on the perceived credit risk within each credit grade. |
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The obligation to pay principal and interest on any Note is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of its 1.0% servicing fee. The fair value election for Borrower Loans and Notes allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to lender members that are dependent upon borrower payments. As such, the aggregate fair value of a group of Notes corresponding to a particular Borrower Loan is approximately equal to the fair value of that Borrower Loan, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to such Note holders. Any unrealized gains or losses on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations. The effective interest rate associated with a group of Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee. See Note 6 for a roll-forward and further discussion of the significant assumptions used to value Borrower Loans and Notes. |
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The changes in Level 3 assets measured at fair value on a recurring basis are as follows: |
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Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | Borrower | | | Notes | | | Loans | | | Total | |
Loans | Held for |
| Investment |
Balance at January 1, 2013 | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Assets transferred on February 1, 2013 | | | 170,344 | | | | (170,574 | ) | | | 175 | | | | (55 | ) |
Originations | | | 331,353 | | | | (159,921 | ) | | | 14,296 | | | | 185,728 | |
Principal repayments and credit losses | | | (99,313 | ) | | | 97,967 | | | | (143 | ) | | | (1,489 | ) |
Borrower loans sold to third parties | | | (171,290 | ) | | | | | | | (10,410 | ) | | | (181,700 | ) |
Change in fair value on borrower loans and notes | | | (4,856 | ) | | | 5,734 | | | | - | | | | 878 | |
Change in fair value of loans held for investment | | | - | | | | - | | | | (1 | ) | | | (1 | ) |
Balance at December 31, 2013 | | $ | 226,238 | | | $ | (226,794 | ) | | $ | 3,917 | | | $ | 3,361 | |
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Quantitative information about Prosper Funding’s Level 3 fair value measurements of its borrower loans and notes as of December 31, 2013 is provided below. The table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to Prosper Funding’s fair value measurements. |
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| | Fair | | Valuation Technique | | Unobservable Inputs | | | | | | | | | |
Assets and | Value as | | | | | | | | | |
Liabilities | of | | | | | | | | | |
| December | | | | | | | | | |
| 31 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Borrower loans receivable at fair value | | $ | 226,238 | | Discounted Cashflow | | Default rates and discount rates | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Notes at fair value | | $ | (226,794 | ) | Discounted Cashflow | | Default rates and discount rates | | | | | | | | | |
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3. Cash and Cash Equivalents |
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Cash and cash equivalents consist of the following: |
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| | December 31, | | | | | | | | | |
Cash and cash equivalents | | 2013 | | | 2012 | | | | | | | | | |
Cash in bank | | $ | 5,789 | | | $ | 5 | | | | | | | | | |
Total cash and cash equivalents | | $ | 5,789 | | | $ | 5 | | | | | | | | | |
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4. Property and Equipment |
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Property and equipment consist of the following: |
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| | December 31, | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | |
Property and equipment: | | | | | | | | | | | | | | |
Internal-use software | | $ | 3,454 | | | $ | - | | | | | | | | | |
Property and equipment | | | 3,454 | | | | - | | | | | | | | | |
Less accumulated depreciation and amortization | | | (1,474 | ) | | | | | | | | | | | | |
Total property and equipment, net | | $ | 1,980 | | | $ | - | | | | | | | | | |
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Depreciation expense for 2013 and 2012 was $538 and $0, respectively. Prosper Funding capitalized internal-use software costs in the amount of $1,798 and $0 for the years ended December 31, 2013 and 2012, respectively. |
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5. Loans Held for Investment |
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During the year ended December 31, 2013, a total of $14,296 of Borrower Loans originated through the platform were held by Prosper Funding as Loans held for investment. During the year ended December 31, 2013, $10,410 of these Borrower Loans were sold to an unrelated third party. Loans held for investment on the consolidated balance sheets as of December 31, 2013 and 2012 was $3,917 and $0, respectively. When a Borrower Loan has been funded by Prosper Funding in whole, or in part, the portion of the borrower’s monthly loan payment that corresponds to the percentage of the Borrower Loan that was funded by Prosper Funding is retained. In these cases, interest income is recorded on such Borrower Loans. |
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The fair value of the Borrower Loans held for investment is estimated using discounted cash flow methodologies based upon a set of valuation assumptions similar to those of Borrower Loans, which are set forth in Note 2, as they have similar characteristics and Prosper Funding expects these loans to behave in a comparable manner. The valuation assumptions used to value these loans include prepayment rates, default rates and recovery rates derived from historical loan performance data and discount rates based on the credit grade applied to each loan. |
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The fair value adjustment on the Borrower Loans held for investment was $(1) and $0, which is included in earnings for the year ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013 Prosper Funding has received $143 in payments on these loans. During the year ended December 31, 2013, there was $14 in Borrower Loans held for investment that were charged-off. |
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6. Borrower Loans and Notes Held at Fair Value |
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The Company estimates the fair value of the Borrower Loans and Notes using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used to value the Borrower Loans and Notes include default rates derived from historical performance and discount rates applied to each Prosper Rating tranche based on the perceived credit risk of each such Prosper Rating. If PMI does not receive payments on a Borrower Loan, PMI is not obligated to and does not make payments on the corresponding Notes. The aggregate fair value of a group of Notes corresponding to a particular Borrower Loan is approximately equal to the fair value of that Borrower Loan, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to Note holders. The effective interest rate associated with the Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee. |
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Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at December 31, 2013 for Borrower Loans and Notes are presented in the following table: |
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| | Borrower Loans | | | Notes | | | | | | | | | |
Discount rate assumption: | | | 9.77 | %* | | | 9.77 | %* | | | | | | | | |
Resulting fair value from: | | | | | | | | | | | | | | | | |
100 basis point increase | | $ | 222,989 | | | $ | 220,362 | | | | | | | | | |
200 basis point increase | | | 220,363 | | | | 217,756 | | | | | | | | | |
Resulting fair value from: | | | | | | | | | | | | | | | | |
100 basis point decrease | | $ | 228,465 | | | $ | 225,784 | | | | | | | | | |
200 basis point decrease | | | 231,282 | | | | 228,560 | | | | | | | | | |
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Default rate assumption: | | | 7.2 | %* | | | 7.2 | %* | | | | | | | | |
Resulting fair value from: | | | | | | | | | | | | | | | | |
10% higher default rates | | $ | 223,233 | | | $ | 220,620 | | | | | | | | | |
20% higher default rates | | | 220,039 | | | | 217,439 | | | | | | | | | |
Increase in fair value and income (loss) to earnings from: | | | | | | | | | | | | | | | | |
10% lower default rates | | $ | 228,151 | | | $ | 225,477 | | | | | | | | | |
20% lower default rates | | | 230,554 | | | | 227,866 | | | | | | | | | |
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* Represents weighted average assumptions considering all Prosper Ratings. |
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The changes in fair value would directly impact the change in fair value on loans, loans held for investment and Notes in the consolidated statements of operations. |
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Due to the recent origination of the Borrower Loans and Notes, the change in fair value attributable to instrument-specific credit risk is immaterial. Of the Borrower Loans originated from July 13, 2009 to December 31, 2013, 332 loans were 90 days or more delinquent for an aggregate principal amount of $1,941 and a fair value of $175 as of December 31, 2013. |
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7. Repurchase and Indemnification Obligation |
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Changes in Prosper Funding’s repurchase and indemnification obligations are summarized below: |
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| | Years Ended December 31, | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | |
Beginning of year balance: | | $ | - | | | $ | - | | | | | | | | | |
Provision for repurchases and indemnifications | | | 41 | | | | - | | | | | | | | | |
Amounts repurchased and immediately charged off or charged off and indemnified (net of recoveries) | | | (9 | ) | | | - | | | | | | | | | |
End of year balance: | | $ | 32 | | | $ | - | | | | | | | | | |
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For the years ended December 31, 2013 and 2012, the provision for repurchase and indemnification obligation was $83 and $0, respectively. |
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8. Income Taxes |
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Prosper Funding incurred no income tax provision for the year ended December 31, 2013 and 2012. Prosper Funding is a US disregarded entity and the income and loss is included in the return of its parent, PMI. Since PMI is in a loss position, not currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%. |
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9. Subsequent Events |
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On March 10, 2014, the boards of PMI and Prosper Funding, respectively, appointed Aaron Vermut, who previously served as President of PMI and Prosper Funding, to the position of Chief Executive Officer of PMI and Prosper Funding. In connection with Aaron Vermut's appointment as Chief Executive Officer of PMI and Prosper Funding, Stephen P. Vermut, who previously served as Chief Executive Officer of PMI and Prosper Funding, has been appointed by the boards of PMI and Prosper Funding, respectively, to the role of Executive Chairman of PMI and Prosper Funding. |
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In connection with the foregoing appointments, the boards of PMI and Prosper Funding, respectively, also appointed Ronald Suber to the role of President of PMI and Prosper Funding. Mr. Suber served as PMI's Head of Global Institutional Sales and Prosper Funding's Vice President prior to his appointment as President. |