Prosper Funding 10-Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

Commission File Number	Exact Name of Registrant as Specified in its Charter	I.R.S. Employer Identification Number
333-179941-01 333-204880 333-225797-01	PROSPER MARKETPLACE, INC. a Delaware corporation 221 Main Street, 3rd Floor San Francisco, CA 94105 Telephone: (415) 593-5400	73-1733867
333-179941 333-204880-01 333-225797	PROSPER FUNDING LLC a Delaware limited liability company 221 Main Street, 3rd Floor San Francisco, CA 94105 Telephone: (415) 593-5400	45-4526070

Securities registered pursuant to Section 12(b) of the Act:

Registrant	Title of Each Class	Name of Each Exchange on Which Registered
Prosper Marketplace, Inc.	None	None
Prosper Funding LLC	None	None

Securities registered pursuant to Section 12(g) of the Act:

Registrant	Title of Each Class	Name of Each Exchange on Which Registered
Prosper Marketplace, Inc.	None	None
Prosper Funding LLC	None	None

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Prosper Marketplace, Inc.	Yes x No ¨
Prosper Funding LLC	Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Prosper Marketplace, Inc.	Yes x No ☐
Prosper Funding LLC	Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

	Large Accelerated Filer	Accelerated Filer	Non-accelerated Filer	Smaller Reporting Company	Emerging Growth Company
Prosper Marketplace, Inc.	☐	☐	x	☐	☐
Prosper Funding LLC	☐	☐	x	☐	☐

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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).

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 November 7, 2022, there were 74,069,871 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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TABLE OF CONTENTS

 

		Page No.
	Forward-Looking Statements	4
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	6
	Prosper Marketplace, Inc.	6
	Condensed Consolidated Balance Sheets (Unaudited)	6
	Condensed Consolidated Statements of Operations (Unaudited)	8
	Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)	9
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit	10
	Condensed Consolidated Statements of Cash Flows (Unaudited)	12
	Notes to Condensed Consolidated Financial Statements (Unaudited)	14
	Prosper Funding LLC	43
	Condensed Consolidated Balance Sheets (Unaudited)	43
	Condensed Consolidated Statements of Operations (Unaudited)	44
	Condensed Consolidated Statements of Member’s Equity	45
	Condensed Consolidated Statements of Cash Flows (Unaudited)	46
	Notes to Condensed Consolidated Financial Statements (Unaudited)	47
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	59
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	82
Item 4.	Controls and Procedures	83
PART II.	OTHER INFORMATION	83
Item 1.	Legal Proceedings	83
Item 1A.	Risk Factors	83
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	84
Item 3.	Defaults upon Senior Securities	84
Item 4.	Mine Safety Disclosures	84
Item 5.	Other Information	84
Item 6.	Exhibit Index	84
Signatures		87

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, Prosper Warehouse I Trust (“PWIT”), a Delaware statutory trust, Prosper Warehouse II Trust (“PWIIT”), a Delaware statutory trust, Prosper Grantor Trust (“PGT”), a Delaware statutory trust, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, 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.” 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. The Notes available to Note Channel investors are distinguishable from notes held by certain third party investors pursuant to Prosper’s securitization transactions, which are referred to herein as “Notes Issued by Securitization Trust.” Finally, although historically the Company has referred to investors as “lender members,” PFL calls them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace.

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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 expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.

The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

•the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;

•PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding Borrower Loans;

•our ability to attract potential borrowers and investors to our personal loan marketplace;

•the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;

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

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

•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 impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;

•the performance of the unsecured credit card (“Credit Card”) product that was launched in December 2021 and the growth of the secured digital Home Equity Line of Credit (“HELOC”) product that was launched in 2019;

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

•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 loans originated through our marketplace;

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

•the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;

•the impact of the COVID-19 pandemic on our business, results of operations, financial condition and future prospects;

•the lack of a public trading market for the Notes and the current lack of any trading platform on which investors can resell the Notes;

•the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and

•our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of the platform 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 occur, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” sections of this Quarterly Report on Form 10-Q

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and our Annual Report on Form 10-K for the year ended December 31, 2021 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. Our SEC filings are also available to the public on the SEC’s website at www.sec.gov. The information contained on our website is not incorporated into this Quarterly Report on Form 10-Q.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Prosper Marketplace, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

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

	September 30, 2022		December 31, 2021
Assets:
Cash and Cash Equivalents	$	43,530	$	67,700
Restricted Cash (1)	159,323		167,925
Accounts Receivable	2,265		1,054
Loans Held for Sale, at Fair Value (1)	398,209		243,170
Borrower Loans, at Fair Value	302,971		267,626
Property and Equipment, Net	39,280		29,714
Prepaid and Other Assets (1)	18,134		6,238
Servicing Assets	12,269		8,761
Goodwill	36,368		36,368
Intangible Assets, Net	226		328
Total Assets	$	1,012,575	$	828,884
Liabilities, Convertible Preferred Stock and Stockholders' Deficit:
Accounts Payable and Accrued Liabilities	$	41,016	$	25,790
Payable to Investors	137,020		152,794
Notes, at Fair Value	301,079		265,985
Warehouse Lines (1)	354,799		209,275
Other Liabilities	26,966		23,900
Convertible Preferred Stock Warrant Liability	162,081		250,941
Total Liabilities	$	1,022,961	$	928,685
Commitments and Contingencies (Note 16)
Convertible Preferred Stock – $0.01 par value; 444,760,848 shares authorized as of September 30, 2022 and December 31, 2021; 209,613,570 issued and outstanding as of September 30, 2022 and December 31, 2021. Aggregate liquidation preference of $370,456 as of September 30, 2022 and December 31, 2021.	$	322,748	$	322,748
Less: Convertible Preferred Stock Held by Consolidated VIE (Note 12), 51,247,915 shares issued and outstanding as of September 30, 2022 and December 31, 2021	(2,381)		(2,381)
Stockholders' Deficit:
Common Stock – $0.01 par value; 625,000,000 shares authorized; 74,950,409 shares issued and 74,014,474 shares outstanding, as of September 30, 2022; 73,089,929 shares issued and 72,153,994 shares outstanding, as of December 31, 2021	264		245
Additional Paid-In Capital	158,734		157,256
Less: Treasury Stock	(23,417)		(23,417)
Accumulated Deficit	(466,334)		(554,252)
Total Stockholders' Deficit	$	(330,753)	$	(420,168)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit	$	1,012,575	$	828,884

(1) Includes amounts in consolidated variable interest entities (VIEs) presented separately in the table below.

The following table presents the assets and liabilities of consolidated variable interest entities (VIEs), which are included in the condensed consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. See

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Note 10, Debt, to our Notes to Condensed Consolidated Financial Statements for additional information.

	September 30, 2022		December 31, 2021
Assets of consolidated VIEs, included in total assets above:
Restricted Cash	$	7,313	$	5,128
Loans Held for Sale, at Fair Value	398,209		243,170
Prepaid and Other Assets	4,241		2,846
Total assets of consolidated variable interest entities	$	409,763	$	251,144
Liabilities of consolidated VIEs, included in total liabilities above:
Warehouse Lines	$	354,799	$	209,275
Total liabilities of consolidated variable interest entities	$	354,799	$	209,275

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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Operating Revenues:
Transaction Fees, Net	$	50,778	$	23,626	$	120,249	$	65,397
Servicing Fees, Net	4,153		3,840		11,514		10,807
(Loss) Gain on Sale of Borrower Loans	(1,145)		1,928		3,886		4,917
Other Revenue	1,542		1,059		5,067		2,524
Total Operating Revenues	55,328		30,453		140,716		83,645
Interest Income (Expense):
Interest Income on Borrower Loans and Loans Held for Sale	22,351		21,495		61,013		64,441
Interest Expense on Financial Instruments	(15,609)		(13,091)		(41,479)		(38,969)
Total Interest Income, Net	6,742		8,404		19,534		25,472
Change in Fair Value of Financial Instruments, Net	(1,660)		(2,071)		(5,986)		(4,481)
Total Net Revenue	60,410		36,786		154,264		104,636
Expenses:
Origination and Servicing	16,238		8,983		41,277		26,038
Sales and Marketing	26,158		8,860		62,243		24,486
General and Administrative	21,055		18,842		61,035		54,815
Change in Fair Value of Convertible Preferred Stock Warrants	(11,374)		86,728		(88,860)		136,845
Gain on Forgiveness of PPP Loan (Note 10)	—		—		(8,604)		—
Loss on Deconsolidation of VIEs	—		1,494		—		1,494
Other Income, Net	(308)		(81)		(805)		(350)
Total Expenses	51,769		124,826		66,286		243,328
Net Income (Loss) Before Taxes	8,641		(88,040)		87,978		(138,692)
Income Tax Expense	(20)		(21)		(60)		(63)
Net Income (Loss)	$	8,621	$	(88,061)	$	87,918	$	(138,755)
Less: Net Income Allocated to Participating Securities	(5,772)		—		(59,054)		—
Net Income (Loss) Attributable to Common Stockholders	$	2,849	$	(88,061)	$	28,864	$	(138,755)
Net Income (Loss) Per Share – Basic	$	0.04	$	(1.24)	$	0.40	$	(1.97)
Net Income (Loss) Per Share – Diluted	$	0.01	$	(1.24)	$	0.08	$	(1.97)
Weighted Average Shares – Basic	73,731,925		71,068,442		73,010,111		70,433,182
Weighted Average Shares – Diluted	341,959,266		71,068,442		348,703,804		70,433,182

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

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Prosper Marketplace, Inc.

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

(in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net Income (Loss)	$	8,621	$	(88,061)	$	87,918	$	(138,755)
Other Comprehensive Income (Loss), Before Tax:
Other Comprehensive Income (Loss), Before Tax	—		—		—		—
Other Comprehensive Income (Loss), Net of Tax:	—		—		—		—
Comprehensive Income (Loss), Net of Tax	$	8,621	$	(88,061)	$	87,918	$	(138,755)

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

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Prosper Marketplace, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (Unaudited)

(in thousands, except for share amounts)

	Convertible Preferred Stock			Convertible Preferred Stock Held by Consolidated VIE			Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance as of January 1, 2022	209,613,570	$	322,748	(51,247,915)	$	(2,381)	77,331,229	$	245	(5,177,235)	$	(23,417)	$	157,256	$	(554,252)	$	(420,168)
Exercise of vested stock options	—	—		—	—		1,860,480	19		—	—		27		—		46
Stock-based compensation expense	—	—		—	—		—	—		—	—		1,451		—		1,451
Net income	—	—		—	—		—	—		—	—		—		87,918		87,918
Balance as of September 30, 2022	209,613,570	$	322,748	(51,247,915)	$	(2,381)	79,191,709	$	264	(5,177,235)	$	(23,417)	$	158,734	$	(466,334)	$	(330,753)

	Convertible Preferred Stock			Convertible Preferred Stock Held by Consolidated VIE			Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance as of January 1, 2021	209,613,570	$	322,748	(51,247,915)	$	(2,381)	74,316,607	$	215	(5,177,235)	$	(23,417)	$	155,952	$	(415,911)	$	(283,161)
Exercise of vested stock options	—	—		—	—		2,182,346	22		—	—		22		—		44
Stock-based compensation expense	—	—		—	—		—	—		—	—		947		—		947
Net loss	—	—		—	—		—	—		—	—		—		(138,755)		(138,755)
Balance as of September 30, 2021	209,613,570	$	322,748	(51,247,915)	$	(2,381)	76,498,953	$	237	(5,177,235)	$	(23,417)	$	156,921	$	(554,666)	$	(420,925)

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	Convertible Preferred Stock			Convertible Preferred Stock Held by Consolidated VIE			Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance as of January 1, 2022	209,613,570	$	322,748	(51,247,915)	$	(2,381)	77,331,229	$	245	(5,177,235)	$	(23,417)	$	157,256	$	(554,252)	$	(420,168)
Exercise of vested stock options	—	—		—	—		339,867	4		—	—		4		—		8
Stock-based compensation expense	—	—		—	—		—	—		—	—		341		—		341
Net income	—	—		—	—		—	—		—	—		—		36,632		36,632
Balance as of March 31, 2022	209,613,570	$	322,748	(51,247,915)	$	(2,381)	77,671,096	$	249	(5,177,235)	$	(23,417)	$	157,601	$	(517,620)	$	(383,187)
Exercise of vested stock options	—	—		—	—		1,105,680	11		—	—		16		—		27
Stock-based compensation expense	—	—		—	—		—	—		—	—		554		—		554
Net income	—	—		—	—		—	—		—	—		—		42,665		42,665
Balance as of June 30, 2022	209,613,570	$	322,748	(51,247,915)	$	(2,381)	78,776,776	$	260	(5,177,235)	$	(23,417)	$	158,171	$	(474,955)	$	(339,941)
Exercise of vested stock options	—	—		—	—		414,933	4		—	—		7		—		11
Stock-based compensation expense	—	—		—	—		—	—		—	—		556		—		556
Net income	—	—		—	—		—	—		—	—		—		8,621		8,621
Balance as of September 30, 2022	209,613,570	$	322,748	(51,247,915)	$	(2,381)	79,191,709	$	264	(5,177,235)	$	(23,417)	$	158,734	$	(466,334)	$	(330,753)

	Convertible Preferred Stock			Convertible Preferred Stock Held by Consolidated VIE			Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance as of January 1, 2021	209,613,570	$	322,748	(51,247,915)	$	(2,381)	74,316,607	$	215	(5,177,235)	$	(23,417)	$	155,952	$	(415,911)	$	(283,161)
Exercise of vested stock options	—	—		—	—		1,624,461	17		—	—		17		—		34
Stock-based compensation expense	—	—		—	—		—	—		—	—		353		—		353
Net loss	—	—		—	—		—	—		—	—		—		(44,889)		(44,889)
Balance as of March 31, 2021	209,613,570	$	322,748	(51,247,915)	$	(2,381)	75,941,068	$	232	(5,177,235)	$	(23,417)	$	156,322	$	(460,800)	$	(327,663)
Exercise of vested stock options	—	—		—	—		129,997	1		—	—		1		—		2
Stock-based compensation expense	—	—		—	—		—	—		—	—		292		—		292
Net loss	—	—		—	—		—	—		—	—		—		(5,805)		(5,805)
Balance as of June 30, 2021	209,613,570	$	322,748	(51,247,915)	(2,381)		76,071,065	$	233	(5,177,235)	$	(23,417)	$	156,615	$	(466,605)	$	(333,174)
Exercise of vested stock options	—	—		—	—		427,888	4		—	—		4		—		8
Stock-based compensation expense	—	—		—	—		—	—		—	—		302		—		302
Net Loss	—	—		—	—		—	—		—	—		—		(88,061)		(88,061)
Balance as of September 30, 2021	209,613,570	$	322,748	(51,247,915)	$	(2,381)	76,498,953	$	237	(5,177,235)	$	(23,417)	$	156,921	$	(554,666)	$	(420,925)

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

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Prosper Marketplace, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2022		2021
Cash flows from Operating Activities:
Net Income (Loss)	$	87,918	$	(138,755)
Adjustments to Reconcile Net Loss to Net Cash (Used in) Provided by Operating Activities:
Change in Fair Value of Financial Instruments, Net	5,986		4,481
Depreciation and Amortization	8,218		7,224
Amortization of Operating Lease Right-of-use Asset	2,652		2,811
Gain on Termination of Operating Lease Right-of-use Asset	(88)		—
Gain on Sales of Borrower Loans	(9,888)		(5,673)
Change in Fair Value of Servicing Rights	6,510		6,214
Stock-Based Compensation Expense	1,295		857
Change in Fair Value of Convertible Preferred Stock Warrants	(88,860)		136,846
Gain on Forgiveness of PPP Loan	(8,604)		—
Loss on Deconsolidation of VIEs (Note 6)	—		1,494
Other, Net	37		1,888
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value	(2,271,312)		(1,248,316)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value	2,100,314		1,262,896
Accounts Receivable	(1,211)		(144)
Prepaid and Other Assets	(1,105)		(475)
Accounts Payable and Accrued Liabilities	15,082		6,139
Payable to Investors	(15,774)		17,021
Other Liabilities	1,604		(3,357)
Net Cash (Used in) Provided by Operating Activities	(167,226)		51,151
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value	(214,271)		(172,082)
Proceeds from Sales and Principal Payments of Borrower Loans Held at Fair Value	158,032		190,893
Purchases of Property and Equipment	(10,055)		(8,881)
Net Cash (Used in) Provided by Investing Activities	(66,294)		9,930
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value	214,107		172,231
Payments of Notes Held at Fair Value	(158,105)		(126,528)
Principal Payments on Notes Issued by Securitization Trust	—		(87,700)
Principal Payments on Certificates Issued by Securitization Trust	—		(14,935)
Net Cash and Restricted Cash Outflows from Deconsolidation of VIEs (Note 6)	—		(6,821)
Proceeds from Warehouse Lines	144,700		63,250
Principal Payments on Warehouse Lines	—		(59,900)
Payments of Debt Issuance Costs	—		(1,740)
Proceeds from Exercise of Stock Options	46		44
Net Cash Provided by (Used in) Financing Activities	200,748		(62,099)
Net Decrease in Cash, Cash Equivalents and Restricted Cash	(32,772)		(1,018)
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period	235,625		213,868
Cash, Cash Equivalents and Restricted Cash at End of the Period	$	202,853	$	212,850
Supplemental Disclosure of Cash Flow Information:

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	Nine Months Ended September 30,
	2022		2021
Cash Paid for Interest	$	39,828	$	38,236
Non-Cash Investing Activity- Accrual for Property and Equipment, Net	1,115		625
Non-Cash Financing Activity - Forgiveness of PPP Loan	8,604		—
Non-Cash Investing Activity - Deconsolidation of Borrower Loans, at Fair Value	—		78,361
Non-Cash Financing Activity - Deconsolidation of Notes Issued by Securitization Trust	—		69,709
Non-Cash Financing Activity - Deconsolidation of Certificates Issued by Securitization Trust, at Fair Value	—		13,979
Reconciliation to Amounts on Consolidated Balance Sheets:
Cash and Cash Equivalents	$	43,530	$	55,949
Restricted Cash	159,323		156,901
Total Cash, Cash Equivalents and Restricted Cash	$	202,853	$	212,850

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

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PROSPER MARKETPLACE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Prosper Marketplace, Inc. (“PMI” or the “Company”) 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 PMI, “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 accounting principles generally accepted in the United States of America (“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, 2021. The balance sheet at December 31, 2021 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 US 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.

The accompanying interim condensed consolidated financial statements include the accounts of PMI, its wholly-owned subsidiaries and consolidated variable interest entities (“VIEs”). All intercompany balances have been eliminated in consolidation.

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, 2021. There have been no changes to these accounting policies during the first nine months of 2022, except as those related to our Credit Card product, as described below.

Fair Value Measurements

Financial instruments measured at fair value consist principally of Borrower Loans, Loans Held for Sale (Note 4), Servicing Assets (Note 6), Credit Card derivative asset (Note 5), Loan Trailing Fee Liabilities (Note 9), Notes and Convertible Preferred Stock Warrant Liability (Note 12). The estimated fair values of other financial instruments, including 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. The estimated fair values of the Warehouse Lines (Note 10) do not approximate their carrying values due primarily to differences in the stated and market rates associated with these instruments.

Refer to Note 7, Fair Value of Assets and Liabilities, for additional fair value disclosures.

Restricted Cash

Restricted Cash consists primarily of cash deposits, money market funds and short-term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors have on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.

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Borrower Loans, Loans Held for Sale and Notes

Borrower Loans are funded either through the Note Channel or through the Whole Loan Channel. 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.

Prosper uses Warehouse Lines to purchase Loans Held for Sale that may be subsequently contributed to securitization transactions or sold to investors. Loans Held for Sale are included in “Loans Held for Sale, at Fair Value” on the Consolidated Balance Sheets. See Note 10, Debt for more details on Warehouse Lines.

Borrower Loans and Loans Held for Sale are purchased from WebBank. Prosper places Borrower Loans and Loans Held for Sale on non-accrual status when they are 120 days past due. When a loan is placed on non-accrual status, Prosper stops accruing interest and reverses all accrued but unpaid interest as of such date. Additionally, Prosper charges-off Borrower Loans and Loans Held for Sale when they are 120 days past due. The fair value of loans 120 or more days past due generally consists of the expected recovery from debt sales in subsequent periods.

Prosper has elected the fair value option for Borrower Loans, Loans Held for Sale and Notes. Changes in fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of Notes due to the borrower payment-dependent design of the Notes. Changes in fair value of Loans Held for Sale are recorded through Proper's earnings and Prosper collects interest on Loans Held for Sale. Changes in the fair values of Borrower Loans, Loans Held for Sale and Notes are included in “Change in Fair Value of Financial Instruments, Net” on the accompanying condensed consolidated statements of operations.

Prosper primarily uses a discounted cash flow model to estimate the fair value of Borrower Loans, Loans Held for Sale and Notes. The key assumptions used in the valuation include default rates and prepayment rates derived primarily from historical performance, and discount rates based on estimates of the rates of return that investors would require when investing in financial instruments with similar characteristics.

Credit Card

In December 2021, the Company launched its Prosper Credit Card product in partnership with Coastal Community Bank (“Coastal”), through which eligible consumers are extended unsecured credit through Prosper-branded Credit Cards. In accordance with the related Program Agreement between Prosper and Coastal, the receivables associated with these Credit Cards are maintained on the balance sheet of Coastal. Customer accounts are then randomly designated as either Prosper Allocations or Coastal Allocations on an approximate 90% to 10% split, respectively. Each party receives 100% of the interest income and is responsible for the credit losses on its allocated customer accounts. Prosper is responsible for verified fraud losses across the entire portfolio.

The Company evaluated the terms of the Program Agreement and determined that it contained features that met the definition of derivatives under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. These features are freestanding financial instruments (as defined under ASC 480, Distinguishing Liabilities from Equity), and have been valued separately as derivatives. A right of offset exists between the derivatives, and they are presented net in “Prepaid and Other Assets” on the accompanying condensed consolidated balance sheets. Changes in the fair value of the Credit Card derivative are included in “Changes in Fair Value of Financial Instruments, Net” on the accompanying condensed consolidated statements of operations.

Refer to Note 5, Credit Card, for additional details on revenues and expenses related to the Prosper Credit Card product.

Leases

Management determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are included on the Consolidated Balance Sheets in Property and Equipment, Net and in Other Liabilities, respectively. For certain leases with original terms of twelve months or less, PMI recognizes the lease expense as incurred and does not record ROU assets and lease liabilities.

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If a contract contains a lease, management evaluates whether it should be classified as an operating or finance lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of PMI's leases do not provide an implicit rate, management uses an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The operating lease ROU assets are evaluated for impairment utilizing the same impairment model used for Property and Equipment.

Consolidation of Variable Interest Entities

The determination of whether to consolidate a VIE in which we have a variable interest requires a significant amount of analysis and judgment regarding whether we are the primary beneficiary of a VIE due to our holding a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support and (ii) whether a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity.

Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate or deconsolidate such VIE in the consolidated financial statements.

Recent Accounting Pronouncements

Accounting Standards Issued, to be Adopted by the Company in Future Periods

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848),” which provides optional expedients and exceptions for applying GAAP on contract modifications and hedge accounting, in order to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative referenced rates, such as the Secured Overnight Financing Rate. This ASU can be adopted after its issuance date through December 31, 2022. The Company is currently evaluating the impact reference rate reform will have on its contracts that reference LIBOR in order to determine whether to adopt this guidance.

3. Property and Equipment, Net

Property and Equipment consists of the following at the dates presented (in thousands):

	September 30, 2022		December 31, 2021
Internal-use software and website development costs	$	44,412	$	41,816
Operating lease right-of-use assets	27,157		17,485
Computer equipment	13,188		15,090
Leasehold improvements	7,157		7,167
Office equipment and furniture	2,961		2,961
Assets not yet placed in service	6,634		5,224
Property and equipment	101,509		89,743
Less: Accumulated depreciation and amortization	(62,229)		(60,029)
Total Property and Equipment, Net	$	39,280	$	29,714

Depreciation and amortization expense for Property and Equipment, Net for the three months ended September 30, 2022 and September 30, 2021 was $2.9 million and $2.5 million, respectively. Depreciation and amortization expense for Property and Equipment, Net for the nine months ended September 30, 2022 and September 30, 2021 was $8.2 million and $7.1 million, respectively. These charges are included in General and Administrative expenses on the condensed consolidated statements of operations. PMI capitalized internal-use software and website development costs in the amount of $2.8 million and $2.6 million for the three months ended September 30, 2022 and September 30, 2021, respectively. PMI capitalized internal-use software and website development costs in the amount of $8.1 million and $7.1 million for the nine months ended

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September 30, 2022 and September 30, 2021, respectively. Additionally, disclosures around the operating lease right-of-use assets are included in Note 15.

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

The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale, and Notes as of September 30, 2022 and December 31, 2021, are presented in the following table (in thousands):

	Borrower Loans				Loans Held for Sale				Notes
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Aggregate principal balance outstanding	$	312,059	$	265,232	$	406,421	$	242,278	$	315,023	$	267,415
Fair value adjustments	(9,088)		2,394		(8,212)		892		(13,944)		(1,430)
Fair value	$	302,971	$	267,626	$	398,209	$	243,170	$	301,079	$	265,985

Borrower Loans

As of September 30, 2022, outstanding Borrower Loans had original terms to maturity of 24, 36, 48 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 33.00%, and had various original maturity dates through September 2027. As of December 31, 2021, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.82%, and had various original maturity dates through December 2026.

As of September 30, 2022, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.0 million and a fair value of $0.2 million. As of December 31, 2021, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $0.9 million and a fair value of $0.1 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of September 30, 2022 and December 31, 2021, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.1 million, respectively.

Loans Held for Sale

As of September 30, 2022, outstanding Loans Held for Sale had original terms to maturity of 24, 36, 48 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 33.00% and had various original maturity dates through September 2027. As of December 31, 2021, outstanding Loans Held for Sale had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.82% and had various original maturity dates through December 2026. Interest income earned on Loans Held for Sale by the Company was $27.7 million and $23.7 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

As of September 30, 2022, Loans Held for Sale that were 90 days or more delinquent had an aggregate principal amount of $1.5 million and a fair value of $0.2 million. As of December 31, 2021, Loans Held for Sale that were 90 days or more delinquent had an aggregate principal amount of $0.8 million and a fair value of $0.1 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of September 30, 2022 and December 31, 2021, Loans Held for Sale in non-accrual status had a fair value of $0.1 million (for both periods).

5. Credit Card

Prosper recognizes gains and losses on the related Credit Card derivative within Changes in Fair Value of Financial Instruments, Net on the accompanying condensed consolidated statement of operations. For the three and nine months ended September 30, 2022, the Company recognized $3.0 million and $6.8 million, respectively, of gains from fair value changes on the Credit Card derivative. Gains from settled transactions underlying the Credit Card derivative were $1.8 million and $2.4 million, respectively, for the three and nine months ended September 30, 2022, and are also included in Changes in Fair Value of Financial Instruments, Net on the accompanying condensed consolidated statements of operations. The fair value of the Credit Card derivative asset was $7.8 million as of September 30, 2022 and is included in Prepaid and Other Assets on the accompanying condensed consolidated financial statements.

The Company records revenue from various fees earned from the Credit Card program, including interchange fees, annual fees and late fees, net of a portion of the interchange fees that must be remitted to Coastal. For the three and nine months ended September 30, 2022, these fees totaled $2.2 million and $3.7 million, respectively, and are included in Transaction Fees on the accompanying condensed consolidated statement of operations.

Under the Program Agreement, Prosper is responsible for servicing the entire underlying Credit Card portfolio. Coastal pays the Company a 1% per annum servicing fee on the daily outstanding balance of receivables designated as Coastal

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Allocations. To the extent these servicing fees do not exceed the adequate compensation a market participant would require to service the entire Credit Card portfolio, the Company records a servicing obligation liability and measures it at fair value through the servicing period. As of September 30, 2022, the net balance of this servicing obligation liability is $2.4 million and is included in Other Liabilities on the accompanying condensed consolidated financial statements. Changes in the fair value of the servicing obligation liability are recorded in Servicing Fees, Net on the accompanying condensed consolidated statement of operations, and totaled $1.1 million and $2.4 million for the three and nine months ended September 30, 2022, respectively.

6. Servicing Assets

Prosper accounts for Servicing Assets 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 are measured at fair value throughout the servicing period. The Company recognized loss on the sale of such Borrower Loans in the amount of $1.1 million and gain in the amount of $1.9 million for the three months ended September 30, 2022 and 2021, respectively, recorded in (Loss)/Gain on Sale of Borrower Loans on the condensed consolidated statements of operations. The total gains recognized on the sale of such Borrower Loans for the nine months ended September 30, 2022 and 2021 were $3.9 million and $4.9 million, respectively, recorded in (Loss)/Gain on Sale of Borrower Loans on the condensed consolidated statements of operations.

As of September 30, 2022, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.0 billion, original terms to maturity of 24, 36, 48 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 33.00%, and various original maturity dates through September 2027. As of December 31, 2021, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $2.3 billion, original terms to maturity of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.82%, and various original maturity dates through December 2026.

Contractually-specified servicing fees and ancillary fees totaling $7.8 million and $6.3 million for the three months ended September 30, 2022 and 2021, respectively, and $21.0 million and $18.1 million for the nine months ended September 30, 2022 and 2021, respectively, are included in the condensed consolidated statements of operations in Servicing Fees, Net.

Fair Value Valuation Method

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

Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the Level 3 Servicing Assets. 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. With the assistance of a valuation specialist, 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 backup service providers.

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 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

18

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.

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. The Company applies 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. Prosper did not transfer any assets or liabilities in or out of Level 3 for the nine months ended September 30, 2022 or September 30, 2021.

Financial Instruments Recorded at Fair Value

The fair value of the Borrower Loans, Loans Held for Sale, Notes, Servicing Assets and Liabilities and loan trailing fee liability are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used in the discounted cash flow model include default and prepayment rates primarily derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.

The fair value of the Credit Card derivative asset is also estimated using a discounted cash flow model using certain assumptions. The key assumptions used in the valuation include default and prepayment rates derived primarily from relevant market data, adjusted as necessary based on the perceived credit risk of the underlying cardholder. In addition, discount rates based on estimates of the rates of return that investors would require when investing in similar credit card portfolios are applied to the individual freestanding derivatives.

The Convertible Preferred Stock Warrant Liability is valued using a Black-Scholes option pricing model. Refer to Note 12 for further details.

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The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):

September 30, 2022	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Loans Held for Sale at Fair Value	$	—	$	—	$	398,209	$	398,209
Borrower Loans, at Fair Value	—		—		302,971		302,971
LIBOR rate swaption (Note 10)	—		2,103		—		2,103
Servicing Assets	—		—		12,269		12,269
Credit Card derivative (Note 5)	—		—		7,837		7,837
Total Assets	$	—	$	2,103	$	721,286	$	723,389
Liabilities:
Notes, at Fair Value	$	—	$	—	$	301,079	$	301,079
Convertible Preferred Stock Warrant Liability	—		—		162,081		162,081
Loan trailing fee liability (Note 9)	—		—		3,062		3,062
Credit Card servicing obligation liability (Note 5)	—		—		2,381		2,381
Total Liabilities	$	—	$	—	$	468,603	$	468,603

 

December 31, 2021	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Loans Held for Sale at Fair Value	$	—	$	—	$	243,170	$	243,170
Borrower Loans, at Fair Value	—		—		267,626		267,626
LIBOR rate swaption	—		66		—		66
Servicing Assets	—		—		8,761		8,761
Total Assets	$	—	$	66	$	519,557	$	519,623
Liabilities:
Notes, at Fair Value	$	—	$	—	$	265,985	$	265,985
Convertible Preferred Stock Warrant Liability	—		—		250,941		250,941
Loan trailing fee liability (Note 9)	—		—		2,161		2,161
Total Liabilities	$	—	$	—	$	519,087	$	519,087

As PMI’s Borrower Loans, Loans Held for Sale, Notes, Convertible Preferred Stock Warrant Liability, Servicing Assets and Liability, Credit Card derivative and loan trailing fee liability do not trade in an active market with readily observable prices, the Company 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, 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. Prosper did not transfer any assets or liabilities in or out of Level 3 for the nine months ended September 30, 2022 and September 30, 2021.

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Significant Unobservable Inputs

The following tables present quantitative information about the ranges of significant unobservable inputs used for the Company’s Level 3 fair value measurements at September 30, 2022 and December 31, 2021:

	Range
Borrower Loans, Loans Held for Sale and Notes:	September 30, 2022	December 31, 2021
Discount rate	5.5% - 18.6%	4.2% - 14.3%
Default rate	1.5% - 14.0%	2.0% - 14.1%

	Range
Servicing Assets:	September 30, 2022	December 31, 2021
Discount rate	15.0% - 25.0%	15.0% - 25.0%
Default rate	1.5% - 14.3%	1.5% - 14.1%
Prepayment rate	9.8% - 27.4%	10.2% - 32.3%
Market servicing rate (1) (2)	0.648% - 0.842%	0.648% - 0.842%

(1) Servicing assets associated with loans enrolled in a relief program offered by the Company in response to the COVID-19 pandemic as of September 30, 2022 and December 31, 2021 were measured using a market servicing rate assumption of 84.2 basis points. This rate was estimated using a multiplier consistent with observable market rates for other loan types, applied to the base market servicing rate assumption of 64.8 basis points.

(2) Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of September 30, 2022 and December 31, 2021, the market rate for collection fees and non-sufficient fund fees was assumed to be 6 basis points and 6 basis points, respectively, for a total market servicing rate range of 70.8 - 90.2 basis points and 70.8 - 90.2 basis points, respectively.

	Range
Credit Card Derivative and Servicing Obligation Liability:	September 30, 2022
Discount rate on Prosper Allocations	27.5%
Discount rate on Coastal Program Fee	9.8%
Default rate	7.0% - 14.4%
Prepayment rate	9.5% - 17.8%
Market servicing rate	2.0%

	Range
Loan Trailing Fee Liability:	September 30, 2022	December 31, 2021
Discount rate	15.0% - 25.0%	15.0% - 25.0%
Default rate	1.5% - 14.3%	1.5% - 14.1%
Prepayment rate	9.8% - 27.4%	10.2% - 32.3%

At September 30, 2022 and December 31, 2021, the discounted cash flow methodology used to estimate the Notes fair values used the same projected cash flows as the related Borrower Loans.

Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis

The following tables present additional information about Level 3 Borrower Loans, Loans Held for Sale, Notes and Certificates Issued by Securitization Trust measured at fair value on a recurring basis (in thousands):

21

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Assets				Liabilities
	Borrower Loans		Loans Held For Sale		Notes		Total
Balance at January 1, 2022	$	267,626	$	243,170	$	(265,985)	$	244,811
Purchase of Borrower Loans/Issuance of Notes	214,271		2,271,312		(214,107)		2,271,476
Principal repayments	(156,706)		(130,667)		158,105		(129,268)
Borrower Loans sold to third parties	(1,326)		(1,969,647)		—		(1,970,973)
Other changes	216		936		(320)		832
Change in fair value	(21,110)		(16,895)		21,228		(16,777)
Balance at September 30, 2022	$	302,971	$	398,209	$	(301,079)	$	400,101

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Assets				Liabilities
	Borrower Loans		Loans Held for Sale		Notes		Certificates Issued by Securitization Trust		Total
Balance at January 1, 2021	$	378,263	$	274,621	$	(208,379)	$	(22,917)	$	421,588
Purchase of Borrower Loans/Issuance of Notes	172,082		1,248,316		(172,231)		—		1,248,167
Principal repayments	(215,076)		(117,876)		126,528		14,935		(191,489)
Borrower Loans sold to third parties	(2,311)		(1,118,526)		—		—		(1,120,837)
Other changes	(1,545)		(34)		205		113		(1,261)
Deconsolidation of VIEs (Note 6)	1,628		(581)		635		(6,110)		(4,428)
Change in fair value	(78,361)		—		—		13,979		(64,382)
Balance at September 30, 2021	$	254,680	$	285,920	$	(253,242)	$	—	$	287,358

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Assets				Liabilities
	Borrower Loans		Loans Held For Sale		Notes		Total
Balance at July 1, 2022	$	301,893	$	312,693	$	(300,521)	$	314,065
Purchase of Borrower Loans/Issuance of Notes	70,486		978,664		(69,797)		979,353
Principal repayments	(59,750)		(47,487)		60,375		(46,862)
Borrower Loans sold to third parties	(502)		(838,774)		—		(839,276)
Other changes	64		575		(207)		432
Change in fair value	(9,220)		(7,462)		9,071		(7,611)
Balance at September 30, 2022	$	302,971	$	398,209	$	(301,079)	$	400,101

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Assets				Liabilities
	Borrower Loans		Loans Held For Sale		Notes		Certificates Issued by Securitization Trust		Total
Balance at July 1, 2021	$	338,939	$	249,955	$	(236,041)	$	(15,295)	$	337,558
Purchase of Borrower Loans/Issuance of Notes	64,473		455,642		(64,028)		—		456,087
Principal repayments	(69,094)		(44,422)		45,486		4,042		(63,988)
Borrower Loans sold to third parties	(587)		(375,192)		—		—		(375,779)
Other changes	(353)		233		(14)		41		(93)
Change in fair value	(337)		(296)		1,355		(2,767)		(2,045)
Deconsolidation of VIEs (Note 6)	(78,361)		—		—		13,979		(64,382)
Balance at September 30, 2021	$	254,680	$	285,920	$	(253,242)	$	—	$	287,358

The following tables present additional information about Level 3 Servicing Assets measured at fair value on a recurring basis for the three and nine month periods ending September 30, 2022 and 2021 (in thousands):

	Servicing Assets
Balance at January 1, 2022	$	8,761
Additions	9,888
Less: Changes in fair value	(6,380)
Balance at September 30, 2022	$	12,269

	Servicing Assets
Balance at January 1, 2021	$	9,242
Additions	5,674
Recognition of Servicing Assets upon deconsolidation of VIEs	215
Less: Changes in fair value	(6,430)
Balance at September 30, 2021	$	8,701

	Servicing Assets
Balance at July 1, 2022	$	10,323
Additions	4,211
Less: Changes in fair value	(2,265)
Balance at September 30, 2022	$	12,269

	Servicing Assets
Balance at July 1, 2021	8,944
Additions	1,895
Recognition of Servicing Assets upon deconsolidation of VIEs	215
Less: Changes in fair value	(2,353)
Balance at September 30, 2021	$	8,701

The following tables present additional information about Level 3 Credit Card derivative measured at fair value on a recurring basis for the three and nine month periods ending September 30, 2022 and 2021 (in thousands):

	Credit Card Derivative
Balance at January 1, 2022	$	7
Changes in fair value	6,839
Gains from settled transactions	2,355
Less: Net payments received	(1,364)
Balance at September 30, 2022	$	7,837

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	Credit Card Derivative
Balance at July 1, 2022	$	4,861
Changes in fair value	2,976
Gains from settled transactions	1,779
Less: Net payments received	(1,779)
Balance at September 30, 2022	$	7,837

The following tables present additional information about the Level 3 Convertible Preferred Stock Warrant Liability measured at fair value on a recurring basis for the three and nine month periods ending September 30, 2022 and 2021 (in thousands):

	Convertible Preferred Stock Warrant Liability
Balance as of January 1, 2022	$	250,941
Change in fair value	(88,860)
Balance as of September 30, 2022	$	162,081

	Convertible Preferred Stock Warrant Liability
Balance as of January 1, 2021	$	112,319
Change in fair value	136,845
Balance as of September 30, 2021	$	249,164

	Convertible Preferred Stock Warrant Liability
Balance as of July 1, 2022	$	173,455
Change in fair value	(11,374)
Balance at September 30, 2022	$	162,081

	Convertible Preferred Stock Warrant Liability
Balance as of July 1, 2021	$	162,436
Change in fair value	86,728
Balance as of September 30, 2021	$	249,164

Loan Trailing Fee

The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and default rates using a discounted cash flow model. The assumptions used are the same as those used for the valuation of Servicing Assets, as described below.

The following tables present additional information about the Level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis for the three and nine month periods ending September 30, 2022 and 2021 (in thousands):

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	Loan Trailing Fee Liability
Balance at January 1, 2022	$	2,161
Issuances	2,286
Cash Payment of Loan Trailing Fee	(1,485)
Change in Fair Value	100
Balance at September 30, 2022	$	3,062

	Loan Trailing Fee Liability
Balance at January 1, 2021	$	2,233
Issuances	1,289
Cash Payment of Loan Trailing Fee	(1,587)
Change in Fair Value	248
Balance at September 30, 2021	$	2,183

	Loan Trailing Fee Liability
Balance at July 1, 2022	$	2,574
Issuances	964
Cash Payment of Loan Trailing Fee	(475)
Change in Fair Value	(1)
Balance at September 30, 2022	$	3,062

	Loan Trailing Fee Liability
Balance at July 1, 2021	2,145
Issuances	472
Cash Payment of Loan Trailing Fee	(521)
Change in Fair Value	87
Balance at September 30, 2021	$	2,183

Significant Recurring Level 3 Fair Value Input Sensitivity

Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at September 30, 2022 and December 31, 2021 for Borrower Loans and Loans Held for Sale are presented in the following table (in thousands, except percentages).

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Borrower Loans and Loans Held for Sale	September 30, 2022			December 31, 2021
Fair value, using the following assumptions:	$	701,180		$	510,796
Weighted-average discount rate	7.84		%	5.64		%
Weighted-average default rate	9.99		%	10.08		%
Fair value resulting from:
100 basis point increase in discount rate	$	694,239		$	505,732
200 basis point increase in discount rate	$	687,473		$	500,763
Fair value resulting from:
100 basis point decrease in discount rate	$	708,301		$	516,064
200 basis point decrease in discount rate	$	715,610		$	521,437
Fair value resulting from:
Applying a 1.1 multiplier to default rate	$	695,007		$	506,362
Applying a 1.2 multiplier to default rate	$	688,875		$	501,921
Fair value resulting from:
Applying a 0.9 multiplier to default rate	$	707,390		$	515,326
Applying a 0.8 multiplier to default rate	$	713,637		$	519,851

Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at September 30, 2022 and December 31, 2021 for Notes are presented in the following table (in thousands, except percentages).

Notes	September 30, 2022			December 31, 2021
Fair value, using the following assumptions:	$	301,079		$	265,985
Weighted-average discount rate	8.32		%	5.76		%
Weighted-average default rate	11.78		%	10.70		%
Fair value resulting from:
100 basis point increase in discount rate	$	298,094		$	263,326
200 basis point increase in discount rate	$	295,184		$	260,735
Fair value resulting from:
100 basis point decrease in discount rate	$	304,141		$	268,714
200 basis point decrease in discount rate	$	307,284		$	271,516
Fair value resulting from:
Applying a 1.1 multiplier to default rate	$	298,411		$	263,644
Applying a 1.2 multiplier to default rate	$	295,761		$	261,318
Fair value resulting from:
Applying a 0.9 multiplier to default rate	$	303,762		$	268,340
Applying a 0.8 multiplier to default rate	$	306,462		$	270,711

Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at September 30, 2022 and December 31, 2021 for Servicing Assets is presented in the following table (in thousands, except percentages).

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Servicing Assets	September 30, 2022			December 31, 2021
Fair value, using the following assumptions	$	12,269		$	8,761
Weighted-average market servicing rate	0.649		%	0.650		%
Weighted-average prepayment rate	20.85		%	20.82		%
Weighted-average default rate	14.62		%	12.54		%
Fair value resulting from:
Market servicing rate increase of 0.025%	$	11,480		$	8,203
Market servicing rate decrease of 0.025%	$	13,059		$	9,320
Fair value resulting from:
Applying a 1.1 multiplier to prepayment rate	$	11,973		$	8,568
Applying a 0.9 multiplier to prepayment rate	$	12,572		$	8,957
Fair value resulting from:
Applying a 1.1 multiplier to default rate	$	12,095		$	8,646
Applying a 0.9 multiplier to default rate	$	12,445		$	8,878

Credit Card Derivative Asset	September 30, 2022
Fair value, using the following assumptions:	$	7,837
Discount rate on Prosper Allocations	27.50		%
Discount rate on Coastal Program Fee	9.84		%
Weighted-average prepayment rate	12.00		%
Weighted-average default rate	15.80		%
Fair value resulting from:
100 basis point increase in both discount rates	$	7,772
200 basis point increase in both discount rates	$	7,708
Fair value resulting from:
100 basis point decrease in both discount rates	$	7,903
200 basis point decrease in both discount rates	$	7,970
Fair value resulting from:
Applying a 1.1 multiplier to prepayment rate	$	7,701
Applying a 0.9 multiplier to prepayment rate	$	7,975
Fair value resulting from:
Applying a 1.1 multiplier to default rate	$	5,650
Applying a 0.9 multiplier to default rate	$	10,091

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.

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Assets and Liabilities Not Recorded at Fair Value

The following table presents the fair value hierarchy for assets, and liabilities not recorded at fair value (in thousands):

September 30, 2022	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Balance at Fair Value
Assets:
Cash and Cash Equivalents	$	43,530	$	43,530	$	—	$	—	$	43,530
Restricted Cash - Cash and Cash Equivalents	154,444		154,444		—		—		154,444
Restricted Cash - Certificates of Deposit	4,879		—		4,879		—		4,879
Accounts Receivable	2,265		—		2,265		—		2,265
Total Assets	$	205,118	$	197,974	$	7,144	$	—	$	205,118
Liabilities:
Accounts Payable and Accrued Liabilities	$	41,016	$	—	$	41,016	$	—	$	41,016
Payable to Investors	137,020		—		137,020		—		137,020
Warehouse Lines	354,799		—		353,229		—		353,229
Total Liabilities	$	532,835	$	—	$	531,265	$	—	$	531,265

December 31, 2021	Carrying Amount		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Balance at Fair Value
Assets:
Cash and Cash Equivalents	$	67,700	$	67,700	$	—	$	—	$	67,700
Restricted Cash - Cash and Cash Equivalents	163,047		163,047		—		—		163,047
Restricted Cash - Certificates of Deposit	4,878		—		4,878		—		4,878
Accounts Receivable	1,054		—		1,054		—		1,054
Total Assets	$	236,679	$	230,747	$	5,932	$	—	$	236,679
Liabilities:
Accounts Payable and Accrued Liabilities	$	25,790	$	—	$	25,790	$	—	$	25,790
Payable to Investors	152,794		—		152,794		—		152,794
Warehouse Lines	209,275		—		211,177		—		211,177
Paycheck Protection Program loan (Note 10)	8,590		—		8,556		—		8,556
Total Liabilities	$	396,449	$	—	$	398,317	$	—	$	398,317

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.

8. Goodwill and Other Intangible Assets, Net

Goodwill 

Prosper’s goodwill balance of $36.4 million at December 31, 2021 did not change during the nine months ended September 30, 2022. The Company recorded no goodwill impairment for the nine months ended September 30, 2022 and 2021.

Other Intangible Assets 

The following table presents the detail of other intangible assets subject to amortization as of the following date (dollars in thousands):

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	September 30, 2022
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Remaining Useful Life (In Years)
Developed technology	$	3,060	$	(3,060)	$	—	—
User base and customer relationships	5,050		(4,824)		226		2.6
Brand name	60		(60)		—		—
Total Intangible Assets subject to amortization	$	8,170	$	(7,944)	$	226

Prosper’s intangible asset balance was $0.2 million and $0.3 million at September 30, 2022 and December 31, 2021, respectively. The user base and customer relationships intangible assets are being amortized on an accelerated basis over a three-to-ten year period.

Amortization expense for the three and nine months ended September 30, 2022 and 2021 was not material.

Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):

Year Ending December 31,
2022 (remainder thereof)	$	34
2023	107
2024	85
Total	$	226

9. Other Liabilities

Other Liabilities consist of the following (in thousands):

	September 30, 2022		December 31, 2021
Operating lease liabilities	$	17,429	$	11,026
Deferred revenue	3,045		1,196
Loan trailing fee liability	3,062		2,161
Credit Card servicing obligation liability (Note 5)	2,381		—
Deferred income tax liability	621		560
Financing lease liabilities	78		78
Paycheck Protection Program loan (Note 10)	—		8,590
Other	350		289
Total Other Liabilities	$	26,966	$	23,900

Additionally, disclosures around the operating lease liabilities are included in Note 15.

10. Debt

PWIT Warehouse Trust Agreements

Prosper’s consolidated VIEs, PWIT and PWIIT (together, “Warehouse VIEs”), each entered into an agreement (together, “Warehouse Agreements”) with certain lenders for committed revolving lines of credit (“Warehouse Lines”) during 2018 and 2019, respectively. In connection with the Warehouse Agreements, the Warehouse VIEs each entered into a security agreement with a bank as administrative agent and a national banking association as collateral trustee and paying agent. Proceeds under the Warehouse Lines may only be used to purchase certain unsecured consumer loans and related rights and documents from Prosper and to pay fees and expenses related to the Warehouse Lines. Both Warehouse VIEs are consolidated because Prosper is the primary beneficiary of the VIEs. The assets of the VIEs can be used only to settle obligations of the VIEs. Additionally, the creditors of the Warehouse Lines have no recourse to the general credit of Prosper. The loans held in

29

the Warehouse VIEs are included in Loans Held for Sale, at Fair Value and Warehouse Lines are in Warehouse Lines in the condensed consolidated balance sheets.

Both Warehouse Agreements contain the same certain covenants including restrictions on each Warehouse VIE's ability to incur indebtedness, pledge assets, merge or consolidate and enter into certain affiliate transactions. Each Warehouse Agreement also requires Prosper to maintain a minimum tangible net worth of $25 million, minimum net liquidity of $15 million and a maximum leverage ratio of 5:1. Tangible net worth is defined as the sum of (i) (A) Convertible Preferred Stock, (B) total Stockholders’ Deficit and (C) Convertible Preferred Stock Warrant Liability, less the sum of (ii) (A) goodwill and (B) intangible assets. Net liquidity is defined as the sum of cash, cash equivalents and Available for Sale Investments. The leverage ratio is defined as the ratio of total consolidated indebtedness other than non-recourse securitization indebtedness, non-recourse or limited recourse warehouse indebtedness and borrower dependent notes, to tangible net worth. As of September 30, 2022, Prosper was in compliance with the covenants under each Warehouse Agreement.

PWIT Warehouse Line

On January 19, 2018, through PWIT, Prosper entered into a Warehouse Agreement for a Warehouse Line. Effective June 12, 2018, the Warehouse Agreement was amended. The amendments included increasing the committed line of credit from $100 million to $200 million, extending the term of the PWIT Warehouse Line (including the final maturity date), amending the monthly unused commitment fee and reducing the rate at which the PWIT Warehouse Line bears interest.

Subsequently the Warehouse Agreement was amended on June 20, 2019 to extend the facility, to reduce the interest rate and unused commitment fee and to expand the eligibility criteria for unsecured consumer loans that can be financed through the PWIT Warehouse Line. It was amended again on May 19, 2021 to extend the facility, to reduce the interest and advance rates and to include provisions for an alternative benchmark rate in light of the ongoing phaseout of LIBOR.

Under the amended agreement, proceeds of loans made under the PWIT Warehouse Line may be borrowed, repaid and reborrowed until the earlier of June 20, 2023 or the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over the 24 month period ending June 20, 2025, excluding the occurrence of any accelerated amortization event or event of default.

Under the amended agreement, the PWIT Warehouse Line bears interest at a rate of an established benchmark rate (currently LIBOR) plus 2.75% and has an advance rate of 87% for the majority of collateral loans, with lower advance rates for certain collateral loans. Additionally, the PWIT Warehouse Line bears a monthly unused commitment fee of 0.50% per annum on the undrawn portion available under the PWIT Warehouse Line.

As of September 30, 2022, Prosper had $172.6 million in debt and accrued interest outstanding under the PWIT Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $199.3 million included in “Loans Held for Sale, at Fair Value” on the condensed consolidated balance sheets. At September 30, 2022 the undrawn portion available under the Warehouse Line was $27.4 million. Prosper incurred $2.2 million of deferred debt issuance costs associated with the PWIT Warehouse Line, including $0.3 million from the amendment signed on May 19, 2021, which are included in “Prepaids and Other Assets” and amortized to interest expense over the term of the revolving arrangement.

Prosper purchased a swaption to limit the Company's exposure to increases in LIBOR. The swaption is recorded on the consolidated balance sheet at fair value in Prepaids and Other Assets. Any changes in the fair value are recorded in the Change in Fair Value of Financial Instruments, Net on the Consolidated Statement of Operations. The fair value of the swaption was $2.1 million at September 30, 2022.

PWIIT Warehouse Line

On March 28, 2019, through PWIIT, Prosper entered into a second Warehouse Agreement for a $300 million Warehouse Line with a national banking association different than that of PWIT. On March 4, 2021, PMI extended its $300 million PWIIT Warehouse Line (“PWIIT Extension”). The PWIIT Extension consists of a $230 million Class A loan with the existing PWIIT Warehouse Line national banking association and a $70 million Class B loan with an asset manager. The advance rate on the PWIIT Extension is 90%. Under the PWIIT Extension, proceeds of loans made under the PWIIT Warehouse Line may be borrowed, repaid and reborrowed until the earlier of March 3, 2023 or the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over a 24-month period ending March 4, 2025, excluding the occurrence of any accelerated amortization event or event of default.

Under the PWIIT Extension, the Class A loan bears interest at a rate of the national banking association's asset-backed commercial paper rate, plus a spread of 2.05%. The spread increases by 0.375% during the first 12 months immediately following the termination of the revolving period with an additional increase of 0.375% one year later. Additionally, the Class A loan bears a monthly unused commitment fee of 0.50% per annum on the undrawn portion available under the Class A loan.

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The Class B loan bears interest at a rate of one-month LIBOR, plus a spread of 8.75%. The spread increases by 0.375% during the first twelve months immediately following the termination of the revolving period with an additional increase of 0.375% one year later. Additionally, the Class B loan bears a monthly unused commitment fee of 0.50% or 1.00% per annum on the undrawn portion available under the Class B loan, depending on the Class B loan utilization percentage.

As of September 30, 2022, Prosper had $182.2 million in debt and accrued interest outstanding under the PWIIT Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $204.3 million included in Loans Held for Sale, at Fair Value on the Consolidated Balance Sheets. At September 30, 2022 the undrawn portion available under the PWIIT Warehouse Line was $117.8 million. PMI incurred $1.3 million of debt issuance costs for the extension in March 2021, which are included in Prepaids and Other Assets and will be amortized to interest expense over the term of the revolving arrangement.

Phaseout of LIBOR

A portion of the interest rate charged on our Warehouse Lines is currently based on LIBOR. LIBOR has been the subject of reform and was expected to phase out by the end of fiscal 2021; however, on November 30, 2020, the ICE Benchmark Administration Limited (“ICE”) announced plans to delay the phase out of LIBOR to June 30, 2023. The consequences of the discontinuation of LIBOR cannot be entirely predicted but could impact the interest expense incurred on these debt instruments. We have negotiated alternatives to LIBOR on the PWIT and PWIIT Warehouse Lines, which we may renegotiate before LIBOR ceases to be a widely available reference rate.

Paycheck Protection Program Loan

In April 2020, the Company obtained an $8.4 million loan under the Paycheck Protection Program (“PPP”), established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and sponsored by the U.S. Small Business Administration (“SBA”). The loan accrued interest at one percent per annum and had a two-year term through April 2022, with payments deferred until such time as an approval or denial of forgiveness was received from the SBA. The Company used the PPP Loan proceeds to cover payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

On March 21, 2022, the Company was notified by the SBA that all principal and interest under the loan, totaling $8.6 million, was forgiven in full through a forgiveness payment made on March 15, 2022 by the SBA to the lender of the PPP loan. As a result, the Company recognized a “Gain on Forgiveness of PPP Loan” for this amount on its accompanying consolidated statement of operations for the nine months ended September 30, 2022.

11. Net Income (Loss) Per Share

PMI computes its net income (loss) per share in accordance with ASC Topic 260, Earnings Per Share (“ASC Topic 260”). Under ASC Topic 260, basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.

Net income (loss) per share is calculated using the two-class method in accordance with ASC Topic 260. The two-class method allocates earnings that otherwise would have been available to common shareholders to holders of participating securities. Management considers all series of our Convertible Preferred Stock to be participating securities due to their rights to participate in dividends with Common Stock. As such, earnings allocated to these participating securities, which include participation rights in undistributed earnings, are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders.

All participating securities are excluded from basic weighted-average common shares outstanding. Prior to any conversion to common shares, each series of Prosper’s Convertible Preferred Stock is entitled to participate on an if-converted basis in distributions of earnings, when and if declared by the board of directors, that are made to common stockholders and consequently, these shares were considered participating securities. During the nine months ended September 30, 2022 and 2021, certain shares issued as a result of the early exercise of stock options which are subject to a repurchase right by PMI were entitled to receive non-forfeitable dividends during the vesting period and consequently, are considered participating securities.

The weighted average shares used in calculating basic and diluted net income (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 income (loss) per share were calculated as follows for the periods presented (in thousands, except share and per share amounts):

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	Three Months Ended September 30,				Nine Months Ended September 30, 2022
	2022		2021		2022		2021
Numerator:
Net Income (Loss)	$	8,621	$	(88,061)	$	87,918	$	(138,755)
Less: Net Income Allocated to Participating Securities	(5,772)		—		(59,054)		—
Net Income (Loss) Attributable to Common Stockholders	$	2,849	$	(88,061)	$	28,864	$	(138,755)
Denominator:
Weighted average shares used in computing basic net income (loss) per share	73,731,925		71,068,442		73,010,111		70,433,182
Effect of dilutive securities:
Stock options	54,551,659		—		61,828,654		—
Warrants	410,837		—		600,194
Convertible preferred stock warrants	213,264,845		—		213,264,845		—
Weighted average shares used in computing diluted Net Income (Loss) per Share	341,959,266		71,068,442		348,703,804		70,433,182
Net Income (Loss) Per Share – Basic	$	0.04	$	(1.24)	$	0.40	$	(1.97)
Net Income (Loss) Per Share – Diluted	$	0.01	$	(1.24)	$	0.08	$	(1.97)

The following common stock equivalents were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have been anti-dilutive:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
	(shares)	(shares)	(shares)	(shares)
Excluded securities:
Convertible preferred stock issued and outstanding, excluding shares held by consolidated VIE	158,365,655	158,365,655	158,365,655	158,365,655
Stock options issued and outstanding	16,382,524	70,601,482	16,227,752	72,845,826
Warrants issued and outstanding	669,512	1,080,349	480,155	1,080,349
Series E-1 convertible preferred stock warrants	—	35,544,141	—	35,544,141
Series F convertible preferred stock warrants	—	177,720,704	—	177,720,704
Total common stock equivalents excluded from diluted net income (loss) per common share computation	175,417,691	443,312,331	175,073,562	445,556,675

12. Convertible Preferred Stock, Convertible Preferred Stock Warrant Liability and Common Stock

Convertible Preferred Stock and Warrants

Under PMI’s amended and restated certificate of incorporation, preferred stock is issuable in series, and the Board of Directors is authorized to determine the rights, preferences, and terms of each series.

On July 13, 2020, the Company established Prosper Grantor Trust (“PGT”), a revocable grantor trust administered by an independent trustee, with the intention of contributing assets to PGT for the benefit of PMI employees in the event of a change in control through an Eligible Employee Retention Plan. PGT was determined to be a VIE and PMI was determined to be its primary beneficiary due to the fact that the Company, through its role as the grantor, has both (a) the power to direct the activities that most significantly affect the VIE’s economic performance, including its funding decisions and investment strategy, and (b) the obligation to absorb losses that could be potentially significant to the economic performance of the VIE by virtue of the Company’s requirement to fund PGT in the event that it is unable to meet its obligations to PMI’s employees. PMI

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also maintains a contingent call liability on PGT’s assets in the event of a bankruptcy. As a result, PGT is fully consolidated into PMI’s consolidated financial statements.

On July 21, 2020, PGT entered into a Stock Transfer Agreement with a PMI investor to purchase 34,670,420 shares of Series A Convertible Preferred Stock and 16,577,495 shares of Series B Convertible Preferred Stock for nominal consideration. Upon execution of the Stock Transfer Agreement, these shares were purchased by a consolidated VIE of the Company, and thus the difference between the fair value of the repurchased stock and the purchase price is included in Convertible Preferred Stock Held by Consolidated VIE on PMI’s accompanying condensed consolidated balance sheets. These shares remain outstanding for legal purposes and retain their voting rights, but are excluded from the earnings per share calculation.

The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of September 30, 2022 are disclosed in the table below (amounts in thousands except share and par value amounts):

Convertible Preferred Stock	Par Value		Authorized Shares	Outstanding and Issued Shares		Liquidation Preference, Outstanding Shares
Series A	$	0.01	68,558,220	66,428,185	*	$	19,160
Series A-1	$	0.01	24,760,915	22,515,315		45,031
Series B	$	0.01	35,775,880	35,127,160	*	21,190
Series C	$	0.01	24,404,770	24,404,770		70,075
Series D	$	0.01	23,888,640	23,888,640		165,000
Series E-1	$	0.01	35,544,141	—		—
Series E-2	$	0.01	16,858,078	—		—
Series F	$	0.01	177,720,707	3		—
Series G	$	0.01	37,249,497	37,249,497		50,000
Total			444,760,848	209,613,570		$	370,456

* Series A and Series B Convertible Preferred Stock totals are inclusive of 34,670,420 and 16,577,495 shares, respectively, held by PGT, a consolidated VIE.

Dividends

Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then-effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights. To date, no dividends have been declared on any of 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 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; (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F, and (v) the shares of Series G Preferred Stock will not be automatically converted unless the holders of at least 60% of the outstanding shares of Series G Preferred Stock approve such conversion. In addition, if a holder of the 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 (as defined under the certificate of incorporation). In lieu of any fractional shares of common stock to which a holder would otherwise be entitled,

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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, each of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, and Series F convertible preferred stock converts into PMI common stock at a 1:1 ratio. The Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio and the Series G convertible preferred stock converts into common stock at a 1:1.36 ratio. The Series G convertible preferred stock conversion ratio reflects the Series G true-up that occurred at end of the vesting period for the Series E-2 and Series F Preferred Stock warrants.

For the Series G true-up, the conversion price of the Series G Convertible Preferred Stock was reduced to a number equal to the Series G Preferred Stock original issuance price, divided by the quotient obtained by dividing the Series G true-up amount by the total number of Series G Preferred Stock issued as of the Series G closing date. The Series G true-up amount means the aggregate number of shares of Series G Preferred Stock that would have been issued to the purchasers of the Series G Preferred Stock on the Series G closing date, if warrants to purchase shares of Series E-2 Preferred Stock or Series F Preferred Stock that were exercisable or exercised as of the true-up time (end of vesting period) had been exercisable or exercised as of such Series G closing date.

Liquidation Rights

PMI’s convertible preferred stock has been classified as temporary equity on the condensed consolidated balance sheets. The preferred stock is not redeemable; however, 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 (as defined under the certificate of incorporation) to the holders of Series A, Series B, Series C, Series D, Series G and Series A-1 convertible 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, Series F, and Series G convertible preferred stock is entitled to receive, on a pari passu basis, prior to and in preference to any distribution of proceeds from a liquidation event (as defined under the certificate of incorporation) to the holders of Series A-1 convertible preferred stock or common stock, (i) an amount per share for each share of Series E-2 and Series F convertible preferred stock equal to the sum of one-third of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (ii) an amount per share for each share of Series A, Series B, Series C, Series D and Series G convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.

After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock, an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.

After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, Series G, and Series A-1 convertible preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of Series A convertible preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the Series A convertible 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 per share for the Series D convertible preferred stock, $0.84 per share for the Series E-1 convertible preferred stock, $0.84 per share for the Series E-2 convertible preferred stock, $0.84 per share for the Series F convertible preferred stock and $1.34 per share for the Series G convertible preferred stock.

Voting

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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, its wholly owned subsidiary Prosper Funding LLC (“PFL”) and Colchis, on December 16, 2016, PMI issued the First Series E-1 Warrant. The Second Series E-1 Warrant for an additional 15,277,006 shares of Series E-1 convertible preferred stock was granted on the signing of the Consortium Purchase Agreement (as described in Note 15 of PMI’s 10-K for the year ended December 31, 2021) on February 27, 2017. The warrants expire ten years from the date of issuance. For the three months ended September 30, 2022 and 2021, Prosper recognized $2.5 million of income and $13.9 million of expense, respectively, from the re-measurement of the fair value of the warrants. For the nine months ended September 30, 2022 and 2021, Prosper recognized $14.2 million of income and $21.3 million of expense, respectively, from the re-measurement of the fair value of the warrants. The income or expense resulted from the remeasurement of the fair value of the warrants is recorded in Change in Fair Value of Convertible Preferred Stock Warrants on the condensed consolidated statements of operations.

To determine the fair value of the Series E-1 Warrants, the Company first determined the value of a share of a Series E-1 Convertible Preferred Stock. To determine the fair value of the Convertible Preferred Stock, the Company first derived the business enterprise value (“BEV”) of the Company using a variety of valuation methods, including discounted cash flow models and market based methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the option pricing method ("OPM") was used to allocate the BEV to the various classes of our equity, including our 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 Series E-1 Warrants utilizing the following assumptions as of the following dates:

	September 30, 2022		December 31, 2021
Volatility	74.0	%	63.0	%
Risk-free interest rate	4.20	%	0.90	%
Expected term (in years)	2.75		2.75
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 as the Company has limited information on the volatility of its 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 September 30, 2022, and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.

Expected Term: The expected term is the period of time for which the warrants are expected to be outstanding.

Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.

Series F Warrants

In connection with the Consortium Purchase Agreement (as described in Note 15 of PMI’s 10-K for the year ended December 31, 2021) on February 27, 2017, PMI issued warrants to purchase up to 177,720,706 shares of PMI's Series F convertible preferred stock at $0.01 per share. The warrants expire ten years from the date of issuance. For the three months ended September 30, 2022 and 2021, Prosper recognized $8.9 million of income and $72.9 million of expense, respectively,

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from the re-measurement of the fair value of the warrants. For the nine months ended September 30, 2022 and 2021, Prosper recognized $74.6 million of income and $115.5 million of expense, respectively, from the re-measurement of the fair value of the warrants. The income or expense resulting from changes in the fair value of the warrant is recorded through Change in Fair Value of Convertible Preferred Stock Warrants on the condensed consolidated statements of operations.

To determine the fair value of the Series F 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 BEV 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 OPM was used to allocate the BEV to the various classes of Prosper's equity, including our 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 Series F Warrants utilizing the following assumptions as of the following dates:

	September 30, 2022		December 31, 2021
Volatility	74.0	%	63.0	%
Risk-free interest rate	4.20	%	0.90	%
Expected term (in years)	2.75		2.75
Dividend yield	—	%	—	%

The above assumptions were determined using the same criteria described above for the Series E-1 Warrants.

The combined activity of the Convertible Preferred Stock Warrant Liability for the three and nine months ended September 30, 2022 and 2021 are presented in Note 7, Fair Value of Assets and Liabilities.

Common Stock

PMI, through its Amended and Restated Certificate of Incorporation, is the sole issuer of common stock and related options, restricted stock units (“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 September 20, 2017, 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 1,069,760,848, consisting of 625,000,000 shares of common stock, $0.01 par value per share, and 444,760,848 shares of preferred stock, $0.01 par value per share. As of September 30, 2022, 74,950,409 shares of common stock were issued and 74,014,474 shares of common stock were outstanding. As of December 31, 2021, 73,089,929 shares of common stock were issued and 72,153,994 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

For the nine months ended September 30, 2022, PMI issued 1,860,480 shares of common stock upon the exercise of vested options for cash proceeds of $46 thousand.

13. Stock-Based Compensation

PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1, Amendment No. 2 and Amendment No. 3, which were approved by PMI's stockholders effective as of February 15, 2016, May 31, 2016, and September 5, 2018 respectively (as amended, the “2015 Plan”). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms.

Stock Option Reprices

On May 3, 2016, March 17, 2017 and August 11, 2020 the Compensation Committee of the Board of Directors of PMI approved three separate stock option repricing programs (collectively, the “Repricings”) authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that had exercise prices above the current fair market value of PMI’s Common Stock on those respective dates.

PMI believes that the Repricings encourage the continued service of valued employees and directors, and motivate

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such service providers to perform at high levels, both of which are critical to the Company’s continued success. PMI expects to incur additional stock based compensation charges as a result of the Repricings.

The financial statement impact of the above Repricings was not material for the nine months ended September 30, 2022. As of September 30, 2022, the unamortized Repricings expense (net of forfeitures) of $11 thousand will be recognized over the remaining weighted-average vesting period of 1.0 year.

Stock Option Activity

Stock option activity under the 2005 Plan and 2015 Plan is summarized for the nine months ended September 30, 2022 below:

	Options Issued and Outstanding	Weighted Average Exercise Price
Balance as of January 1, 2022	72,186,151	$	0.07
Options issued	13,822,243	$	0.66
Options exercised	(1,860,480)	$	0.02
Options forfeited	(3,703,067)	$	0.22
Options expired	(5,825)	$	0.02
Balance as of September 30, 2022	80,439,022	$	0.16
Options vested and expected to vest as of September 30, 2022	72,283,669	$	0.16
Options vested and exercisable as of September 30, 2022	53,632,329	$	0.04

Other Information Regarding Stock Options

The weighted-average remaining life for options outstanding as of September 30, 2022 was 6.51 years.

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 PMI 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, the Company 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 publicly 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 PMI. 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. PMI uses an expected dividend yield of zero as it does not anticipate paying any dividends in the foreseeable future.

PMI also estimates forfeitures of unvested stock options. Expected forfeitures are based on the Company’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.

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The fair value of PMI’s stock option awards granted during the three and nine months ended September 30, 2022 and 2021 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Volatility of common stock	68.09	%	64.84	%	67.08	%	64.37	%
Risk-free interest rate	2.87	%	0.97	%	2.61	%	0.99	%
Expected life (in years)	6.0 years		6.0 years		6.0 years		6.0 years
Dividend yield	—	%	—	%	—	%	—	%

Restricted Stock Unit Activity

In previous years, PMI granted RSUs to certain employees that are subject to three-year or four-year vesting terms and the occurrence of a liquidity event. There was no RSU activity for the nine months ended September 30, 2022, and as of that date, there were 2,874,348 unvested RSUs with a weighted-average grant date fair value of $1.14 per share.

Share Based Compensation

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 for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Origination and servicing	$	36	$	30	$	98	$	92
Sales and marketing	215		15		417		47
General and administrative	245		225		780		718
Total stock-based compensation	$	496	$	270	$	1,295	$	857

As of September 30, 2022, the unamortized stock-based compensation expense, adjusted for forfeiture estimates, related to unvested stock-based awards was approximately $3.7 million, which will be recognized over a remaining weighted-average vesting period of approximately 3.1 years.

14. Income Taxes

For the three months ended September 30, 2022 and 2021, PMI recognized $20 thousand and $21 thousand of income tax expense, respectively. For the nine months ended September 30, 2022 and 2021, PMI recognized $60 thousand and $63 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 nine month periods ended September 30, 2022 and 2021 due to a full valuation allowance recorded against the Company’s 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.

15. Leases

Prosper has operating leases for corporate offices and datacenters. These leases have remaining lease terms of less than one year to approximately six years. Some of the lease agreements include options to extend the lease term for up to an additional five years. Rental expense under operating lease arrangements was $1.2 million and $1.1 million for the three months ended September 30, 2022 and 2021, respectively, and $3.5 million and $3.4 million for the nine months ended September 30, 2022 and 2021, respectively. Additionally, Prosper subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income from operating lease arrangements was $0.2 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $0.6 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively.

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Operating Lease Right-of-Use (“ROU”) Assets

The following table summarizes the operating lease right-of-use assets as of September 30, 2022, which are included in “Property and Equipment, Net” on the condensed consolidated balance sheets.

	September 30, 2022
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
ROU Assets - Office buildings	$	26,257	$	11,518	$	14,739
ROU Assets - Other	900		615		285
Total right-of-use assets subject to amortization	$	27,157	$	12,133	$	15,024

In May 2022, the Company entered into an amendment to its San Francisco office lease, the most prominent impact of which was to extend the lease term for the Company’s primary space in that office for an additional period through May 2028. As a result of this lease modification, the Company recorded additional ROU operating lease assets and liabilities of $9.9 million.

Lease Liabilities

Future maturities of operating lease liabilities as of September 30, 2022 were as follows (in thousands). The present value of the future minimum lease payments represents our operating lease liabilities as of September 30, 2022 and are included in "Other Liabilities" on the condensed consolidated balance sheets.

	September 30, 2022
Remainder of 2022	$	1,435
2023	3,820
2024	4,391
2025	4,517
2026	4,432
Thereafter	4,723
Total future minimum lease payments	$	23,318
Less imputed interest	(5,889)
Present value of future minimum lease payments	$	17,429

Because the rate implicit in each lease is not readily determinable, we use our incremental borrowing rate to determine the present value of the lease payments. Other information related to leases was as follows (dollars in thousands):

	September 30, 2022
Cash paid for operating leases year-to-date	$	4,350
Weighted average remaining lease term (in years)	5.02 years
Weighted average discount rate	10.82		%

16. Commitments and Contingencies

In the normal course of its operations, Prosper becomes involved in various legal actions. Prosper maintains provisions it considers to be adequate for such actions. Prosper does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper's financial condition, results of operations or cash flows.

Operating Commitments

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. On June 25, 2021, PMI, along with its wholly-owned subsidiary Prosper Funding LLC, and WebBank entered into: (i) a Fifth Amendment (the “Sale Agreement Amendment”) to the Asset Sale Agreement, dated July 1, 2016, between Prosper Funding LLC and WebBank (the “Sale Agreement”); (ii) a Sixth

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Amendment (the “Marketing Agreement Amendment”) to the Marketing Agreement, dated July 1, 2016, between PMI and WebBank (the “Marketing Agreement”); and (iii) a Third Amendment (the “Purchase Agreement Amendment”) to the Stand By Purchase Agreement, dated July 1, 2016, between PMI and WebBank (the “Purchase Agreement” and, collectively with the Sale Agreement and the Marketing Agreement, the “Origination and Sale Agreements”). The Sale Agreement Amendment, the Marketing Agreement Amendment, and the Purchase Agreement Amendment, collectively, are hereinafter referred to as the “Amendments.”

The Sale Agreement Amendment, among other things, extends the term of the Sale Agreement to February 1, 2025 and amends certain collateral requirements under the Sale Agreement. The Marketing Agreement Amendment, among other things, extends the term of the Marketing Agreement to February 1, 2025 and sets forth the amended terms and conditions of certain fees owed by the Registrants to WebBank under the Marketing Agreement. The Purchase Agreement Amendment amends certain collateral requirements of PMI under the Purchase Agreement.

Pursuant to the Marketing Agreement Amendment, 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 the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $100,000 through February 1, 2025, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining three months of 2022 is $0.3 million. The minimum fee is $1.2 million for 2023 and 2024, and $0.1 million in 2025.

Additionally, under the agreement with WebBank, Prosper is required to maintain minimum net liquidity of $15.0 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. As of September 30, 2022, Prosper was in compliance with the covenant.

Loan Purchase Commitments

Prosper entered into an agreement with WebBank to purchase $24.1 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended September 30, 2022. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending December 31, 2022.

Repurchase Obligation    

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. Prosper recognizes a liability at fair value for the repurchase obligation when the Borrower Loans are sold. The fair value of the repurchase obligation is estimated based on historical experience. 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. The maximum potential amount of future payments associated with this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at September 30, 2022 is $3.4 billion. Prosper has accrued $0.3 and $0.3 million as of September 30, 2022 and December 31, 2021, respectively, in regard to this obligation.

Regulatory Contingencies

Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, an amount is recorded which management considers to be the best estimate within the range of potential losses that are both probable and estimable; however, if management cannot quantify the amount of the estimated loss, then the low end of the range of the potential losses is recorded.

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West Virginia Matter

In January 2018, the Attorney General of the State of West Virginia (the “Attorney General”) initiated discussions regarding certain acts and practices of PMI and PFL that the Attorney General asserts may have violated the West Virginia Consumer Credit and Protection Act (the “Consumer Act”), to which Prosper responded with such information as was requested by the Attorney General. Following a period of more than a year with limited to no communication, in February 2020, Prosper received a proposed Assurance of Discontinuance (an “AOD”) from the Attorney General requesting that, without in any way admitting that any of its prior practices were in violation of the Consumer Act, Prosper agree to certain terms and conditions regarding its past and potential future conduct of its business with respect to customers in West Virginia, including a release by the Attorney General of any claims it may have related to the matters identified in the AOD. Prosper is evaluating and intends to discuss the proposed terms in the AOD with the Attorney General.

We cannot predict the outcome of the matter and any potential fines or penalties, if any, that may arise from the matter. Further, we are unable to estimate a range of outcomes and as a result no accrual has been made.

No loans have been originated through the Prosper platform to West Virginians since June 2016.

17. Related Parties

Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers, and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers, and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.

Prosper’s executive officers, directors who are not executive officers, and certain affiliates participate in its marketplace by placing bids and purchasing Notes. The aggregate amount of the Notes purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the three and nine months ended September 30, 2022 and 2021, as well as the Notes outstanding as of September 30, 2022 and December 31, 2021 are summarized below (in thousands):

	Aggregate Amount of Notes Purchased the Three Months Ended September 30,				Interest Earned on Notes the Three Months Ended September 30,
Related Party	2022		2021		2022		2021
Executive officers and management	$	9	$	9	$	2	$	2
Directors (excluding executive officers and management)	—		4		—		1
Total	$	9	$	13	$	2	$	3

	Aggregate Amount of Notes Purchased the Nine Months Ended September 30,				Interest Earned on Notes the Nine Months Ended September 30,
Related Party	2022		2021		2022		2021
Executive officers and management	$	28	$	26	$	6	$	5
Directors (excluding executive officers and management)	—		24		1		1
Total	$	28	$	50	$	7	$	6

	Notes Balance as of
Related Party	September 30, 2022		December 31, 2021
Executive officers and management	$	51	$	41
Directors (excluding executive officers and management)	7		15
Total	$	58	$	56

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18. Significant Concentrations

Prosper is dependent on third-party funding sources such as banks, asset managers, investment funds and Warehouse Lines 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 three months ended September 30, 2022, three individual third parties purchased 23.4%, 12.7% and 10.2% of all Borrower Loans originated, and the Company’s Warehouse VIEs purchased 13.5% of such loans. For the three months ended September 30, 2021, one individual party purchased 24.7% of all Borrower Loans originated, and the Company’s Warehouse VIEs purchased 15.7% of such loans.

Of all Borrower Loans originated in the nine months ended September 30, 2022, two individual third parties purchased 23.7% and 10.3% of such loans, and the Company’s Warehouse VIEs purchased 12.1% of such loans. For the nine months ended September 30, 2021 one individual party purchased 27.0% of such loans, and the Company’s Warehouse VIEs purchased 13.4% of such loans. These purchases reflect that a significant portion of Prosper’s business is dependent on funding through the Whole Loan Channel, through which 92% and 88% of Borrower Loans were originated in the nine months ended September 30, 2022 and 2021, respectively.

Prosper receives all of its personal loan transaction fee revenue from WebBank. Prosper earns a transaction fee from WebBank for its services in facilitating originations of Borrower Loans issued by WebBank. The rate of the transaction fee for each individual Borrower Loan is based on the term and credit grade of the Borrower Loan. No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented.

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Prosper Funding LLC

Condensed Consolidated Balance Sheets (Unaudited)

(amounts in thousands)

	September 30, 2022		December 31, 2021
Assets:
Cash and Cash Equivalents	$	5,691	$	10,765
Restricted Cash	147,007		157,111
Borrower Loans, at Fair Value	302,971		267,626
Property and Equipment, Net	9,073		7,907
Servicing Assets	14,074		9,796
Other Assets	243		317
Total Assets	$	479,059	$	453,522
Liabilities and Member’s Equity:
Accounts Payable and Accrued Liabilities	$	4,929	$	1,818
Payable to Related Party	4,739		1,306
Payable to Investors	138,326		153,681
Notes, at Fair Value	301,079		265,985
Other Liabilities	3,371		2,434
Total Liabilities	452,444		425,224
Member's Equity:
Member's Equity	11,404		11,404
Retained Earnings	15,211		16,894
Total Member's Equity	$	26,615	$	28,298
Total Liabilities and Member's Equity	$	479,059	$	453,522

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

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Prosper Funding LLC

Condensed Consolidated Statements of Operations (Unaudited)

(amounts in thousands)

	Three Months Ended September 30,			Nine Months Ended September 30,
	2022	2021		2022		2021
Revenues:
Operating Revenues:
Administration Fee Revenue - Related Party	18,234	$	9,066	$	42,385	$	24,247
Servicing Fees, Net	5,695	3,954		14,808		11,483
(Loss) Gain on Sale of Borrower Loans	(346)	2,404		5,611		6,078
Other Revenue	132	447		802		804
Total Operating Revenues	23,715	15,871		63,606		42,612
Interest Income on Borrower Loans	11,592	9,574		33,228		27,130
Interest Expense on Notes	(10,758)	(8,935)		(30,945)		(25,366)
Total Interest Income, Net	834	639		2,283		1,764
Change in Fair Value of Financial Instruments, Net	(149)	371		118		527
Total Net Revenues	24,400	16,881		66,007		44,903
Expenses:
Administration Fee - Related Party	21,966	13,686		55,773		38,653
Servicing	2,256	1,830		5,778		4,729
General and Administrative	143	108		439		364
Total Expenses	24,365	15,624		61,990		43,746
Net Income (Loss)	35	$	1,257	$	4,017	$	1,157

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

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Prosper Funding LLC

Condensed Consolidated Statements of Member’s Equity (Unaudited)

(amounts in thousands)

	Member’s Equity		Retained Earnings		Total
Balance at January 1, 2022	$	11,404	$	16,894	$	28,298
Distribution to Parent	(5,700)				(5,700)
Net Income	—		4,017		4,017
Balance as of September 30, 2022	$	5,704	$	20,911	$	26,615
	Member’s Equity		Retained Earnings		Total
Balance at January 1, 2021	$	11,404	$	13,684	$	25,088
Net Loss	—		1,157		1,157
Balance as of September 30, 2021	$	11,404	$	14,841	$	26,245

	Member’s Equity		Retained Earnings		Total
Balance at January 1, 2022	$	11,404	$	16,894	$	28,298
Net Income	—		1,445		1,445
Balance at March 31, 2022	$	11,404	$	18,339	$	29,743
Net Income	—		$	2,537	2,537
Balance as of June 30, 2022	$	11,404	$	20,876	$	32,280
Distribution to Parent	(5,700)		$	—	(5,700)
Net Income	—		$	35	35
Balance as of September 30, 2022	$	5,704	$	20,911	$	26,615
	Member’s Equity		Retained Earnings		Total
Balance at January 1, 2021	$	11,404	$	13,684	$	25,088
Net Loss	—		(1,204)		(1,204)
Balance at March 31, 2021	$	11,404	$	12,480	$	23,884
Net Income	—		1,104		1,104
Balance as of June 30, 2021	$	11,404	$	13,584	$	24,988
Net Income	$	—	$	1,257	$	1,257
Balance as of September 30, 2021	$	11,404	$	14,841	$	26,245

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

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Prosper Funding LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(amounts in thousands)

	Nine Months Ended September 30,
	2022		2021
Cash Flows from Operating Activities:
Net Income	$	4,017	$	1,157
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities:
Change in Fair Value of Financial Instruments, Net	(118)		(527)
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes	104		18
Gain on Sale of Borrower Loans	(11,384)		(6,675)
Change in Fair Value of Servicing Rights	7,106		7,795
Depreciation and Amortization	4,168		3,540
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value	(2,271,312)		(1,248,316)
Proceeds from Sales and Principal Payments of Loans Held for Sale, at Fair Value	2,271,312		1,248,316
Other Assets	74		(65)
Accounts Payable and Accrued Liabilities	3,111		(491)
Payable to Investors	(15,355)		15,793
Net Related Party Receivable/Payable	2,761		(704)
Other Liabilities	937		(160)
Net Cash (Used in) Provided by Operating Activities	(4,579)		19,681
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value	(214,271)		(172,082)
Proceeds from Sales and Principal Payments of Borrower Loans, at Fair Value	158,032		126,741
Purchases of Property and Equipment	(4,662)		(5,361)
Net Cash Used in Investing Activities	(60,901)		(50,702)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value	214,107		172,231
Payments of Notes, at Fair Value	(158,105)		(126,528)
Cash Distributions to Parent	(5,700)		—
Net Cash Provided by Financing Activities	50,302		45,703
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash	(15,178)		14,682
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period	167,876		140,924
Cash, Cash Equivalents and Restricted Cash at End of the Period	$	152,698	$	155,606
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	30,632	$	25,571
Non-Cash Investing Activity - Accrual for Property and Equipment, Net	906		480
Reconciliation to Amounts on Consolidated Balance Sheets:
Cash and Cash Equivalents	$	5,691	$	8,362
Restricted Cash	147,007		147,244
Total Cash, Cash Equivalents and Restricted Cash	$	152,698	$	155,606

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

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PROSPER FUNDING LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Prosper Funding LLC (“PFL”) was formed in the state of Delaware in February 2012 as a limited liability company with Prosper Marketplace, Inc. (“PMI”) as its sole equity member. Except as the context otherwise requires, as used in these Notes to the condensed consolidated financial statements of Prosper Funding LLC, “PFL”, and the “Company” refers to Prosper Funding LLC and its wholly owned subsidiary, 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, 2021. The balance sheet at December 31, 2021 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.

PFL did not have any items of other comprehensive income or loss for any of the periods presented in the condensed consolidated financial statements as of and for the nine months ended September 30, 2022 and 2021.

The preparation of PFL's condensed consolidated financial statements and related disclosures in conformity with US 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.

2. Summary of Significant Accounting Policies

PFL's significant accounting policies are included in Note 2, Summary of Significant Accounting Policies, in PFL’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no changes to these accounting policies during the first nine months of 2021.

Fair Value Measurements

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, 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.

Refer to Note 7 for additional fair value disclosures.

Restricted Cash

Restricted Cash consists primarily of cash deposits, money market funds and short-term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors have on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.

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Borrower Loans, Loans Held for Sale and Notes

With respect to the Note Channel, PFL 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 PFL’s condensed consolidated balance sheets as assets and liabilities, respectively.

PFL places Borrower Loans and Loans Held for Sale on non-accrual status when they are 120 days past due. When a loan is placed on non-accrual status, PFL stops accruing interest and reverses all accrued but unpaid interest as of such date. Additionally, PFL charges-off Borrower Loans and Loans Held for Sale when they are 120 days past due. The fair value of loans 120 days past due generally consists of the expected recovery from debt sales in subsequent periods.

Management has elected the fair value option for Borrower Loans, Loans Held for Sale, and Notes. Changes in fair value of Borrower Loans are largely offset by the changes in fair value of Notes due to the borrower payment-dependent design of the Notes. Changes in fair value of Borrower Loans, Loans Held for Sale and Notes are included in “Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net” on the condensed consolidated statements of operations.

PFL primarily uses a discounted cash flow model to estimate the fair value of Borrower Loans, Loans Held for Sale and Notes. The key assumptions used in the valuation include default rates and prepayment rates derived primarily from historical performance and discount rates based on estimates of the rates of return that investors would require when investing in financial instruments with similar characteristics.

Recent Accounting Pronouncements

Accounting Standards Adopted In The Current Period

No accounting standards were adopted in the current period for PFL.

Accounting Standards Issued, To Be Adopted By PFL In Future Periods

No issued and pending accounting standards were identified that are expected to have an impact on PFL.

3. Property and Equipment, Net

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

	September 30, 2022		December 31, 2021
Internal-use software and web site development costs	$	33,141	$	31,979
Less accumulated depreciation and amortization	(24,068)		(24,072)
Total property and equipment, net	$	9,073	$	7,907

Depreciation expense for the three months ended September 30, 2022 and 2021 was $1.5 million and $1.3 million, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $4.2 million and $3.5 million, respectively.

4. Borrower Loans and Notes, at Fair Value

The aggregate principal balances outstanding and fair values of Borrower Loans and Notes as of September 30, 2022 and December 31, 2021, are presented in the following table (in thousands):

	Borrower Loans				Notes
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Aggregate principal balance outstanding	$	312,059	$	265,232	$	315,023	$	267,415
Fair value adjustments	(9,088)		2,394		(13,944)		(1,430)
Fair value	$	302,971	$	267,626	$	301,079	$	265,985

As of September 30, 2022, outstanding Borrower Loans had original terms to maturity of 24, 36, 48 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 33.00% and had various original maturity dates through

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September 2027. As of December 31, 2021, outstanding Borrower Loans had original maturities of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.82%, and had various original maturity dates through December 2026.

As of September 30, 2022, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.0 million and a fair value of $0.2 million. As of December 31, 2021, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $0.9 million and a fair value of $0.1 million. PFL places loans on non-accrual status when they are over 120 days past due. As of September 30, 2022 and December 31, 2021, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.1 million, respectively.

5. Servicing Assets

PFL accounts for Servicing Assets at their estimated fair values with changes in fair values recorded in Servicing Fees, Net on the condensed consolidated statements of operations. The initial asset or liability is recognized when PFL sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The total recognized loss on the sale of such Borrower Loans was $0.3 million for the three months ended September 30, 2022 and gain of $2.4 million for the three months ended September 30, 2021. The total recognized gain on sale of such Borrower Loans was $5.6 million and $6.1 million for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, Borrower Loans that were sold, but for which PFL retained servicing rights, had a total outstanding principal balance of $3.4 billion, original terms of 24, 36, 48 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 33.00%, and various original maturity dates through September 2027. As of December 31, 2021, Borrower Loans that were sold, but for which PFL retained servicing rights, had a total outstanding principal balance of $2.5 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.82%, and various original maturity dates through December 2026.

Contractually-specified servicing fees and ancillary fees totaled $9.1 million and $8.8 million for the three months ended September 30, 2022 and 2021, respectively, and $24.1 million and $27.1 million for the nine months ended September 30, 2022 and 2021, respectively, and are included on the condensed consolidated statements of operations in Servicing Fees, Net.

Fair Value Valuation Method

PFL 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 are those that PFL considers significant to the estimated fair values of the Level 3 Servicing Assets. The following is a description of the significant unobservable inputs provided in the table.

Market Servicing Rate

PFL 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. With the assistance of a valuation specialist, PFL estimates these market servicing rates based on observable market rates for other loan types in the industry and bids from sub-servicing providers, adjusted for the unique loan attributes that are present in the specific loans that PFL sells and services and information from backup service providers.

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. Management used a range of discount rates for the Servicing Assets 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 PFL’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

49

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 PFL expects to collect fees on the Borrower Loans, which is used to project future servicing revenues.

6. Income Taxes

PFL incurred no income tax provision for the nine months ended September 30, 2022 and 2021. PFL is a U.S. disregarded entity and its income and loss are included in the income tax reporting of its parent, PMI. Since PMI is in a taxable loss position, is not currently subject to income taxes, and has fully reserved against its deferred tax asset, the net effective tax rate for PFL is 0%.

7. Fair Value of Assets and Liabilities

PFL has elected to record certain financial instruments at fair value on the balance sheet. PFL classifies Borrower Loans, Loans Held for Sale and Notes as financial instruments and assesses their fair value each on a quarterly basis for financial statement presentation purposes. Gains and losses on these financial instruments are shown separately on the condensed consolidated statements of operations.

As of September 30, 2022 and December 31, 2021, the discounted cash flow methodology used to estimate the Notes fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the table below, 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.

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. PFL did not transfer any assets or liabilities in or out of Level 3 for the nine months ended September 30, 2022 or 2021.

Financial Instruments Recorded at Fair Value

The fair value of the Borrower Loans 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 and Notes include default and prepayment rates derived primarily from historical performance and discount rates that reflect estimates of the rates of return that investors would require when investing in financial instruments with similar characteristics.

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The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):

September 30, 2022	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans, at Fair Value	$	—	$	—	$	302,971	$	302,971
Servicing Assets	—		—		14,074		14,074
Total Assets	$	—	$	—	$	317,045	$	317,045
Liabilities:
Notes, at Fair Value	$	—	$	—	$	301,079	$	301,079
Loan Trailing Fee Liability	—		—		3,062		3,062
Total Liabilities	$	—	$	—	$	304,141	$	304,141

December 31, 2021	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans, at Fair Value	$	—	$	—	$	267,626	$	267,626
Servicing Assets	—		—		9,796		9,796
Total Assets	$	—	$	—	$	277,422	$	277,422
Liabilities:
Notes, at Fair Value	$	—	$	—	$	265,985	$	265,985
Loan Trailing Fee Liability	—		—		2,161		2,161
Total Liabilities	$	—	$	—	$	268,146	$	268,146

As PFL’s Borrower Loans, Notes, Servicing Assets and loan trailing fee liability do not trade in an active market with readily observable prices, PFL 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 PFL’s Level 3 fair value measurements at the dates presented:

	Range
Borrower Loans and Notes	September 30, 2022	December 31, 2021
Discount rate	5.5% - 18.1%	4.3% - 13.9%
Default rate	2.0% - 14.0%	2.0% - 13.5%

	Range
Servicing Assets	September 30, 2022	December 31, 2021
Discount rate	15.0% - 25.0%	15.0% - 25.0%
Default rate	1.5% - 14.3%	1.5% - 14.1%
Prepayment rate	9.8% - 27.4%	10.2% - 32.3%
Market servicing rate (1) (2)	0.648% - 0.842%	0.648% - 0.842%

(1) Servicing assets associated with loans enrolled in a relief program offered by the Company in response to the COVID-19 pandemic as of September 30, 2022 and December 31, 2021 were measured using a market servicing rate assumption of 84.2 basis points. This rate was estimated using a multiplier consistent with observable market rates for other loan types, applied to the base market servicing rate assumption of 64.8 basis points.

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(2) Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of September 30, 2022 and December 31, 2021, the market rate for collection fees and non-sufficient fund fees was assumed to be 6 basis points and 6 basis points, respectively, for a total market servicing rate range of 70.8 - 90.2 basis points and a total market servicing rate of 70.8 - 90.2 basis points, respectively.

	Range
Loan Trailing Fee Liability	September 30, 2022	December 31, 2021
Discount rate	15.0% - 25.0%	15.0% - 25.0%
Default rate	1.5% - 14.3%	1.5% - 14.1%
Prepayment rate	9.8% - 27.4%	10.2% - 32.3%

Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis

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)
	Assets				Liabilities
	Borrower  Loans		Loans Held for Sale		Notes		Total
Balance at January 1, 2022	$	267,626	$	—	$	(265,985)	$	1,641
Originations	214,271		2,271,312		(214,107)		2,271,476
Principal repayments	(156,706)		—		158,105		1,399
Borrower Loans sold to third parties	(1,326)		(2,271,312)		—		(2,272,638)
Other changes	216		—		(320)		(104)
Change in fair value	(21,110)		—		21,228		118
Balance at September 30, 2022	$	302,971	$	—	$	(301,079)	$	1,892

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Assets				Liabilities
	Borrower  Loans		Loans Held for Sale		Notes		Total
Balance at January 1, 2021	$	209,670	$	—	$	(208,379)	$	1,291
Originations	172,082		1,248,316		(172,231)		1,248,167
Principal repayments	(125,672)		—		126,528		856
Borrower Loans sold to third parties	(1,069)		(1,248,316)		—		(1,249,385)
Other changes	(223)		—		205		(18)
Change in fair value	(108)		—		635		527
Balance at September 30, 2021	$	254,680	$	—	$	(253,242)	$	1,438

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Assets				Liabilities
	Borrower  Loans		Loans Held for Sale		Notes		Total
Balance at July 1, 2022	$	301,893	$	—	$	(300,521)	1,372
Originations	70,486		978,664		(69,797)		979,353
Principal repayments	(59,750)		—		60,375		625
Borrower Loans sold to third parties	(502)		(978,664)		—		(979,166)
Other changes	64		—		(207)		(143)
Change in fair value	(9,220)		—		9,071		(149)
Balance at September 30, 2022	$	302,971	$	—	$	(301,079)	$	1,892

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Assets				Liabilities
	Borrower  Loans		Loans Held for Sale		Notes		Total
Balance at July 1, 2021	$	236,844	$	—	$	(236,041)	$	803
Originations	64,473		455,642		(64,028)		456,087
Principal repayments	(45,338)		—		45,486		148
Borrower Loans sold to third parties	(300)		(455,642)		—		(455,942)
Other changes	(15)		—		(14)		(29)
Change in fair value	(984)		—		1355		371
Balance at September 30, 2021	$	254,680	$	—	$	(253,242)	$	1,438

The following tables present additional information about Level 3 Servicing Assets recorded at fair value (in thousands):

	Servicing Assets
Balance as of January 1, 2022	$	9,796
Additions	11,383
Less: Changes in fair value	(7,105)
Balance as of September 30, 2022	$	14,074

	Servicing Assets
Balance as of January 1, 2021	$	11,088
Additions	6,676
Less: Changes in fair value	(7,796)
Balance as of September 30, 2021	$	9,968

	Servicing Assets
Balance as of July 1, 2022	$	11,699
Additions	4,903
Less: Changes in fair value	(2,528)
Balance as of September 30, 2022	$	14,074

	Servicing Assets
Balance as of July 1, 2021	10,389
Additions	2,300
Less: Changes in fair value	(2,721)
Balance as of September 30, 2021	$	9,968

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Loan Trailing Fee Liability

The fair value of the Loan Trailing Fee Liability represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and default rates using a discounted cash flow model. The assumptions used are the same as those used for the valuation of Servicing Assets, as described below.

The following tables present additional information about Level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):

	Loan Trailing Fee Liability
Balance as of January 1, 2022	$	2,161
Issuances	2,286
Cash payment of Loan Trailing Fee	(1,485)
Change in fair value	100
Balance as of September 30, 2022	$	3,062

	Loan Trailing Fee Liability
Balance as of January 1, 2021	$	2,233
Issuances	1,289
Cash payment of Loan Trailing Fee	(1,587)
Change in fair value	248
Balance as of September 30, 2021	$	2,183

	Loan Trailing Fee Liability
Balance as of July 1, 2022	2,574
Issuances	964
Cash payment of Loan Trailing Fee	(475)
Change in fair value	(1)
Balance as of September 30, 2022	$	3,062

	Loan Trailing Fee Liability
Balance as of July 1, 2021	2,145
Issuances	472
Cash payment of Loan Trailing Fee	(521)
Change in fair value	87
Balance as of September 30, 2021	$	2,183

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Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Key economic assumptions are used to compute the fair value of Borrower Loans. The sensitivity of the fair value to immediate changes in assumptions at September 30, 2022 and December 31, 2021 for Borrower Loans are presented in the following table (in thousands, except percentages).

Borrower Loans:	September 30, 2022			December 31, 2021
Fair value, using the following assumptions:	$	302,971		$	267,626
Weighted-average discount rate	8.32		%	5.76		%
Weighted-average default rate	11.78		%	10.70		%
Fair value resulting from:
100 basis point increase in discount rate	$	299,972		$	265,104
200 basis point increase in discount rate	$	297,048		$	262,499
Fair value resulting from:
100 basis point decrease in discount rate	$	306,048		$	270,520
200 basis point decrease in discount rate	$	309,206		$	273,337
Fair value resulting from:
Applying a 1.1 multiplier to default rate	$	300,304		$	265,435
Applying a 1.2 multiplier to default rate	$	297,654		$	263,107
Fair value resulting from:
Applying a 0.9 multiplier to default rate	$	305,654		$	270,133
Applying a 0.8 multiplier to default rate	$	308,353		$	272,505

Key economic assumptions are used to compute the fair value of Notes. The sensitivity of the fair value to immediate changes in assumptions at September 30, 2022 and December 31, 2021 for Notes funded through the Note Channel are presented in the following table (in thousands, except percentages).

Notes	September 30, 2022			December 31, 2021
Fair value, using the following assumptions:	$	301,079		$	265,985
Weighted-average discount rate	8.32		%	5.76		%
Weighted-average default rate	11.78		%	10.70		%
Fair value resulting from:
100 basis point increase in discount rate	$	298,094		$	263,326
200 basis point increase in discount rate	$	295,184		$	260,735
Fair value resulting from:
100 basis point decrease in discount rate	$	304,141		$	268,714
200 basis point decrease in discount rate	$	307,284		$	271,516
Fair value resulting from:
Applying a 1.1 multiplier to default rate	$	298,411		$	263,644
Applying a 1.2 multiplier to default rate	$	295,761		$	261,318
Fair value resulting from:
Applying a 0.9 multiplier to default rate	$	303,762		$	268,340
Applying a 0.8 multiplier to default rate	$	306,462		$	270,711

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Key economic assumptions are used to compute the fair value of Servicing Assets. The sensitivity of the current fair value to immediate changes in assumptions at September 30, 2022 and December 31, 2021 for Servicing Assets are presented in the following table (in thousands, except percentages).

Servicing Assets	September 30, 2022			December 31, 2021
Fair value, using the following assumptions:	$	14,074		$	9,796
Weighted-average market servicing rate	0.649		%	0.650		%
Weighted-average prepayment rate	20.85		%	20.82		%
Weighted-average default rate	13.91		%	12.24		%
Fair value resulting from:
Market servicing rate increase of 0.025%	$	13,168		$	9,171
Market servicing rate decrease of 0.025%	$	14,980		$	10,421
Fair value resulting from:
Applying a 1.1 multiplier to prepayment rate	$	13,734		$	9,580
Applying a 0.9 multiplier to prepayment rate	$	14,421		$	10,015
Fair value resulting from:
Applying a 1.1 multiplier to default rate	$	13,874		$	9,667
Applying a 0.9 multiplier to default rate	$	14,275		$	9,926

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. Commitments and Contingencies

Operating Commitments

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. On June 25, 2021, PMI, along with PFL, and WebBank entered into: (i) a Fifth Amendment (the “Sale Agreement Amendment”) to the Asset Sale Agreement, dated July 1, 2016, between PFL and WebBank (the “Sale Agreement”); (ii) a Sixth Amendment (the “Marketing Agreement Amendment”) to the Marketing Agreement, dated July 1, 2016, between PMI and WebBank (the “Marketing Agreement”); and (iii) a Third Amendment (the “Purchase Agreement Amendment”) to the Stand By Purchase Agreement, dated July 1, 2016, between PMI and WebBank (the “Purchase Agreement” and, collectively with the Sale Agreement and the Marketing Agreement, the “Origination and Sale Agreements”). The Sale Agreement Amendment, the Marketing Agreement Amendment, and the Purchase Agreement Amendment, collectively, are hereinafter referred to as the “Amendments.”

The Sale Agreement Amendment, among other things, extends the term of the Sale Agreement to February 1, 2025 and amends certain collateral requirements under the Sale Agreement. The Marketing Agreement Amendment, among other things, extends the term of the Marketing Agreement to February 1, 2025 and sets forth the amended terms and conditions of certain fees owed by the Registrants to WebBank under the Marketing Agreement. The Purchase Agreement Amendment amends certain collateral requirements of Prosper under the Purchase Agreement.

Pursuant to the Marketing Agreement Amendment, 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 the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $100,000 through February 1, 2025, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining three months of 2022 is $0.3 million. The minimum fee is then $1.2 million for 2023 and 2024, and $0.1 million in 2025.

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Additionally, under the agreement with WebBank, Prosper is required to maintain 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. As of September 30, 2022, the Company was in compliance with the covenant.

Loan Purchase Commitments

Under the terms of PFL’s agreement with WebBank, PFL is committed to purchase $24.1 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended September 30, 2022. PFL will purchase these Borrower Loans within the first three business days of the quarter ending December 31, 2022.

Repurchase Obligation

Under the terms of the loan purchase agreements between PFL and investors that participate in the Whole Loan Channel, PFL 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. PFL 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 as of September 30, 2022 is $3.4 billion. PFL has accrued $0.3 million and $0.3 million as of September 30, 2022 and December 31, 2021, respectively, in regard to this obligation.

Regulatory Contingencies

PFL accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, PFL reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If PFL determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, PFL does not accrue for a potential litigation loss. If an unfavorable outcome is probable and PFL can estimate a range of outcomes, PFL record the amount management considers to be the best estimate within the range of potential losses that are both probable and estimable; however, if management cannot quantify the amount of the estimated loss, then PFL records the low end of the range of those potential losses.

West Virginia Matter

In January 2018, the Attorney General of the State of West Virginia (the “Attorney General”) initiated discussions regarding certain acts and practices of PMI and PFL that the Attorney General asserts may have violated the West Virginia Consumer Credit and Protection Act (the “Consumer Act”), to which PMI responded with such information as was requested by the Attorney General. Following a period of more than a year with limited to no communication, in February 2020, PMI received a proposed Assurance of Discontinuance (an “AOD”) from the Attorney General requesting that, without in any way admitting that any of its prior practices were in violation of the Consumer Act, PMI agreed to certain terms and conditions regarding its past and potential future conduct of its business with respect to customers in West Virginia, including a release by the Attorney General of any claims it may have related to the matters identified in the AOD. PMI is evaluating and intends to discuss the proposed terms in the AOD with the Attorney General.

We cannot predict the outcome of the matter and any potential fines or penalties, if any, that may arise from the matter. Further, we are unable to estimate a range of outcomes and as a result no accrual has been made.

No loans have been originated through the PFL platform to West Virginians since June 2016.

9. Related Parties

Since inception, PFL has engaged in various transactions with its directors, executive officers, PMI, and immediate family members and other affiliates of its directors, executive officers, and PMI. PFL believes that all of the transactions described below were made on terms no less favorable to PFL than could have been obtained from unaffiliated third parties.

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PFL’s executive officers and directors who are not executive officers participate in its marketplace by placing bids and purchasing Notes. The aggregate amount of the Notes purchased and the income earned by parties deemed to be related parties of PFL for the three and nine months ended September 30, 2022 and 2021 are summarized below (in thousands):

	Aggregate Amount of Notes Purchased				Interest Earned on Notes
	Three Months Ended September 30,				Three Months Ended September 30,
Related Party	2022		2021		2022		2021
Executive officers and management	$	8	$	9	$	2	$	2
Directors (excluding executive officers and management)	—		—		—		—
Total	$	8	$	9	$	2	$	2

	Aggregate Amount of Notes Purchased the Nine Months Ended September 30,				Interest Earned on Notes the Nine Months Ended September 30,
Related Party	2022		2021		2022		2021
Executive officers and management	$	26	$	26	$	5	$	5
Directors (excluding executive officers and management)	—		—		—		—
Total	$	26	$	26	$	5	$	5

The balance of Notes held by officers and directors who are not executive officers are as follows (in thousands):

	Notes Balance as of
Related Party	September 30, 2022		December 31, 2021
Executive officers and management	$	45	$	41
Directors (excluding executive officers and management)	—		—
Total	$	45	$	41

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q 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” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper’s Annual Report on Form 10-K for the year ended December 31, 2021.

PROSPER MARKETPLACE, INC.

Overview

Our vision is to transform lives by providing affordable financial solutions through the simplest and most trusted platform. We currently offer access to three lending products, each of which supports our vision: (i) unsecured personal loans through a personal loan marketplace which connects eligible consumer borrowers with individual and institutional investors, (ii) a Credit Card product available to eligible borrowers, and (iii) home equity products available to eligible homeowners.

We believe our business model has key advantages relative to traditional banks, 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) use of advanced technology and machine learning to deliver simple, fast, personalized, and transparent solutions that can improve consumers’ financial health as they move across the credit spectrum. We do not operate physical branches or incur expenses related to infrastructure like traditional banks or consumer finance institutions. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, underwriting, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.

During the year ended December 31, 2021, our marketplace facilitated $1.9 billion in Borrower Loan originations, of which $1.7 billion were funded through our Whole Loan Channel, representing 88% of the total Borrower Loans originated through our marketplace during this period. From inception through September 30, 2022, our marketplace has facilitated $22.6 billion in Borrower Loan originations, of which $20.3 billion were funded through our Whole Loan Channel, representing 90% of the total Borrower Loans originated through our marketplace during this period. For the three months ended September 30, 2022, our marketplace facilitated $1,043.2 million in Borrower Loan originations, an increase of 103% from the same period in 2021. The percentage of loans funded through the Whole Loan Channel for the three months ended September 30, 2022 was 94%.

As a credit marketplace, we believe our customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors and, consequently, could negatively affect our business and results of operations.

Recent Developments

Loan Term Expansion

In September 2022, we started offering Borrower Loans with 24- and 48-month terms through our marketplace, as an expansion to our existing offering of 36- and 60-month loan terms. Borrower Loans with these expanded terms were available solely for investment through our Whole Loan Channel as of September 30, 2022, but were made available through our Retail Channel starting in October 2022.

Credit Card

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In December 2021, we launched our Prosper Card product in partnership with Coastal Community Bank (“Coastal”), through which eligible consumers are extended unsecured credit through Prosper-branded Credit Cards. In accordance with our Program Agreement with Coastal, the receivables associated with these Credit Cards are maintained on the balance sheet of Coastal. Customer accounts are then randomly designated as either Prosper Allocations or Coastal Allocations on an approximate 90% to 10% split, respectively. Each party receives 100% of the interest income and is responsible for the credit losses on its allocated customer accounts. Credit Card receivables are not available on our personal loan marketplace for investment purposes. Further details pertaining to our Credit Card product are included in Notes 2 and 5 of the accompanying condensed financial statements.

Key Operating and Financial Metrics (in thousands)

The following table displays our key operating and financial metrics for the three and nine months ended September 30, 2022 and 2021.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2022		2021	2022		2021
Loan Originations	$	1,043,213	514,220	$	2,495,600	1,422,891
Transaction Fees, Net	50,778		23,626	120,249		65,397
Whole Loans Outstanding (1)	3,391,926		2,549,123	3,391,926		2,549,123
Servicing Fees, Net	4,153		3,840	11,514		10,807
Total Net Revenue	60,410		36,786	154,264		104,636
Net Income (Loss)	8,621		(88,061)	87,918		(138,755)
Adjusted EBITDA (2)	521		3,032	(140)		7,722

(1) Balance as of September 30.

(2) Adjusted EBITDA is a non-GAAP financial measure. For more information regarding this measure and a reconciliation to Net Income (Loss), the most comparable US GAAP measure, see “Non-GAAP Financial Measure - Adjusted EBITDA.”

Loan Originations

From inception through September 30, 2022, a total of 1,830,855 Borrower Loans totaling $22.6 billion were originated through Prosper’s marketplace.

For the three months ended September 30, 2022, 96,347 Borrower Loans totaling $1,043.2 million were originated through Prosper’s marketplace, compared to 49,124 Borrower Loans totaling $514.2 million during the three months ended September 30, 2021. This represents an increase of 96% in terms of the number of loans and an increase of 103% in the dollar amount of loans. The originations increase for the quarter ended September 30, 2022 versus the quarter ended September 30, 2021 was due primarily to an improved competitive and pricing environment, as well as more normalized underwriting requirements, which is also reflective of the general economic recovery since the start of the COVID-19 pandemic.

Loan origination volume by Prosper Rating was as follows for the periods presented (in millions, except percentages):

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	Three Months Ended September 30,								Nine Months Ended September 30,
	2022				2021				2022				2021
	Amount		%		Amount		%		Amount		%		Amount		%
AA	$	164.1	16	%	$	60.1	12	%	$	331.1	13	%	$	200.0	14	%
A	151.7		15	%	96.8		19	%	377.7		15	%	296.4		21	%
B	197.1		18	%	83.7		16	%	413.2		17	%	215.5		15	%
C	109.9		11	%	73.8		14	%	316.0		13	%	164.3		12	%
D	92.4		9	%	34.0		7	%	223.8		9	%	61.8		4	%
E	123.3		12	%	11.6		2	%	243.4		10	%	17.8		1	%
HR	11.0		1	%	0.2		—	%	21.4		1	%	0.8		—	%
Other (1)	193.7		18	%	154.0		30	%	569.0		22	%	466.3		33	%
Total	$	1,043.2			$	514.2			$	2,495.6			$	1,422.9

(1) Represents loans originated through the Prosper platform via the Whole Loan Channel but not assigned Prosper Ratings. These loans are sold only to institutional investors and based on specific underwriting criteria and custom risk models developed by these investors.

For the three and nine months ended September 30, 2022, the mix of originations on the Prosper platform was generally reflective of more normalized underwriting standards as compared to the corresponding periods in 2021, as the economy continued to recover from the COVID-19 pandemic. A significant number of loans are not assigned Prosper ratings as the Company continues to sell higher risk loans through the Whole Loan Channel to institutional investors that rely on their own custom risk models to underwrite the loans.

Whole Loans Outstanding

We sell Borrower Loans through our Whole Loan Channel, and the outstanding balance of these loans serves as a primary driver of our Servicing Assets. Whole loans outstanding increased $842.8 million or 33% from September 30, 2021 to September 30, 2022. This increase is primarily due to the increase in originations in the past year, driven by the factors described in the Loan Originations section, above. We have also continued to purchase and hold loans in consolidated warehouse trusts, increasing the overall balance of outstanding whole loans.

Net Income (Loss)

See the section titled “Results of Operations” below, for the discussion on significant changes in Net Income (Loss) year-over-year.

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Results of Operations

Overview

The following tables summarize Prosper’s net income (loss) for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):

	Three Months Ended September 30,
	2022		2021		Change		% Change
Total Net Revenues	$	60,410	$	36,786	$	23,624	64	%
Total Expenses	51,769		124,826		(73,057)		(59)	%
Net Income (Loss) Before Taxes	8,641		(88,040)		96,681		(110)	%
Income Tax Expense	(20)		(21)		1		(5)	%
Net Income (Loss)	$	8,621	$	(88,061)	$	96,682	(110)	%

	Nine Months Ended September 30,
	2022		2021		Change		% Change
Total Net Revenues	154,264		$	104,636	$	49,628	47	%
Total Expenses	66,286		$	243,328	(177,042)		(73)	%
Net Income (Loss) Before Taxes	87,978		(138,692)		226,670		n/m
Income Tax Expense	(60)		$	(63)	3		(5)	%
Net Income (Loss)	$	87,918	$	(138,755)	$	226,673	n/m

n/m: not meaningful

Total Net Revenues for the three months ended September 30, 2022 increased $23.6 million as compared to the same period in 2021. The increase was primarily attributable to a $27.2 million increase in Transaction Fees, Net, and a $0.3 million increase in Servicing Fees, Net, both of which are due to the increase in originations during this time, as discussed above. There was also a $0.5 million increase in Other Revenues, driven primarily by additional credit referral and incentive fees due to increased personal loan application volume. These increases were partially offset by a $3.1 million decrease in (Loss) Gain on Sale of Borrower Loans, due to additional rebates provided to whole loan investors driven by market volatility and rebates offered by competitors. There was also a $1.6 million decrease in Total Interest Income (Expense), Net, due primarily to the deconsolidation of securitized Borrower Loans in the third quarter of 2021. Finally, there was also a $0.4 million increase in Total Net Revenues from Change in Fair Value of Financial Instruments, Net, due primarily to gains on our Credit Card derivative asset and LIBOR rate swaption, as well as the deconsolidation of Certificates Issued by Securitization Trust in the third quarter of 2021 (as negative fair value adjustments were recognized on these certificates in the prior year). These gains were partially offset by volatility in the capital markets and higher interest rates, which led to negative fair value adjustments on the loans held in consolidated warehouse trusts.

Total Expenses for the three months ended September 30, 2022 decreased $73.1 million as compared to the same period in 2021, primarily due to the Change in Fair Value of Convertible Preferred Stock Warrants, which is in turn driven by changes in the fair value of the underlying Convertible Preferred Stock. Specifically, the gain for the three months ended September 30, 2022 totaled $11.4 million, which compared to a loss of $86.7 million for the corresponding period in 2021, a change of $98.1 million. This decrease was partially offset by a combined $26.8 million increase in Origination and Servicing, Sales and Marketing and General and Administrative expenses, as costs increased to support the higher originations for the three months ended September 30, 2022. In the third quarter of 2021, we recognized a $1.5 million one-time loss related to the deconsolidation of our securitization VIEs. Accordingly, the net income for the three months ended September 30, 2022 increased $96.7 million when compared to the net loss for the three months ended September 30, 2021.

Total Net Revenues for the nine months ended September 30, 2022 increased $49.6 million as compared to the same period in 2021. The increase was primarily attributable to a $54.9 million increase in Transaction Fees, Net, and a $0.7 million increase in Servicing Fees, Net, both of which are due to the increase in originations during this time, as discussed above. There was also a $2.5 million increase in Other Revenues, driven by additional credit referral and incentive fees due to increased personal loan application volume. These increases were partially offset by a $1.0 million decrease in (Loss) Gain on Sale of Borrower Loans, due primarily to additional rebates provided to whole loan investors driven by market volatility and rebates offered by competitors. There was also a $5.9 million decrease in Total Interest Income (Expense), Net, due primarily to the

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deconsolidation of securitized Borrower Loans in the third quarter of 2021, partially offset by additional interest income generated from loans held in consolidated warehouse trusts. Finally, there was also a $1.5 million decrease in Total Net Revenues from Change in Fair Value of Financial Instruments, Net, due primarily to volatility in the capital markets and higher interest rates, which led to negative fair value adjustments on the loans held in consolidated warehouse trusts. These negative fair value adjustments were partially offset by gains on our Credit Card derivative since the product launched at the end of 2021.

Total Expenses for the nine months ended September 30, 2022 decreased $177.0 million as compared to the same period in 2021, primarily due to the Change in Fair Value of Convertible Preferred Stock Warrants, which is in turn driven by changes in the fair value of the underlying Convertible Preferred Stock. Specifically, the gain for the nine months ended September 30, 2022 totaled $88.9 million, which compared to a loss of $136.8 million for the corresponding period in 2021, a change of $225.7 million. We also recorded an $8.6 million Gain on Forgiveness of PPP Loan for the nine months ended September 30, 2022, as the U.S. Small Business Administration (“SBA”) formally forgave our PPP loan in March 2022, which is discussed in Note 10 of the accompanying condensed consolidated financial statements. Additionally, in the third quarter of 2021, we recognized a $1.5 million one-time loss related to the deconsolidation of our securitization VIEs. These decreases were partially offset by a combined $59.2 million increase in Origination and Servicing, Sales and Marketing and General and Administrative expenses, as costs increased to support the higher originations for the nine months ended September 30, 2022. Accordingly, the net income for the nine months ended September 30, 2022 increased $226.7 million when compared to the net loss for the nine months ended September 30, 2021.

Revenues

The following tables summarize our revenues for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):

	Three Months Ended September 30,
	2022		2021		$ Change		% Change
Operating Revenues:
Transaction Fees, Net	$	50,778	$	23,626	$	27,152	115	%
Servicing Fees, Net	4,153		3,840		313		8	%
(Loss)/Gain on Sale of Borrower Loans	(1,145)		1,928		(3,073)		(159)	%
Other Revenues	1,542		1,059		483		46	%
Total Operating Revenues	55,328		30,453		24,875		82	%
Interest Income (Expenses):
Interest Income on Borrower Loans and Loans Held for Sale	22,351		21,495		856		4	%
Interest Expense on Financial Instruments	(15,609)		(13,091)		(2,518)		19	%
Total Interest Income (Expense), Net	6,742		8,404		(1,662)		(20)	%
Change in Fair Value of Financial Instruments, Net	(1,660)		(2,071)		411		(20)	%
Total Net Revenues	$	60,410	$	36,786	$	23,624	64	%

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	Nine Months Ended September 30,
	2022		2021		$ Change		% Change
Operating Revenues:
Transaction Fees, Net	$	120,249	$	65,397	$	54,852	84	%
Servicing Fees, Net	11,514		$	10,807	707		7	%
Gain on Sale of Borrower Loans	3,886		$	4,917	(1,031)		(21)	%
Other Revenues	5,067		$	2,524	2,543		101	%
Total Operating Revenues	140,716		83,645		57,071		68	%
Interest Income (Expenses):
Interest Income on Borrower Loans and Loans Held for Sale	61,013		$	64,441	(3,428)		(5)	%
Interest Expense on Financial Instruments	(41,479)		$	(38,969)	(2,510)		6	%
Total Interest Income (Expense), Net	19,534		25,472		(5,938)		(23)	%
Change in Fair Value of Financial Instruments, Net	(5,986)		$	(4,481)	(1,505)		34	%
Total Net Revenues	$	154,264	$	104,636	$	49,628	47	%

n/m: not meaningful

Transaction Fees, Net

We earn a transaction fee upon the successful origination of all Borrower Loans facilitated through our marketplace. Prosper receives payments from WebBank as compensation for the activities we perform on behalf of WebBank. Our fee is determined by the term and credit grade of the Borrower Loans that we facilitate on our marketplace and WebBank originates. We record the transaction fee revenue net of any fees paid by us to WebBank.

We also earn various program fees from our Credit Card product, such as interchange fees, annual fees and late fees, and record them within Transaction Fees, Net.

Transaction fees increased $27.2 million, or 115%, for the three months ended September 30, 2022, as compared to the corresponding period in 2021. This increase is generally consistent with the higher origination volume discussed above. We also recognized approximately $2.2 million in program fees under our Credit Card product for the three months ended September 30, 2022.

Transaction fees increased $54.9 million, or 84%, for the nine months ended September 30, 2022, as compared to the corresponding period in 2021. This increase is generally consistent with the higher origination volume discussed above. We also recognized approximately $3.7 million in program fees under our Credit Card product for the nine months ended September 30, 2022.

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Servicing Fees, Net

Investors who purchase Borrower Loans from Prosper through the Whole Loan Channel typically pay us a servicing fee, which is generally set at 1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. The servicing fee compensates us for the costs incurred in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. We record Servicing Fees from investors as a component of operating revenues when received. We also include any collection fees received, net of collection agency expenses, in Servicing Fees.

In addition, we are contractually obligated to service the entire portfolio under our Credit Card product. Our banking partner, Coastal, pays us a servicing fee of 1% per annum of the daily outstanding principal balance of all cards designated as Coastal allocations (approximately 10% of the portfolio). To the extent that these contractual fees are less than adequate compensation that would be required by a market participant to service the entire portfolio, a servicing obligation is recorded. Changes to this servicing obligation are included in Servicing Fees, Net.

The increase of $0.3 million, or 8%, in Servicing Fees for the three months ended September 30, 2022, as compared to the corresponding period in 2021, is primarily due to a $1.2 million increase in whole loan servicing revenues during this period, due to the increase in the balance of whole loans outstanding, as discussed above. This was partially offset by a $1.1 million increase in the Credit Card servicing obligation for the three months ended September 30, 2022, due to the growth in the portfolio.

The increase of $0.7 million, or 7%, in Servicing Fees for the nine months ended September 30, 2022, as compared to the corresponding period in 2021, is primarily due to an increase of $1.3 million in whole loan servicing revenues during this period, due to the increase in the balance of whole loans outstanding. There was also a $0.3 million increase in debt sale fees, generally due to the increase in charge-offs as compared to the prior year. We also reduced our reliance on external collection agencies during this time, which resulted in a $1.3 million increase. We utilized these agencies more in the prior year to address enhanced collection efforts required during the COVID-19 pandemic. These increases were partially offset by a $2.4 million increase in the Credit Card servicing obligation for the nine months ended September 30, 2022, due to the growth in the portfolio.

(Loss) Gain on Sale of Borrower Loans

(Loss) Gain on Sale of Borrower Loans consists of net gains on Borrower Loans sold through the Whole Loan Channel, net of any rebates provided at the time of sale. In the third quarter 2022, due to market volatility and rebates offered by competitors, we provided additional rebates to our whole loan investors. For the three and nine months ended September 30, 2022, these rebates increased $5.4 million (for both periods). Excluding the impact of these rebates, the remaining increases in Gain on Sale of Borrower Loans for the three and nine months ended September 30, 2022, as compared to the corresponding periods in 2021, were primarily due to increases in the volume of whole loans sold due to higher originations, as discussed above.

Other Revenues

Other Revenues consists primarily of credit referral and incentive fees. Credit referral fees are earned from partner companies for the referral of customers on our platform, while incentive fees are earned from partner companies through our incentive programs. The $0.5 million increase in Other Revenues for the three months ended September 30, 2022, as compared to the corresponding period in 2021, was due primarily to $0.9 million in additional credit referral fees earned as a result of increased personal loan application volume directed to our credit referral partners. This increase was partially offset by a $0.4 million decrease in incentive fees for the period.

The $2.5 million increase in Other Revenues for the nine months ended September 30, 2022, as compared to the corresponding period in 2021, was due primarily to $2.6 million in additional credit referral fees earned as a result of increased personal loan application volume directed to our credit referral partners. This increase was partially offset by a $0.1 million decrease in incentive fees for the period.

Interest Income on Borrower Loans and Loans Held for Sale and Interest Expense on Financial Instruments

We recognize Interest Income on Borrower Loans and Loans Held for Sale using the accrual method based on the stated interest rate to the extent we believe it to be collectible. We record interest expense on the corresponding Notes and Warehouse Lines based on the contractual interest rates. The interest rate on Notes is generally 1% lower than the interest rate on the corresponding Borrower Loans to compensate us for servicing the underlying Borrower Loans.

The decrease of $1.7 million, or 20%, in Total Interest Income (Expense), Net for the three months ended September 30, 2022, as compared to the corresponding period in 2021, was primarily due to the deconsolidation of securitized Borrower

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Loans, as well as the associated Notes and Certificates Issued by Securitization Trust, from our balance sheet on September 27, 2021. Net interest income from securitizations decreased approximately $2.1 million for the three months ended September 30, 2022. This was partially offset by a $0.3 million increase in net interest income due to a decrease in the amortization of warehouse line and securitization setup costs.

The decrease of $5.9 million, or 23%, in Total Interest Income (Expense), Net for the nine months ended September 30, 2022, as compared to the corresponding period in 2021, was also primarily due to the deconsolidation of securitized Borrower Loans, as well as the associated Notes and Certificates Issued by Securitization Trust, from our balance sheet on September 27, 2021. Net interest income from securitizations decreased approximately $8.3 million for the nine months ended September 30, 2022. This was partially offset by a $1.0 million increase in net interest income from Loans Held for Sale, as we increased the usage of our Warehouse Lines and the outstanding principal balance on those loans increased. Additionally, there was a $0.8 million increase in net interest income due to a decrease in the amortization of warehouse line and securitization setup costs, and a $0.5 million increase related to net interest income on Borrower Loans funded through the Note Channel.

Change in Fair Value of Financial Instruments, Net

We record Borrower Loans, Loans Held for Sale, Notes and the Credit Card derivative (see Note 5 of the accompanying condensed consolidated financial statements) at fair value. Prior to the deconsolidation of our securitization entities on September 27, 2021, we also recorded Certificates Issued by Securitization Trust at fair value. Changes in the fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of the Notes due to their borrower payment-dependent structure. Our obligation to pay principal and interest on Notes is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of the servicing fee, which is generally 1.0% of the outstanding balance.

We use Warehouse Lines to finance the purchase of Loans Held for Sale for the purpose of earning Net Interest Income and contributing to securitization transactions. Loans Held for Sale consist primarily of loans held in warehouse trusts. Changes in the fair value of Loans Held for Sale are not offset by changes in fair value of Warehouse Lines because Warehouse Lines are carried at amortized cost. See Note 10 of the accompanying notes to our condensed consolidated financial statements for more details on Warehouse Lines.

We earn interest income on loans held in warehouse trusts during the period we own or consolidate the loans, which partially offsets changes in the fair value of those loans. The following table illustrates the composition of the loans held in warehouse trusts by Prosper Rating, which is an indicator of the credit quality:

	Nine Months Ended September 30,
	2022		2021
Loans Held for Sale(1):
AA	23	%	22	%
A	28	%	33	%
B	24	%	29	%
C	17	%	13	%
D	6	%	2	%
E	2	%	1	%
HR	—	%	—	%
Total	100	%	100	%
(1) The percentages are calculated using the weighted average of month-end principal balances of Loans Held for Sale by Prosper Rating.

Fair values of Borrower Loans, Loans Held for Sale, Notes and the Credit Card derivative are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The key assumptions used include default and prepayment rates derived primarily from historical performance, and discount rates based on estimates of the rates of return that investors would require when investing in other financial instruments with similar characteristics. For the three months ended September 30, 2022 and 2021, the Change in Fair Value of Financial Instruments, Net was a loss of $1.7 million and a loss of $2.1 million, respectively. For the nine months ended September 30, 2022 and 2021, the Change in Fair Value of Financial Instruments, Net was a loss of $6.0 million and a loss of $4.5 million, respectively.

The losses for the three and nine months ended September 30, 2022, are largely driven by Loans Held for Sale. Capital markets volatility, benchmark interest rates and purchases of loans through our consolidated warehouse trusts all increased during the current period. Consistent with originations, warehouse purchases in the current period included a higher mix of loans rated C, D and E (based on Prosper Rating and as reflected in the table above) which have higher borrower rates and

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expected losses compared to loans rated AA, A or B, resulting in higher charge-offs and an overall greater impact on the change in fair value. Specifically, for Loans Held for Sale, the loss from changes in fair value for the three months ended September 30, 2022, was $7.4 million, due to a $4.4 million loss on fair value and $3.0 million in net charge-offs. This compares to the corresponding period in 2021, when the loss from changes in fair value was $0.3 million, due to fair value gains of $1.3 million, offset by $1.6 million in net charge-offs. For the nine months ended September 30, 2022, the loss from changes in fair value was $16.9 million, due to a $9.1 million loss on fair value and $7.8 million in net charge-offs. This compares to the corresponding period in 2021, when the loss from changes in fair value was $0.6 million, due to fair value gains of $4.8 million, offset by $5.3 million in net charge-offs.

For Borrower Loans, the loss from changes in fair value was $9.2 million for the three months ended September 30, 2022, which compared to a loss of $0.3 million for the corresponding period in the prior year. The loss for the three months ended September 30, 2022 was attributable primarily to a $5.6 million loss on fair value and $3.5 million in net charge-offs, while the loss for the same period in 2021 was attributable to a gain from fair value adjustments of $3.2 million, offset by net charge-offs of $3.5 million. For the nine months ended September 30, 2022, the loss from changes in fair value was $21.1 million, which compared to a gain of $1.6 million for the corresponding period in the prior year. The loss for the nine months ended September 30, 2022 was attributable primarily to a $11.5 million loss on fair value and $9.3 million in net charge-offs, while the gain for the same period in the prior year was attributable to a $15.1 million fair value gain, partially offset by $13.2 million in net charge-offs. In general, the losses for the three and nine months ended September 30, 2022 are reflective of increased capital markets volatility and benchmark interest rates during the period, while the gains recognized in the prior year were primarily due to the continued fair value recovery of Borrower Loans following the large negative adjustments recognized in 2020 as a result of the COVID-19 pandemic. In addition, the changes in fair value for the three and nine months ended September 30, 2021 were reflective of $0.6 million and $1.7 million, respectively, in gains related to securitized Borrower Loans, which were deconsolidated from our balance sheet on September 27, 2021, as discussed above.

There were losses of $2.8 million and $6.1 million recognized for the three and nine months ended September 30, 2021, respectively, related to the Certificates Issued by Securitization Trust, which are no longer on our balance sheet. The gains on changes in fair value from Notes of $9.1 million and $21.2 million for the three and nine months ended September 30, 2022 was generally consistent with the negative fair value adjustments, partially offset by reduced charge-offs, related to the Borrower Loans, as discussed above.

The Credit Card derivative is primarily reflective of discounted future cash flows from certain features of our Credit Card program that were determined to meet the definition of freestanding derivatives, including interest income, program fees paid to our banking partner Coastal, credit losses and fraud losses. Fair value changes related to future cash flows underlying the Credit Card derivative were gains of $3.0 million and $6.8 million for the three and nine months ended September 30, 2022, respectively, while the net impact of settled transactions totaled $1.8 million and $2.4 million for the three and nine months ended September 30, 2022, respectively. These increases were primarily due to the growth in the underlying portfolio since the Credit Card launched at the end of 2021.

We also hold a swaption to limit our exposure to fluctuations in LIBOR due to our PWIT Warehouse Line, which bears interest at LIBOR plus 2.75%. For the three and nine months ended September 30, 2022, the fair value of that swaption increased $1.2 million and $1.6 million, respectively, due to the increase in market interest rates. For the three and nine months ended September 30, 2021, the change in the fair value was immaterial.

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The following table details the changes in our fair value of our financial instruments for the three and nine months ended September 30, 2022 and 2021, respectively (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Assets:
Borrower Loans	$	(9,220)	$	(337)	$	(21,110)	$	1,628
Loans Held for Sale	(7,462)		(296)		(16,895)		(581)
Credit Card derivative (included in Prepaid and Other Assets)	4,754		—		9,194		—
LIBOR rate swaption (included in Prepaid and Other Assets)	1,197		(26)		1,597		(53)
Liabilities:
Notes	9,071		1,355		21,228		635
Certificates Issued by Securitization Trust	—		(2,767)		—		(6,110)
Total	$	(1,660)	$	(2,071)	$	(5,986)	$	(4,481)

Expenses

The following tables summarize our expenses for the three and nine months ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended September 30,
	2022		2021		Change		% Change
Expenses
Origination and Servicing	$	16,238	$	8,983	$	7,255	81	%
Sales and Marketing	26,158		8,860		17,298		195	%
General and Administrative - Research and Development	4,723		4,156		567		14	%
General and Administrative - Other	16,332		14,685		1,647		11	%
Change in Fair Value of Convertible Preferred Stock Warrants	(11,374)		86,728		(98,102)		n/m
Loss on Deconsolidation of VIEs	—		1,494		(1,494)		n/m
Other Income, Net	(308)		(81)		(227)		280	%
Total Expenses	$	51,769	$	124,825	$	(73,056)	(59)	%

	Nine Months Ended September 30,
	2022		2021		Change		% Change
Expenses
Origination and Servicing	$	41,277	$	26,038	$	15,239	59	%
Sales and Marketing	62,243		24,486		37,757		154	%
General and Administrative - Research and Development	15,384		12,934		2,450		19	%
General and Administrative - Other	45,651		41,880		3,771		9	%
Change in Fair Value of Convertible Preferred Stock Warrants	(88,860)		136,845		(225,705)		n/m
Loss on Deconsolidation of VIEs	—		1,494		(1,494)		(100)	%
Gain on Forgiveness of PPP Loan	(8,604)		$	—	(8,604)		100	%
Other Income, Net	(805)		(350)		(455)		130	%
Total Expenses	$	66,286	$	243,327	$	(177,041)	(73)	%

n/m: not meaningful

The following table reflects full-time employees as of September 30, 2022 and 2021 by functional area:

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	September 30, 2022	September 30, 2021
Origination and Servicing	168	124
Sales and Marketing	30	17
General and Administrative - Research and Development	99	95
General and Administrative - Other	170	143
Total Headcount	467	379

Origination and Servicing

Origination and Servicing costs consist primarily of salaries, benefits and stock-based compensation expense related to our capital markets, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing loans and our Credit Card product. The increase for the three months ended September 30, 2022 of $7.3 million, or 81%, as compared to the corresponding period in 2021 was primarily due to a $6.0 million combined increase in loan servicing and origination costs, consistent with the increase in originations discussed above. Included in that increase is $0.8 million in third-party servicing costs associated with our Credit Card product. Additionally, compensation expense increased $0.9 million, driven primarily by increased headcount, and internal-use software amortization increased $0.3 million due to the deployment of various marketplace features over the past two years.

The increase for the nine months ended September 30, 2022 of $15.2 million, or 59%, as compared to the corresponding period in 2021 was primarily due to a $12.5 million combined increase in loan servicing and origination costs, consistent with the increase in originations discussed above. Included in that increase is $2.2 million in third-party servicing costs associated with our Credit Card product. Additionally, compensation expense increased $1.8 million, driven primarily by increased headcount, and internal-use software amortization increased $0.9 million due to the deployment of various marketplace features over the past two years.

Of the total Origination and Servicing costs for the three and nine months ended September 30, 2022, approximately $2.1 million and $5.2 million, respectively, related specifically to our Credit Card product. For the corresponding periods in the prior year, Origination and Servicing costs related to our Credit Card product were not material and $0.1 million, respectively.

Sales and Marketing

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 compensation expenses such as wages, benefits and stock-based compensation for the employees who support these activities. For the three months ended September 30, 2022, the increase of $17.3 million, or 195%, from the corresponding period in the prior year was due primarily to an overall increase in marketing and advertising, including marketing partnership costs of $12.9 million, direct mail costs of $2.5 million and digital advertising spend of $0.7 million. Additionally, compensation expense increased $0.8 million, due primarily to increased headcount, and marketing consulting expenses increased $0.2 million.

For the nine months ended September 30, 2022, the increase of $37.8 million, or 154%, from the corresponding period in the prior year was due primarily to an overall increase in marketing and advertising, including marketing partnership costs of $26.8 million, direct mail costs of $6.1 million, digital advertising spend of $2.5 million and direct to site advertising of $0.1 million. Additionally, compensation expense increased $1.8 million, due primarily to increased headcount, and marketing consulting expenses increased $0.3 million.

Of the total Sales and Marketing costs for the three and nine months ended September 30, 2022, approximately $3.6 million and $10.1 million, respectively, related specifically to our Credit Card product. For the corresponding periods in the prior year, Sales and Marketing costs related to our Credit Card product were $0.1 million (for both periods).

General and Administrative - Research and Development

General and Administrative – Research and Development costs consist primarily of salaries, benefits and stock-based compensation expense related to our engineering and product development employees, as well as related vendor costs. The increase in General and Administrative – Research and Development for the three months ended September 30, 2022 of $0.6 million, or 14%, was due primarily to a $0.6 million increase in compensation expense and a $0.1 million increase in outsourced services, primarily related to headcount additions for the development of various platform features and our Credit Card product. These increases were partially offset by additional capitalized internal-use software and web development costs. Specifically, these capitalized costs were $2.8 million and $2.6 million for the three months ended September 30, 2022 and 2021, respectively.

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The increase in General and Administrative – Research and Development for the nine months ended September 30, 2022 of $2.5 million, or 19%, was due primarily to a $2.4 million increase in compensation expense and a $1.1 million increase in outsourced services, primarily related to headcount additions for the development of various platform features and our Credit Card product. These increases were partially offset by additional capitalized internal-use software and web development costs. Specifically, these capitalized costs were $8.1 million and $7.1 million for the nine months ended September 30, 2022 and 2021, respectively.

Of the total General and Administrative - Research and Development costs for the three and nine months ended September 30, 2022, approximately $0.4 million and $1.1 million, respectively, related specifically to our Credit Card product. These amounts are presented net of $0.4 million and $1.3 million, respectively, of capitalized internal-use software and web development costs. For the corresponding periods in the prior year, General and Administrative - Research and Development costs related to our Credit Card product were $1.2 million and $1.1 million, respectively. These amounts are presented net of $1.2 million and $2.0 million, respectively, of capitalized internal-use software and web development costs.

General and Administrative - Other

General and Administrative – Other expenses consist primarily of salaries, benefits and stock-based compensation expense related to our accounting and finance, risk, legal, compliance, human resources and facilities employees, professional fees related to legal and accounting and facilities expenses. The increase in General and Administrative - Other for the three months ended September 30, 2022 of $1.6 million, or 11%, was due primarily to a $1.0 million increase in compensation expense, driven primarily by increased headcount. There was also a $0.5 million increase in facilities and maintenance costs, due primarily to additional usage of software licenses and subscriptions and contractual rent increases.

The increase in General and Administrative - Other for the nine months ended September 30, 2022 of $3.8 million, or 9%, was due primarily to a $2.7 million increase in compensation expense, driven primarily by increased headcount. We also utilized additional outside contractors, resulting in a $0.2 million increase in outsourced services. There was also a $1.1 million increase in facilities and maintenance costs, due in part to our employees beginning to return to the office in the first quarter of 2022, as well as increased usage of software licenses and subscriptions. Various other expenses generally related to the growth in the business and return to the office, such as travel, recruiting, office costs, insurance and state franchise taxes, increased a combined $0.8 million from the prior year. These increases were partially offset by a $1.3 million decrease in professional services, as there were additional initiatives in the prior year that did not recur in 2022, including those related to the launch of our Credit Card product.

Of the total General and Administrative - Other costs for the three and nine months ended September 30, 2022, approximately $0.8 million and $2.2 million, respectively, related specifically to our Credit Card product. For the corresponding periods in the prior year, General and Administrative - Other costs related to our Credit Card product were $0.4 million and $1.0 million, respectively.

Change in Fair Value of Convertible Preferred Stock Warrants

Change in Fair Value of Convertible Preferred Stock Warrants was a gain of $11.4 million and a gain of $88.9 million for the three and nine months ended September 30, 2022, respectively, due to a decrease in the fair value of the underlying Convertible Preferred Stock for those periods. Change in Fair Value of Convertible Preferred Stock Warrants was a loss of $86.7 million and loss of $136.8 million for the three and nine months ended September 30, 2021, due to an increase in the fair value of the underlying Convertible Preferred Stock for those periods.

Gain on Forgiveness of PPP Loan

As discussed in Note 10 of the accompanying condensed consolidated financial statements, on March 21, 2022, we were notified by the SBA that all principal and interest under our PPP loan, totaling $8.6 million, was forgiven through a full forgiveness payment made on March 15, 2022 by the SBA to the lender of our PPP loan. As a result, we recognized the entire forgiven principal and interest as Gain on Forgiveness of PPP Loan for the nine months ended September 30, 2022.

Loss on Deconsolidation of VIEs

We sold our holdings of residual certificates issued by three consolidated securitization trust VIEs to an unrelated third party on September 27, 2021. As a result of that sale, we determined that we were no longer the primary beneficiary of those VIEs and they were deconsolidated on that date. We recognized a loss on deconsolidation totaling $1.5 million for the nine months ended September 30, 2021, which consists of the $4.1 million in cash consideration received for the sale of the residual certificates, less net assets deconsolidated of $5.6 million.

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Other Income, Net

Other Income, Net was $0.3 million and $0.8 million for the three and nine months ended September 30, 2022, respectively, and primarily consists of sublease income, interest income on cash and cash equivalents and other miscellaneous items. The $0.2 million increase for the three months ended September 30, 2022 primarily relates to a $0.1 million increase in each of sublease income and interest income. The $0.5 million increase for the nine months ended September 30, 2022 relates to a $0.3 million increase in sublease income, and a $0.2 million increase in interest income.

Non-GAAP Financial Measure - Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we define as Net Income (Loss) adjusted for interest income on Cash and Cash Equivalents, Income Tax Expense, depreciation and amortization, impairment of long-lived assets and Goodwill, stock-based compensation expense, Change in Fair Value of Convertible Preferred Stock Warrants and certain infrequent or unusual transactions. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

We consider Adjusted EBITDA to be a helpful indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Management uses Adjusted EBITDA to, among other things, understand and compare operating results across accounting periods, evaluate our operations and financial performance and for internal planning and forecasting purposes. Inclusion of Adjusted EBITDA is intended to provide investors insight into the manner in which management views the performance of the Company, enhance investors’ evaluation of our operating results, and to facilitate meaningful comparisons of our results between periods. These non-GAAP financial measures should not be considered an alternative to, or more meaningful than, the GAAP financial information provided herein.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•Adjusted EBITDA does not consider the potentially dilutive impact of equity-based charges;

•Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

•Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

The major non-GAAP adjustments, and our basis for excluding them, are outlined below:

•Fair value of warrants vested on the sale of Borrower Loans and changes in the fair value of convertible preferred stock warrants liability: We exclude these charges primarily because they are non-cash charges and the fair value varies based on the fair value of the underlying preferred stock, varying valuation methodologies and subjective assumptions. Their inclusion makes the comparison of our current financial results to previous and future periods difficult to evaluate.

•Stock-based compensation expense: This consists of expenses for equity awards under our equity incentive plans. Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to evaluate; therefore, we believe it is useful to exclude stock-based compensation. We also excluded these expenses because they are non-cash.

•Amortization or impairment of acquired intangible assets and impairment of goodwill: We incur amortization or impairment of acquired Intangible Assets and Goodwill in connection with acquisitions and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.

•Gain on Forgiveness of PPP Loan: We recorded a gain on forgiveness when our PPP loan was forgiven by the SBA in the first quarter of 2022. We exclude the impact of this gain because of the infrequent nature of the transaction. Management does not believe that it is reflective of our ongoing operating results.

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The following table presents a reconciliation of Net Income (Loss) to Adjusted EBITDA for each of the periods indicated (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net Income (Loss)	$	8,621	$	(88,061)	$	87,918	$	(138,755)
Depreciation expense:
Servicing and Origination	2,175		1,880		6,155		5,236
General and Administration - Other	674		659		1,961		1,859
Amortization of Intangibles	34		43		102		129
Stock-Based Compensation	496		270		1,295		857
Gain on Forgiveness of PPP Loan	—		—		(8,604)		—
Loss on Deconsolidation of VIEs	—		1,494		—		1,494
Change in the Fair Value of Warrants	(11,374)		86,728		(88,860)		136,845
Interest Income on Cash and Cash Equivalents	(125)		(2)		(167)		(6)
Income Tax Expense	20		21		60		63
Adjusted EBITDA	$	521	$	3,032	$	(140)	$	7,722

The decreases in Adjusted EBITDA for the three and nine months ended September 30, 2022, compared to the corresponding periods in 2021, are primarily reflective of (a) changes in the fair value of Loans Held for Sale due to capital markets volatility and higher interest rates, (b) rebates provided to whole loan investors driven by market volatility and rebates offered by competitors and (c) additional investments in our Credit Card product.

Expenses on the condensed consolidated statements of operations include the following amounts of stock-based compensation expense for the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Origination and Servicing	$	36	$	30	$	98	$	92
Sales and Marketing	215		15		417		47
General and Administrative	245		225		780		718
Total Stock-Based Compensation Expense	$	496	$	270	$	1,295	$	857

LIQUIDITY AND CAPITAL RESOURCES

We believe our liquidity needs for the next twelve months, and for the foreseeable future beyond that period, can be met through transaction fees, servicing fees, net interest income, other revenue, proceeds from sales of loans, draws on Warehouse Lines and Cash and Cash Equivalents. For further details related to our warehouse lines, see Note 10 of the accompanying condensed consolidated financial statements. If the financial results anticipated are not achieved, our sources of liquidity may not be sufficient to meet our operating and liquidity requirements without obtaining additional liquidity which may not be available on favorable terms or at all.

The following table summarizes our cash flow activities for the three months ended September 30, 2022 and 2021 (in thousands):

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	Three Months Ended September 30,
	2022		2021
Net Income (Loss)	$	8,621	$	(88,061)
Net Cash Used in Operating Activities	(104,255)		(52,113)
Net Cash Used in Investing Activities	(13,592)		(5,167)
Net Cash Provided by Financing Activities	89,233		8,735
Net Decrease in Cash, Cash Equivalents and Restricted Cash	(28,614)		(48,545)
Cash, cash equivalents and restricted cash at the beginning of the period	231,467		261,395
Cash, cash equivalents and restricted cash at the end of the period	$	202,853	$	212,850

Cash, Cash Equivalents and Restricted Cash decreased by $28.6 million for the three months ended September 30, 2022, based on the following components:

Operating Activities: $104.3 million in cash was used in operating activities, driven by (a) $92.4 million in net purchases of Loans Held for Sale and (b) $11.9 million in cash used for working capital, primarily due to the timing of payments to investors and third-party vendors, partially offset by (c) $0.1 million in net income, net of non-cash items.

Investing Activities: $13.6 million in cash was used in investing activities due to (a) $70.5 million in purchases of Borrower Loans, and (b) $3.4 million in purchases of property and equipment, primarily consisting of internal-use software, partially offset by (c) $60.3 million from sales and principal payments of Borrower Loans.

Financing Activities: $89.2 million in cash was provided by financing activities, due primarily to (a) $9.4 million in proceeds from issuance, net of payments, on Notes, at Fair Value and (b) $79.8 million in proceeds from Warehouse Lines.

Cash, Cash Equivalents and Restricted Cash decreased $48.5 million for the three months ended September 30, 2021 based on the following components:

Operating Activities: $52.1 million in cash was used in operating activities, driven by (a) $29.7 million in cash used for working capital, primarily due to the timing of payments to investors and third-party vendors and (b) $29.0 million in net purchases of Loans Held for Sale, offset by (c) $6.6 million in net loss, net of non-cash items. These non-cash items include the $1.5 million Loss on Deconsolidation of VIEs, which is more fully described in Note 6 of the accompanying condensed consolidated financial statements.

Investing Activities: $5.2 million in cash was used in investing activities due to (a) $64.5 million in purchases of Borrower Loans, and (b) $3.4 million in purchases of property and equipment, primarily consisting of internal-use software, offset by (c) $62.7 million from sales and principal payments of Borrower Loans.

Financing Activities: $8.7 million in cash was provided by financing activities, due primarily to (a) $26.3 million in proceeds from the Warehouse Lines, (b) $18.5 million in proceeds, net of payments, from Notes, at Fair Value, offset by (c) $29.3 million in payments on Notes and Certificates Issued by Securitization Trusts and (d) $6.8 million in net cash and restricted cash outflows from the deconsolidation of the securitization VIEs. This $6.8 million consists of $4.1 million in cash proceeds from the sale of residual certificates, offset by $10.9 million in restricted cash retained by the deconsolidated VIEs.

The following table summarizes our cash flow activities for the nine months ended September 30, 2022 and 2021 (in thousands):

	Nine Months Ended September 30,
	2022		2021
Net Income (Loss)	87,918		(138,755)
Net Cash (Used in) Provided by Operating Activities	(167,226)		51,151
Net Cash (Used in) Provided by Investing Activities	(66,294)		9,930
Net Cash Provided by (Used in) Financing Activities	200,748		(62,099)
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash	(32,772)		(1,018)
Cash, cash equivalents and restricted cash at the beginning of the period	$	235,625	213,868
Cash, cash equivalents and restricted cash at the end of the period	$	202,853	$	212,850

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Cash, Cash Equivalents and Restricted Cash decreased $32.8 million for the nine months ended September 30, 2022, based on the following components:

Operating Activities: $167.2 million in cash was used in operating activities, driven by (a) $171.0 million in net purchases of Loans Held for Sale and (b) $1.4 million in cash used for working capital, primarily due to the timing of payments to investors and third-party vendors, partially offset by (c) $5.2 million in net income, net of non-cash items. These non-cash items include the $8.6 million Gain on Forgiveness of PPP Loan, which is more fully described in Note 10 of the accompanying condensed consolidated financial statements.

Investing Activities: $66.3 million in cash was used in investing activities due to (a) $214.3 million in purchases of Borrower Loans, and (b) $10.1 million in purchases of property and equipment, primarily consisting of internal-use software, partially offset by (c) $158.0 million from sales and principal payments of Borrower Loans.

Financing Activities: $200.7 million in cash was provided by financing activities, due primarily to (a) $56.0 million in proceeds from issuance, net of payments, on Notes, at Fair Value and (b) $144.7 million in proceeds from Warehouse Lines.

Cash, Cash Equivalents and Restricted Cash increased $1.0 million for the nine months ended September 30, 2021 based on the following components:

Operating Activities: $51.2 million in cash was provided by operating activities, driven by (a) $19.2 million in cash provided by working capital, (b) $14.6 million in net proceeds from Loans Held for Sale, and (c) $17.4 million in net loss, net of non-cash items. These non-cash items include the $1.5 million Loss on Deconsolidation of VIEs, which is more fully described in Note 6 of the accompanying condensed consolidated financial statements.

Investing Activities: $9.9 million in cash was provided by investing activities due to (a) $190.9 million from principal payments on Borrower Loans, offset by (b) $172.1 million in purchases of Borrower Loans and (c) $8.9 million in purchases of property and equipment, primarily consisting of internal-use software.

Financing Activities: $62.1 million in cash was used in financing activities, due primarily to (a) $102.6 million in payments on Notes and Certificates Issued by Securitization Trusts and (b) $6.8 million in net cash and restricted cash outflows from the deconsolidation of the securitization VIEs. This $6.8 million consists of $4.1 million in cash proceeds from the sale of residual certificates, offset by $10.9 million in restricted cash retained by the deconsolidated VIEs. These are offset by (c) $45.7 million in proceeds, net of payments, from Notes, at Fair Value and (d) $3.4 million in net proceeds from Warehouse Lines. We also incurred $1.7 million in debt issuance costs related to the extension of the PWIIT Warehouse Line in March 2021 and the PWIT Warehouse Line in May 2021 (Note 10).

Income Taxes

We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets. Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, we have provided a full valuation allowance against our net deferred tax assets.

We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are required to make subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.

Off-Balance Sheet Arrangements

As a result of retaining servicing rights on the sale of Borrower Loans, we are an interest holder in certain special purpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as we are not the primary beneficiary. Other than these special purpose entities, as of September 30, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.

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 Operations—Critical Accounting

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Estimates” in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to these critical accounting estimates during the first nine months of 2022.

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PROSPER FUNDING LLC

Overview

Prosper Funding was formed in the state of Delaware in February 2012 as a limited liability company with PMI as its sole equity member. 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 by implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI.

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 in our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.

Recent Developments

Loan Term Expansion

In September 2022, we started offering Borrower Loans with 24- and 48-month terms through our marketplace, as an expansion to our existing offering of 36- and 60-month loan terms. Borrower Loans with these expanded terms were available solely for investment through our Whole Loan Channel as of September 30, 2022, but were made available through our Retail Channel starting in October 2022.

Results of Operations

Overview

The following tables summarize Prosper Funding’s net income (loss) for the three and nine months ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended September 30,
	2022		2021		$ Change		% Change
Total Net Revenues	$	24,400	$	16,881	$	7,519	45	%
Total Expenses	24,365		15,624		8,741		56	%
Net Income (Loss)	$	35	$	1,257	$	(1,222)	n/m

	Nine Months Ended September 30,
	2022		2021		$ Change		% Change
Total Net Revenues	66,007		44,903		$	21,104	47	%
Total Expenses	61,990		43,746		18,244		42	%
Net Income (Loss)	$	4,017	$	1,157	$	2,860	n/m

n/m: not meaningful

Total net revenues for the three months ended September 30, 2022 increased $7.5 million, or 45%, from the three months ended September 30, 2021, primarily due to increased administration fee revenue driven by both an increase in the number of loan listings on our marketplace during the period, as well as an increase in rebates provided to whole loan investors (for which PFL bills PMI). Because of the growth in our servicing book (in line with the increase in whole loan originations from the prior year), there was a resulting increase in Servicing Fees, Net. These increases were partially offset by an increase in the Loss on Sale of Borrower Loans, due to the increase in rebates provided to whole loan investors, as discussed above. Because these rebates are reimbursed through the administration fee revenue, there is no net impact on total net revenues.

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Finally, due to volatility in the capital markets and an increase in benchmark interest rates, the loss from Change in Fair Value of Financial Instruments, Net increased as compared to the gain recognized for the corresponding period in the prior year. Total expenses for the three months ended September 30, 2022 increased $8.7 million, or 56%, from the three months ended September 30, 2021, primarily due to an increase in the number of loans funded during the period, which resulted in increased administration fee expense. The increases in loan listings and originations are due to an improved competitive and pricing environment, as well as more normalized underwriting requirements, reflecting the general economic recovery since the start of the COVID-19 pandemic.

Total net revenues for the nine months ended September 30, 2022 increased $21.1 million, or 47%, from the nine months ended September 30, 2021, primarily due to increased administration fee revenue driven by an increase in the number of loan listings on our marketplace during the period, as well as an increase in rebates provided to whole loan investors (for which PFL bills PMI). Because of the growth in our servicing book (in line with the increase in whole loan originations from the prior year), there was a resulting increase in Servicing Fees, Net. Additionally, we have reduced our reliance on external collection agencies, which also resulted in an increase in Servicing Fees, Net. These increases were partially offset by a decrease in the Gain on Sale of Borrower Loans, due to the increase in rebates provided to whole loan investors, as discussed above. Because these rebates are reimbursed through the administration fee revenue, there is no net impact on total net revenues. Finally, due to volatility in the capital markets and an increase in benchmark interest rates, the loss from Change in Fair Value of Financial Instruments, Net increased as compared to the gain recognized for the corresponding period in the prior year. Total expenses for the nine months ended September 30, 2022 increased $18.2 million, or 42%, from the nine months ended September 30, 2021, primarily due to an increase in the number of loans funded during the period, which resulted in increased administration fee expense. The increases in loan listings and originations are due to an improved competitive and pricing environment, as well as more normalized underwriting requirements, reflecting the general economic recovery since the start of the COVID-19 pandemic.

Revenues

The following tables summarizes Prosper Funding’s revenue for the three and nine months ended September 30, 2022 and 2021 (in thousands, except percentages):

	Three Months Ended September 30,
	2022		2021		$ Change		% Change
Revenues:
Operating Revenues:
Administration Fee Revenue - Related Party	$	18,234	$	9,066	$	9,168	101	%
Servicing Fees, Net	5,695		3,954		1,741		44	%
(Loss)/Gain on Sale of Borrower Loans	(346)		2,404		(2,750)		(114)	%
Other Revenues	132		447		(315)		(70)	%
Total Operating Revenues	23,715		15,871		7,844		49	%
Interest Income on Borrower Loans	11,592		9,574		2,018		21	%
Interest Expense on Notes	(10,758)		(8,935)		(1,823)		20	%
Net Interest Income	834		639		195		31	%
Change in Fair Value of Financial Instruments, Net	(149)		371		(520)		(140)	%
Total Net Revenue	$	24,400	$	16,881	$	7,519	45	%

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	Nine Months Ended September 30,
	2022		2021		$ Change		% Change
Revenues:
Operating Revenues:
Administration Fee Revenue - Related Party	$	42,385	$	24,247	$	18,138	75	%
Servicing Fees, Net	14,808		11,483		3,325		29	%
Gain on Sale of Borrower Loans	5,611		6,078		(467)		(8)	%
Other Revenues	802		804		(2)		—	%
Total Operating Revenues	63,606		42,612		20,994		49	%
Interest Income on Borrower Loans	33,228		27,130		6,098		22	%
Interest Expense on Notes	(30,945)		(25,366)		(5,579)		22	%
Net Interest Income	2,283		1,764		519		29	%
Change in Fair Value of Financial Instruments, Net	118		527		(409)		(78)	%
Total Net Revenue	$	66,007	$	44,903	$	21,104	47	%

Administration Fee Revenue - Related Party

We primarily generate revenues through license fees we earn under our Administration Agreement with PMI. The Administration Agreement contains a license we grant to PMI that entitles PMI to use the marketplace for, and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement. The Administration Agreement requires PMI to pay us a monthly license fee that is partially based on the number of loan listings posted on the marketplace in that month, as well as a rebate fee based on rebates given to investors as an incentive to purchase Borrower Loans from PFL. The increases in Administrative Fee Revenue of $9.2 million and $18.1 million for the three and nine months ended September 30, 2022, as compared to the corresponding periods in 2021, were primarily due to an increase in loan listings generated on the marketplace, as well as an increase in rebates provided to whole loan investors, as discussed above.

Servicing Fees, Net

Investors who purchase Borrower Loans through the Whole Loan Channel typically pay us a servicing fee which is currently set at 1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. The servicing fee compensates us for the costs incurred in servicing the Borrower Loan, including managing payments from borrowers, managing payments to investors and maintaining investors’ account portfolios. We record Servicing Fees from investors as a component of operating revenue when received. We also include any collection fees received, net of collection agency expenses, in Servicing Fees, Net.

The increases in Servicing Fees, Net of $1.7 million and $3.3 million for the three and nine months ended September 30, 2022, respectively, as compared to the corresponding periods in 2021, were largely due to the increase in the size of the servicing book as compared to the prior year, which led to increased servicing fees. This is generally in line with the increase in originations during this time. Approximately $1.4 million and $1.3 million, respectively, of the increases for these periods related to the growth of the servicing book. For the nine months ended September 30, 2022, approximately $1.8 million of the increase was also due to our reduced reliance on external collection agencies. We utilized these agencies more in the prior year to address enhanced collection efforts required due to the COVID-19 pandemic.

(Loss) Gain on Sale of Borrower Loans

(Loss) Gain on Sale of Borrower Loans consists of net gains on Borrower Loans sold through the Whole Loan Channel, net of any rebates provided to investors at the time of sale. For the three months ended September 30, 2022, the decrease in Loss on Sale of Borrower Loans of $2.8 million was primarily due to additional rebates provided to whole loan investors, due to market volatility and rebates offered by competitors. This resulted in a $5.4 million decrease due to losses on rebates, which was partially offset by a $2.6 million increase due to gains recognized on whole loan originations.

For the nine months ended September 30, 2022, the decrease in Gain on Sale of Borrower Loans of $0.5 million was also primarily due to the rebates provided to whole loan investors. This resulted in a $5.3 million decrease from the corresponding period in 2021, which was partially offset by a $4.7 million increase due to gains recognized on whole loan originations.

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Other Revenues

Other Revenues consists primarily of incentive fees, which are earned from partner companies through our incentive programs. The $0.3 million decrease in Other Revenues for the three months ended September 30, 2022, as compared to the corresponding period in 2021, is primarily due to a decrease in these incentive fees, as we terminated an incentive program at the end of June 2022. The increase in Other Revenues for the nine months ended September 30, 2022, as compared to the corresponding periods in 2021, is not significant.

Interest Income on Borrower Loans and Interest Expense on Notes

We recognize Interest Income on Borrower Loans using the accrual method based on the stated interest rate to the extent we believe it to be collectible. We record Interest Expense on the corresponding Notes based on the contractual interest rates. The interest rate on Notes is generally 1% lower than the interest rate on the corresponding Borrower Loans to compensate us for servicing the underlying Borrower Loans.

Overall, the $0.2 million and $0.5 million increases in Net Interest Income for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021, were due to an increase in the outstanding principal balance of Borrower Loans and Notes during these periods.

Change in Fair Value of Financial Instruments, Net

Change in Fair Value of Financial Instruments, Net, captures gains (losses) in fair value estimates using discounted cash flow methodologies that are based upon a set of valuation assumptions. The key assumptions used in valuations include default and prepayment rates derived from historical performance and discount rates that reflect estimates of the rates of return that investors would require when investing in other financial instruments with similar characteristics. Changes in fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of the corresponding Notes due to the borrower payment-dependent structure, though differences will arise due to the actual and projected impact of cash flows related to charge-offs, debt sales and miscellaneous fees.

The following table summarizes the fair value adjustments for the three and nine month periods ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Borrower Loans	$	(9,220)	$	(984)	$	(21,110)	$	(108)
Notes	9,071		1,355		21,228		635
Total	$	(149)	$	371	$	118	$	527

In general, the decreases in Change in Fair Value of Financial Instruments, Net for the three and nine months ended September 30, 2022 are reflective of increased capital markets volatility and benchmark interest rates during the period, while the gains recognized in the prior year were primarily due to the continued fair value recovery of Borrower Loans following the large negative adjustments recognized in 2020 as a result of the COVID-19 pandemic.

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Expenses

The following table summarizes our expenses for the three and nine month periods ended September 30, 2022 and 2021 (in thousands, except percentages):

	Three Months Ended September 30,
	2022		2021		Change		% Change
Expenses:
Administration Fee - Related Party	$	21,966	$	13,686	$	8,280	60	%
Servicing	2,256		1,830		426		23	%
General and Administrative	143		108		35		32	%
Total Expenses	$	24,365	$	15,624	$	8,741	56	%

	Nine Months Ended September 30,
	2022		2021		Change		% Change
Expenses:
Administration Fee - Related Party	$	55,773	$	38,653	$	17,120	44	%
Servicing	5,778		4,729		1,049		22	%
General and Administrative	439		364		75		21	%
Total Expenses	$	61,990	$	43,746	$	18,244	42	%

Administration Fee - Related Party

Pursuant to our Administration Agreement with PMI, PMI manages the marketplace on our behalf. Accordingly, each month we are required to pay PMI (a) a corporate administration fee of $500,000 per month, (b) a fee for each Borrower Loan originated through the marketplace, (c) 62.5% of all Servicing Fees collected by us or on our behalf, and (d) all nonsufficient funds fees collected by us or on our behalf. The increases in Administration Fee expense of $8.3 million and $17.1 million for the three and nine months ended September 30, 2022, as compared to the same periods in 2021, were due to increased origination volume of Borrower Loans for the current periods. In general, the Administrative Fee Expense will not fluctuate directly in line with the Administrative Fee Revenue due to both the flat corporate administrative fee, as well as the fact that we pay fees for three different services, but receive a fee based only the number of loans listed on the platform.

Servicing

Servicing costs consist primarily of vendor and borrower costs, as well as depreciation of internal-use software associated with servicing Borrower Loans. The increases in Servicing costs for the three and nine months ended September 30, 2022, as compared to the corresponding periods in 2021, were primarily driven by the increase in originations and the depreciation of internal-use software during this time.

General and Administrative

General and Administrative costs consist primarily of bank service charges and professional fees. The changes in General and Administrative costs were not significant for the three and nine months ended September 30, 2022, as compared to the corresponding periods in 2021.

LIQUIDITY AND CAPITAL RESOURCES

We anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for at least the next 12 months.

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The following table summarizes our cash flow activities for the nine months ended September 30, 2022 and 2021 (in thousands):

	Nine Months Ended September 30,
	2022		2021
Net Income	$	4,017	$	1,157
Net Cash (Used in) Provided by Operating Activities	(4,579)		19,681
Net Cash Used in Investing Activities	(60,901)		(50,702)
Net Cash Provided by Financing Activities	50,302		45,703
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash	(15,178)		14,682
Cash, cash equivalents and restricted cash at the beginning of the period	167,876		140,924
Cash, cash equivalents and restricted cash at the end of the period	$	152,698	$	155,606

Cash, Cash Equivalents and Restricted Cash decreased $15.2 million for the nine months ended September 30, 2022, based on the following components:

Operating Activities: $4.6 million was used in operating activities, driven by cash used in working capital of $8.5 million, primarily due to the timing of payments to PMI and investors, partially offset by net income, net of non-cash adjustments of $3.9 million.

Investing Activities: $60.9 million was used in investing activities, due to $214.3 million in purchases of Borrower Loans and $4.7 million in purchases of property and equipment, partially offset by $158.0 million of principal payments under Borrower Loans.

Financing Activities: $50.3 million was provided by financing activities, due to $214.1 million in proceeds from the issuance of Notes, at Fair Value, partially offset by $158.1 million in payments for Notes, at Fair Value, and $5.7 million in cash distributions to our parent, PMI.

Cash, Cash Equivalents and Restricted Cash increased $14.7 million for the nine months ended September 30, 2021, based on the following components:

Operating Activities: $19.7 million was provided by operating activities, driven by cash from working capital of $48.3 million, primarily due to the timing of payments to PMI and investors, and $2.7 million from net loss, net of non-cash adjustments.

Investing Activities: $50.7 million was used in investing activities, due to $107.6 million in purchases of Borrower Loans and $4.1 million in purchases of property and equipment, partially offset by $81.1 million of principal payments under Borrower Loans.

Financing Activities: $45.7 million was provided by financing activities, due to $108.2 million in proceeds from the issuance of Notes, at Fair Value, partially offset by $81.0 million in payments for Notes, at Fair Value.

Income Taxes

We incurred no income tax expense for the nine months ended September 30, 2022 and 2021. We are a US disregarded entity for income tax purposes and our income and loss is included in the return of our parent, PMI. Given PMI’s history of taxable losses, it is difficult to accurately forecast how Prosper’s and our 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, we are a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special interest entities are consolidated as we are not the primary beneficiary. Otherwise as of September 30, 2022, we have not engaged in any off-balance sheet financing activities.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST RATE RISK

PROSPER MARKETPLACE, INC.

Market Risk

Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.

Through the Warehouse Lines we invest in Loans Held for Sale. Investments in interest-earning instruments carry a degree of interest rate risk. Changes in U.S. interest rates affect the market value of these Loans Held for Sale on our balance sheet. Our future investment income may fall short of expectations, or we may suffer a loss in principal if we are forced to sell Loans Held for Sale that have declined in market value due to changes in interest rates, loss assumptions or overall market conditions. Recent interest rate increases, due in part to ongoing inflation and the Russia-Ukraine conflict, may increase the risks of our investments in Loans Held for Sale, and additional fluctuations in the interest rates may exacerbate such risks. Changes in the market value of Loans Held for Sale are recorded on the Consolidated Statement of Operations. The fair value of Loans Held for Sale was $398.2 million and $243.2 million as of September 30, 2022, and December 31, 2021, respectively.

The fair values of Borrower Loans, Loans Held for Sale, and Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions such as default rate, prepayment rate and discount rate. Default rate, prepayment rate and discount rate may change due to expected loan performance or changes in the expected returns of similar financial instruments available in the market. We are exposed to the risk of decrease in the fair value of loans held in the warehouse trusts. For Borrower Loans and Notes presented on our Balance Sheet on behalf of our Note Channel investors, 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.

We are also exposed to variable interest rate risk under the debt from the Warehouse Lines, which had an outstanding balance of $354.8 million and $209.3 million as of September 30, 2022, and December 31, 2021, respectively. To reduce the impact of large fluctuations in interest rates, we hedged a portion of our interest rate risk by entering into a derivative agreement with a financial institution, which is currently in the money. The derivative agreement that we use to manage the risk associated with fluctuations in interest rates may not be able to eliminate the exposure to these changes. Interest rates are sensitive to numerous factors outside of our control, such as government and central bank monetary policy in the United States. Depending on the size of the exposures and the relative movements of interest rates, if we choose not to hedge or fail to effectively hedge our exposure, we could experience a material adverse effect on our results of operations and financial condition.

We have cash and cash equivalents of $43.5 million and $67.7 million as of September 30, 2022, and December 31, 2021, respectively. These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities which may include money market funds, 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 moderately reduce interest income on these Cash and Cash Equivalents. Increases in short-term interest rates will moderately increase the interest income earned on the Cash and Cash Equivalents.

Interest Rate Sensitivity

As more fully described in Note 7, Fair Value of Assets and Liabilities, of Prosper's condensed consolidated financial statements attached to this Quarterly Report on Form 10-Q, the combined fair value of Borrower Loans and Loans Held for Sale is $701.2 million as of September 30, 2022, determined using a weighted-average discount rate of 7.84%. The combined fair value of Borrower Loans and Loans Held for Sale was $510.8 million as of December 31, 2021, determined using a weighted-average discount rate of 5.64%. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $6.9 million and $5.1 million in the fair value of Prosper’s investment in Borrower Loans and Loans Held for Sale as of September 30, 2022, and December 31, 2021, respectively. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $7.1 million and $5.3 million in the fair value of Prosper’s investment in Borrower Loans and Loans Held for Sale as of September 30, 2022, and December 31, 2021, respectively. Any realized or unrealized gains or losses resulting from such interest rate change would be recorded in our statement of operations so long as we hold these Borrower Loans and Loans Held for Sale on our balance sheet.

A portion of the interest rate charged on our Warehouse Lines is currently based on LIBOR. LIBOR has been the subject of reform and was expected to phase out by the end of fiscal 2021; however, on November 30, 2020, the ICE Benchmark Administration Limited (“ICE”) announced plans to delay the phase out of LIBOR to June 30, 2023. The

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consequences of the discontinuation of LIBOR cannot be entirely predicted but could impact the interest expense incurred on these debt instruments. We have negotiated alternatives to LIBOR on the PWIT and PWIIT Warehouse Lines, which we may renegotiate before LIBOR ceases to be a widely available reference rate. The recent interest rate increases, due in part to ongoing inflation and the Russia-Ukraine conflict, may increase our interest rate risk and the ability to manage our risk through hedging our exposure thereunder.

PROSPER FUNDING LLC

Market Risk

Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.

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 of 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 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 had cash and cash equivalents of $5.7 million as of September 30, 2022, and $10.8 million as of December 31, 2021. These amounts were held in various unrestricted deposits with highly rated financial institutions and short term, highly liquid marketable securities which may include money market funds, 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 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 moderately reduce interest income on these cash and cash equivalents, while increases in short-term interest rates will moderately increase the interest income earned on these cash and cash equivalent 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 Registrant’s Principal Executive Officer (PEO) and 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 September 30, 2022. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of September 30, 2022.

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 Exchange Act) during the three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

This Item should be read in conjunction with the disclosures contained in Part I, Item 3, “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II, Item 1, “Legal Proceedings” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.

Item 1A. Risk Factors 

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You should carefully consider all information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and related notes, and the risks described in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2021.

RISKS RELATED TO PFL AND PMI, OUR MARKETPLACE AND OUR ABILITY TO SERVICE THE NOTES

Human error in the operation of our platform has resulted in the allocation of Borrower Loans to our Note Channel which did not conform to the eligibility criteria applicable to Borrower Loans at the time of allocation. If we are unable to prevent the reoccurrence of similar errors, our business and investors could be adversely impacted.

In August 2022, we became aware of an error which resulted in the allocation of certain Borrower Loans intended for our Whole Loan Channel to our Note Channel. These Borrower Loans corresponded to Borrower Loan listings with attributes which, at the time of allocation, did not conform to the eligibility criteria applicable to Borrower Loans offered for investment in our Note Channel. The error impacted a total of approximately $14 million out of the approximately $182 million of Borrower Loans allocated to the Note Channel from January 2022 to August 2022. The error did not affect any other parts of Note investors’ accounts or the platform, including the receipt and distribution of loan payments, the Note and loan level information provided to investors, or the enforceability of the Borrower Loans. Following discovery of the error, we repurchased the impacted Notes from investors for the full outstanding principal balance, allowing such investors to retain all interest, principal and other payments received on such Notes prior to their repurchase, and have implemented new measures designed to avoid similar issues in the future.

This error illustrates the risks of human error on our processes to allocate loan listings to the Note Channel. If similar errors were to occur in the future, it could result in repurchase or indemnification obligations, 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, loss of income and/or liability for damages, any of which could adversely affect our business and financial results.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

Prosper – None.

Prosper Funding – 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; Prosper Funding is therefore filing this Form with the reduced disclosure format.

Item 3. Defaults upon Senior Securities

Not applicable. 

Item 4. Mine Safety Disclosures

Not applicable. 

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference.

EXHIBIT INDEX

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)

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3.2	Amended and Restated Certificate of Incorporation of PMI, as further amended on October 15, 2018 (incorporated by reference to Exhibit 3.2 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on November 14, 2018)
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)
3.4	Bylaws of PMI, as amended by Amendment No. 1 dated February 15, 2016 and Amendment No. 2 dated May 19, 2020 (incorporated by reference to Exhibit 3.4 of PMI and PFL's Quarterly Report on Form 10-Q, filed on August 14, 2020)
4.1	Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.2)
4.2	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)
4.3	First Supplemental Indenture, dated May 10, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL's Quarterly Report on Form 10-Q, filed on August 14, 2013)
10.1	Promissory Note, dated April 24, 2020, by and between Broadway National Bank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI’s Current Report on Form 8-K, filed on April 30, 2020)
10.2	Sixth Amendment to Asset Sale Agreement, dated October 5, 2022, between Prosper Funding LLC and WebBank (incorporated by reference to Exhibit 10.1 of PMI’s Current Report on Form 8-K, filed on October 11, 2022) (1)
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 September 30, 2022 (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 September 30, 2022 (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 September 30, 2022 (2)
31.4	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 September 30, 2022 (2)
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 September 30, 2022 (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 September 30, 2022 (2)
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL  Taxonomy Extension Schema Document
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
(1)	Certain confidential information contained in this exhibit, market by brackets, has been omitted because the information (i) is not material and (ii) would be competitively harmful if disclosed.

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(2) Filed herewith.

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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
November 10, 2022	/s/ David Kimball
	David Kimball
	Chief Executive Officer of Prosper Marketplace, Inc.
	Chief Executive Officer of Prosper Funding LLC
	(Principal Executive Officer)
November 10, 2022	/s/ Usama Ashraf
	Usama Ashraf
	President and Chief Financial Officer of Prosper Marketplace, Inc.
	President, Chief Financial Officer and Treasurer of Prosper Funding LLC
	(Principal Financial Officer)

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