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Large Accelerated Filer | Accelerated Filer | Non-Accelerated Filer | Smaller Reporting Company | ||||||||||||
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Prosper Funding LLC | ¨ |
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| Registrant | Aggregate Market Value of Voting and Non-Voting Common Equity Held by Non-Affiliates of the Registrant at June 30, | Number of Shares of Common Stock of the Registrant Outstanding at March 3, | ||
Prosper Marketplace, Inc. | (a) |
69,702,689 ($.01 par value) | ||
Prosper Funding LLC | (a)(b) | None | ||
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| (a) | Not applicable. |
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| (b) | All voting and non-voting common equity is owned by Prosper Marketplace, Inc. |
ITEM PART I ITEM 1B ITEM 2 ITEM 3 ITEM 4 PART II ITEM 6 ITEM 7 ITEM 7A ITEM 8 ITEM 9 ITEM 9A ITEM 9B PART III ITEM 11 ITEM 12 ITEM 13 ITEM 14 PART IV Exhibit 31.1 Exhibit 31.2 Exhibit 32.1 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; PFL has retained PMI, pursuant to the Administration Agreement, to provide certain administrative services relating to our marketplace. Specifically, the Administration Agreement contains a license granted by PFL to PMI that entitles PMI to use the marketplace for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement relating to corporate administration, loan platform services, loan and note servicing, and marketing, and (ii) PMI’s performance of its duties and obligations to WebBank in relation to loan origination and funding. The license is terminable in whole or in part upon the failure by PMI to pay PFL the licensing fee, or upon PMI’s termination as the provider of some or all of the aforementioned services. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Prosper Marketplace, Inc.—Agreements with PFL” for more information. 2016. to the submission of loan applications by borrowers and the making of related Borrower Loans by WebBank in exchange for a fee. WebBank makes each Borrower Loan with its own funds. A joint WebBank-Prosper Credit Policy, which can be changed only with WebBank’s approval, constitutes the policy Prosper must follow in reviewing, approving and administering Borrower Loans made by WebBank through the marketplace. WebBank, PMI and PFL are parties to a Loan Sale Agreement, under which WebBank sells and assigns the promissory notes evidencing the Borrower Loans to PFL. As consideration for WebBank's agreement to sell and assign the promissory notes, PFL pays WebBank payments will be made on any Note after its final maturity date. Sources of Revenues assume servicing responsibilities in the event that we are no longer able to service the Borrower Loans and Notes. First Associates is a financial services company that has entered into numerous successor loan servicing agreements. We have registered trademarks in the United States for “Prosper,” “Prosper Healthcare Funding,” “Prosper.com,” the Prosper and Prosper Healthcare Funding logos, and other trademarks. Sales and Marketing General and Administrative - Research and Development General and Administrative – Other Total Headcount was not entitled to the benefits of federal preemption of claims of usury. obtain explicit consent from borrowers to obtain such reports. As the servicer for the Borrower Loan, we have systems in place to report Borrower Loan payment and delinquency information to appropriate reporting agencies. We provide an adverse action notice to a rejected borrower on WebBank’s behalf at the time the borrower is rejected that includes all the required disclosures. We have also implemented an identity theft prevention program as required by law. Bank Secrecy Act. In cooperation with WebBank, we have implemented an anti-money laundering policy and various anti-money laundering procedures to comply with applicable federal law. With respect to new borrowers and investors, we apply the customer identification and verification program rules and screen names against the list of Specially Designated Nationals maintained by the U.S. Department of the Treasury Office of Foreign Asset Control’s (“OFAC”) pursuant to the USA PATRIOT Act amendments to the Bank Secrecy Act (“BSA”) and its implementing regulation. The Borrower Loans are not secured by any collateral or guaranteed or insured by any third party, and investors must rely on us or a third-party collection agency to pursue collection against any borrower. The Auto Invest tool was first implemented on June 2, 2016. Since such time through December 31, 2016, the Auto Invest tool has experienced programming errors that affected 2 Notes out of the 515,168 Notes purchased. Some borrowers may use our marketplace to defraud investors, which could adversely affect investors’ ability to recoup their investment. The Borrower Loans do not restrict borrowers from incurring additional unsecured or secured debt, nor do they impose any financial restrictions on borrowers during the term of the Borrower Loan, which may reduce the likelihood that an investor will receive the full principal and interest payments that such investor expects to receive on a Note. duty. A holder of a Note that is dependent on such a Borrower Loan for payment will not receive the difference between 6% and the original stated interest rate for the Borrower Loan during any such period. The SCRA also permits courts to stay proceedings and the execution of judgments against service members and reservists on active duty, which may delay recovery on any Borrower Loans in default, and, accordingly, payments to investors on the corresponding Notes. obligations incurred by it and PMI. Nonetheless, there can be no assurance that if PFL is obligated to repurchase a Note or indemnify a Note holder, that it will be able to meet its repurchase or indemnification obligations. If PFL is unable to meet its indemnification and repurchase obligations with respect to a Note, the investor in such Note may lose all of such investor’s investment in the Note. The U.S. ITEMPagePART I 16ITEM 1 ITEM 1A 34343435PART IIITEM 5 3636364848484850PART IIIITEM 10 5156606365PART IVITEM 15 67S-55XBRL Content ×the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
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;
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 marketplace;
our ability to attract potential borrowers and investors to our marketplace;×the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;
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;××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;
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;×our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;×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;
our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;×the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
our compliance with applicable regulations and regulatory developments or court decisions affecting our business;×the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;
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 lack of a public trading market for the Notes and any inability to resell the Notes on the Note Trader platform;
the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;×the federal income tax treatment of an investment in the Notes and the PMI Management Rights;
the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;×our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of the platform or adversely impact our ability to service Borrower Loans; and
the lack of a public trading market for the Notes and the lack of any trading platform on which investors can resell the Notes;×the other risks discussed under the “Risk Factors” section of this Annual Report on Form 10-K. PART IItem 1. Overview$3.7$2.2 billion in Borrower Loan originations during 20152016 and $6.1$8.3 billion in Borrower Loan originations since it first launched in 2006.thanthat they would pay on outstanding credit card balances or unsecured installment loans from a traditional bank. We also believe that we offer faster decisions and loan originations, and greater transparency, resulting in a better customer experience than that provided by traditional consumer finance institutions.and institutional investors.and institutional investors to purchase a Borrower Loan in its entirety directly from PFL. PFL continues to own the Borrower Loans originated through the Note Channel. Prosper services all of the Borrower Loans made through the marketplace.(the(as amended to date, the “Administration Agreement”), PMI has agreed, in its dealings with PFL and with third parties, to observe certain “separateness covenants” related to its corporate formalities.sevenfive credit bureau inquiries (after excluding duplicate inquiries) within the last 6 months, (3) have an annual income greater than $0, (4) have a debt-to-income ratio below 50%, (5) have at least three open trades reported on their credit report, and (6) have not filed for bankruptcy within the last 12 months. Borrowers may have up to two loans through Prosper outstanding at one time, provided that (1) the first loan is current, (2) the aggregate outstanding principal balance of both loans does not exceed the then-current maximum allowable loan amount for loans (currently $35,000), and (3) the borrower complies with the prior-borrower constraints above. From time to time, we have, with WebBank’s consent, tested new products that include features which are outside the standard eligibility criteria discussed above. These products are available on a limited basis, exclusively through our Whole Loan Channel and did not have a material impact on our business or our financial statements during the fiscal year ended December 31, 2015. a monthly fee in addition to the purchase price of the promissory notes.notes, as well as a monthly fee, which is partially tied to the terms and performance of the loans. PMI receives payments from WebBank as compensation for the activities it undertakes on WebBank's behalf.Experian’sTransUnion’s FICO08 score. We obtain a borrower’s credit score at the time the loan listing is created, unless we already have a credit score on file that is not more than thirty days old.fundedoriginated through the Note Channel. The Notes are sold to the investors who successfully bid on the corresponding loan listing in the principal amounts of their respective bids. Each series of Notes is dependent for payment on PFL’s receipt of payments on the corresponding Borrower Loan. PFL uses the proceeds of each series of Notes to purchase the corresponding Borrower Loan from WebBank on the second business day after WebBank has originated the Borrower Loan.payments.payments or any payment processing fees we may collect. In addition, the funds available for payment on the Borrower Loans will be reduced by the amount of any attorneys' fees or collection fees we, a third-party servicer or a collection agency imposes in connection with collection efforts related to the Borrower Loan.Recent operatesoperated a patient financing platform, and merged American HealthCare Lending with and into PHL, with PHL surviving the merger. all of the outstanding shares of BillGuard, a privately held personal finance analytics company that developsdeveloped consumer apps that help consumers manage their identity, finances and credit, pursuant to an Agreement and Plan of Merger, dated as of September 23, 2015, by and among PMI, BillGuard, Beach Merger Sub, Inc., a wholly owned subsidiary of PMI, and Shareholder Representative Services LLC, solely in its capacity as the Stockholders’ Representative.2015,2016, the balance of outstanding consumer credit in the United States totaled $3.5$3.8 trillion. This amount included $936$996 billion of revolving consumer credit, which many consumers seek to refinance for a lower interest rate.we compete withour competition includes banking institutions, credit unions, credit card issuers and other consumer finance companies. We also faceFor investors, our competition fromincludes other onlineinvestment vehicles such as consumer lending companies. For investors, we compete with other investment vehiclesfunds and asset classes such as equities, bonds and commodities. Our competition for borrowers and investors also includes other online consumer lending companies, such as LendingClub Corporation, and other marketplace lending platforms. We may also face potential competition from new market entrants, or business expansion from established companies. These companies may have significantly greater financial, technical, marketing and other resources and may be able to devote greater resources to the development, promotion, sale and support of their offerings. strengthens. This allows us to attract top talent, speed up product innovation, attract marketplace participants and drive down our cost structure, all of which further benefit borrowers and investors. ×Robust Network Effect: The attractiveness of our marketplace increases as the number of participants on our marketplace increases, yielding a classic network effect. Our marketplace offers consumer borrowers access to affordable credit, and allows individual and institutional investors to invest in an asset class with attractive risk-adjusted returns. The diversity of investors brings scale and breadth of funding to our marketplace and makes credit more affordable. As both sides of the equation grow, the advantages (reduced risk, lower cost) scale accordingly, attracting even more borrowers and investors. The increased participant pool generates more data which we use to improve the effectiveness of our credit decisioning and scoring models. This enhances our aggregate loan performance and builds increased trust in our marketplace, which in turn attracts more borrowers and investors.×Technology Platform: Our technology platform automates key aspects of our operations, including the borrower application process, data gathering, underwriting, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection. This provides a significant time and cost advantage over traditional consumer lending business models and, we believe, enables us to provide a superior user experience to our borrowers and investors. Using our accumulated performance data, we continually invest in incremental improvements in our algorithms thus extending our technological advantage.×Proprietary Risk Management Capabilities: We have developed a proprietary risk model based on consumer loan performance data, which we believe allows us to accurately assess the credit risk profile of borrowers and which we believe also allows investors to earn attractive risk adjusted returns. We leverage the results from our growing data stream to continually refine this risk model and more accurately predict loan performance.×Unique Corporate Structure: Our corporate structure was designed to offer our investors extra protection. The organization and operation of PFL and PMI as separate and distinct entities should serve to protect our Note investors in the event of a bankruptcy filing by or against PMI. This organizational structure, along with the federal and state registration process, is expensive and time consuming to undertake, and is not easily duplicated by competitors.×Efficient and Attractive Financial Model: We have multiple revenue streams and an efficient cost model. We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, as well as from servicing fees related to Borrower Loans for which we retain the servicing rights. Our technology platform significantly reduces the need for physical infrastructure and therefore allows our business to grow with a lower cost operating model, providing us with significant operating leverage. accounting software to process electronic cash movements, record book entries and calculate cash balances in users’ funding accounts. Electronic deposits and payments are mostly done via Automated Clearing House (“ACH”) transactions. The technology platform allows us to economically acquire and service Borrower Loans and Notes, and allows WebBank to efficiently originate and fund Borrower Loans. We believe the growth of our marketplace will give us the economies of scale to lower unit costs.Arizona;Arizona and Las Vegas, Nevada; and San Francisco, California.Nevada. We own all of the hardware deployed in support of our marketplace. We continuously monitor the performance and availability of our marketplace. The infrastructure is scalable and utilizes standard techniques such as load-balancing and redundancies.user’susers' information and we take the integrity and security of the data provided by them very seriously. To that end, we have established data protection policies which are implemented and enforced using the latest technologies. All sensitive information is transmitted on secure channels using SSL technology, with SSL certificates issued by VeriSign (Symantec). or DigiCert. We employ principles of least privilege and layered security to protect stored sensitive information. Information at rest is encrypted using the industry level encryption technologies with appropriate controls to access the data. We protect the network perimeter using the latest technologies including but not limited to firewall and anti-virus threat management techniques. We use strong multi-factor authentication to protect and monitor remote access. We back up all data securely and would expect to recover operations in a short period of time in the event of a disaster. Extensive loggingLogging and monitoring of the systems and security controls enables us to ensure that the controls are functional and that alerts are triggered on policysecurity violations.2015,2016, we employed 619355 full-time employees. The following table shows a breakdown by function:EmployeesEmployees Origination and Servicing 151 22128 11578 13398 150355 619 and WebBank’s activities and the Borrower Loans acquired and Notes issued through our marketplace. In particular, these rules may limit the fees that may be assessed on the Borrower Loans, require extensive disclosure to, and consents from, borrowers, prohibit discrimination and impose multiple qualification and licensing obligations on marketplace activities. Failure to comply with these requirements may result in, among other things, revocation of required licenses or registrations, loss of approved status, voiding of loan contracts, indemnification liabilities to contract counterparties, class action lawsuits, administrative enforcement actions and civil and criminal liabilities. While compliance with such requirements is at times complicated by our novel business model, we believe we are in substantial compliance with these rules and regulations. These rules and regulations are subject to continuous change, however, and a material change could have an adverse effect on our compliance efforts and ability to operate.Pennsylvania.West Virginia. We are subject to supervision and examination by the state regulatory authorities that administer these state lending laws. The licensing statutes vary from state to state and prescribe or impose different requirements on us, including: restrictions on loan origination and servicing practices, including limits on finance charges and the type, amount and manner of charging fees; disclosure requirements; requirements that licensees submit to periodic examination; surety bond and minimum specified net worth requirements; periodic financial reporting requirements; notification requirements for changes in principal officers, stock ownership or corporate control; restrictions on advertising; and requirements that loan forms be submitted for review.Theisof the Second Circuit intact and binding on federal courts located in Connecticut, New York and Vermont, but the decision could also be adopted by other courts. The defendant’s petition to the U.S. Supreme Court to review the decision is currently pending. We are unable to predict whether the U.S. Supreme Court will review the decision and, if it does, what the outcome will be.Vermont. If applied to any of the Borrower Loans originated through our marketplace, the Second Circuit’s decision could adversely impact our business. , administered by the CFPB, promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. FCRA requires a permissible purpose to obtain a consumer credit report, and requires persons to report loan payment information to credit bureaus accurately. FCRA also imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in a credit report. WebBank and we have a permissible purpose for obtaining credit reports on potential borrowers and WebBank and we alsoprogram. requiresas well as certain state laws with similar protections for military members, require us to adjust the interest rate of borrowers who qualify for and request relief. If a borrower with an outstanding Borrower Loan qualifies for protection under the SCRA protection,or similar state laws, we will reduce the interest rate on the Borrower Loan to 6% for the duration of the borrower’s active duty. During this period, the investors who have invested in such Borrower Loan will not receive the difference between 6% and the Borrower Loan’s original interest rate. For a borrower to obtain an interest rate reduction on a Borrower Loan due to military service, we require the borrower to send us a written request and a copy of the borrower’s mobilization orders. We do not take military service into account in assigning Prosper Ratings to borrower loan requests and we do not disclose the military status of borrowers to investors. participant.participant or otherwise permitted by applicable law. In addition, we take a number of measures to safeguard the personal information of our borrowers and investors and to protect it against unauthorized access. Item 1A. funded.originated. For the period from July 14, 2009 to December 31, 2015,2016, we verified employment and/or income on approximately 58%61% of the Borrower Loans originated through our marketplace on a unit basis (275,607(389,386 out of 473,986)634,147) and approximately 72%74% of originations on a dollar basis ($4,319,3036,037,215 out of $5,979,755)$8,149,236). We selected these listings based on a combination of factors, including amount of loan requested, Prosper Rating, debt-to-income ratio and stated income. The number or percentage of applicants whose income and employment information is verified in relation to future listings may differ from the historical information supplied above. No assurance is made that such information will be verified with respect to any particular applicant or borrower. Further, Note holders will not have any contractual or other relationship with any borrowers that would enable them to make any claim against such borrowers for fraud or breach of any representation or warranty in relation to any false, incomplete or misleading information supplied by such borrowers in relation to the relevant Borrower Loan or Note.toolor Auto Invest tools may face additional risk of funding Borrower Loans that have been erroneously selected by Quick Invest.Quick Invest is a loan search tool that allows investors to identify loan listings in the Note Channel that meet their criteria. Investors who use the Quick Invest tool may face additional risk of funding Borrower Loans that have been erroneously selected by Quick Invest. tool.itsit was first implementationimplemented in July 2011 through December 31, 2015,2016, the Quick Invest tool has experienced programming errors that affected 8,630 Notes and PMI Notes out of the 6,182,1598,905,428 Notes and PMI Notes purchased. thatof any errors in Quick Invest or Auto Invest that cause an investor to purchase a Note from PFL that such investor would not otherwise have purchased or that differs materially from the Note such investor would have purchased had there been no error, PFL will either repurchase the Note, indemnify the investor against losses suffered on that Note or cure such error. See “Item 1A. Risk Factors—"Risk Factors - Risks Related to PFL and PMI, ourOur Marketplace and Our Ability to Service the Notes”Notes" for more information.requiresand other similar state laws require that the interest rate on preexisting debts, such as Borrower Loans, be set at no more than 6% while the qualified service member or reservist is on activeSCRA.SCRA or the MLA. See “Item 1. Government Regulation” for more information.2015, forty2016, seventy-six Borrower Loans, with a total outstanding balance of $461,000,$668 thousand are subject to the SCRA.The Notes will not be listed on any securities exchange, will not be transferable except through the Foliofn Note Trader platform, and can be held only by our registered investors. Investors should be prepared to hold the Notes they purchase until they mature.may onlycan be held only by our registeredPFL’s investors. TheFurther, no trading platform for the transfer of Notes will not be transferable except through the Note Trader platform operated and maintained by FOLIOfn Investments, Inc. (the “Foliofn Note Trader platform”),exists and there can be no assurance that a markettrading platform for the transfer of Notes will continue to develop onin the Foliofn Note Trader platform, or that the Foliofn Note Trader platform will continue in operation.future. Therefore, investors should be prepared to hold the Notes they purchase until maturity.If an investor chooses to post a Note for sale on the Foliofn Note Trader platform, he or she may not realize the expected return on his or her investment in the Note.The ability to sell a Note on the Foliofn Note Trader platform does not guarantee that an investor will be able to find another investor willing to buy the Note at a price acceptable to the selling investor, or at all. If the borrower becomes delinquent in payments under the corresponding Borrower Loan upon which an investor’s Note is dependent for payment, such investor’s ability to sell the Note on the Foliofn Note Trader platform will be substantially impaired. The investor may have to offer the Note for sale at a substantial discount, and there is no guarantee that such investor will receive the expected value of the Note or any value at all. In addition, a Note offered for sale on the Foliofn Note Trader platform must be purchased in its entirety by a single investor, and Notes with a high outstanding principal balance may be more difficult to sell with or without a discount due to the smaller number of investors with the ability to purchase such Notes. Also, investors may be less willing to bid for and purchase a Note if prevailing interest rates have changed or other investing activities have proven more attractive while the selling investor has held the Note.
Our participation in the funding of Borrower Loans could be viewed as creating a conflict of interest.
In the past, a
In the past, a
Our business could be adversely affected by a weakening market for securities backed by consumer assets.
holders of other Notes or Borrower Loans) may be deemed to have rights to such funds or interests in the deposit account and monies credited thereto that are equal to or greater than the rights of the holder of such Note.
or PMI determines a default is reasonably foreseeable or that such action is consistent with its servicing obligation, the Administration Agreement grants PMI the authority to waive or modify a material term of a Borrower Loan, to accept payment of an amount less than the principal balance in final satisfaction of a Borrower Loan and to grant any indulgence to a borrower, providedthat PMI has reasonably and prudently determined that such action will not be materially adverse to the interests of the
The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.
The consumer lending market is competitive and rapidly changing. With the introduction of new technologies and the influx of new entrants, we expect competition to persist and intensify in the future, which could harm our ability to increase volume in our marketplace.
Prosper’s principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other marketplace lending platforms, including LendingClub. Competition could result in reduced volumes, reduced fees or the failure of our marketplace to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, in the future Prosper may experience new competition, including from companies possessing large, existing customer bases, substantial financial resources and established distribution channels.
a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.
Most of our current or potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their marketplaces and distribution channels. Our potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and broader customer relationships than we have. These competitors may be better able to develop new products, to respond quickly to new technologies and to undertake more extensive marketing campaigns. Our industry is driven by constant innovation. If we are unable to compete with such companies and meet the need for innovation, the use of our marketplace could stagnate or substantially decline.
If
error, malfeasance or otherwise, or if design flaws in the relevant software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any investor or borrowers’ data, PFL’s relationships with users will be severely damaged, and it (or PMI) could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause users to lose confidence in the effectiveness of PFL’s and PMI’s data security measures. Any security breach, whether actual or perceived, would harm our reputations, and PFL could lose users.
PMI’s success will depend in part on the ability of its senior management to effectively manage the growth it achieves. To do so, PMI must continue to hire, train and manage new employees as needed. If PMI’s new hires perform poorly, or if PMI is unsuccessful in hiring, training, managing and integrating new employees, or if PMI is not successful in retaining its existing employees, PMI’s ability to perform under the Administration Agreement may be impaired. To manage the expected growth of PMI’s operations and personnel, PMI will need to continue to improve its operational and financial controls and update its reporting procedures and systems. The addition of new employees and the system development that PMI anticipates will be necessary to manage its growth will increase PMI’s cost base, which will make it more difficult for PMI to offset any future revenue shortfalls by reducing expenses in the short term. If PMI fails to successfully manage its growth, it will be unable to execute its business plan and its ability to perform under the Administration Agreement may be impaired. with such laws could also result in civil or criminal liability. Compliance with these requirements is also costly, time-consuming and limits operational flexibility. See “Item 1. Business – Government Regulation” for more information. maximum APR Although we have committed resources to enhancing our compliance programs, actions by the CFPB or other regulators against us, our issuing bank or our competitors that discourage the use of the marketplace model or suggest to consumers the desirability of other loan products or services could result in reputational harm and a loss of borrowers or investors. Our compliance costs and litigation exposure could increase materially if the CFPB or other regulators enact new regulations, change regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing regulations in a manner different or stricter than have been previously interpreted. marketplace lending. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to PFL’s users in the form of increased fees. In addition, federal and state governmental or regulatory agencies may decide to impose taxes on services provided over the If the investor's search criteria include multiple Prosper Ratings, Quick Invest divides his or her basket into equal portions, one portion representing each Prosper Rating selected. The Auto Quick Invest feature allows investors (i) to have Quick Invest searches run on their designated criteria automatically each time new listings are posted to our marketplace, and (ii) to place bids on any Notes identified by each such search. through in connection therewith. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities details regarding the sale. various factors, including but not limited to those included in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2015 2014 $ Change % Change Total Revenue $ 204,275 $ 81,317 122,958 151 % Total Expenses 229,903 83,986 145,917 174 % Net Loss Before Taxes (25,628 ) (2,669 ) (22,959 ) 860 % Income Tax Expense 340 - 340 100 % Net Loss $ (25,968 ) $ (2,669 ) (23,299 ) 873 % expenses discussed above. During the fourth quarter There is no assurance that these actions will result in significant additional long term capital available in the marketplace. increased marketing activities. Year Ended December 31, 2015 2014 $ Change % Change Operating Revenues Transaction Fees, Net $ 161,708 $ 68,229 93,479 137 % Servicing Fees, Net 17,238 4,552 12,686 279 % Gain on Sale of Borrower Loans 14,151 3,227 10,924 339 % Other Revenues 7,687 1,828 5,859 321 % Total Operating Revenues 200,784 77,836 122,948 158 % Interest Income Interest Income on Borrower Loans 41,606 42,087 (481 ) -1 % Interest Expense on Notes (38,174 ) (38,734 ) 560 -1 % Net Interest Income 3,432 3,353 79 2 % Change in Fair Value of Borrower Loans, Loans Held for Investment and Notes, Net 59 128 (69 ) (54 )% Total Revenues 204,275 81,317 122,958 151 % . Channel over the past three years. Borrower Loan sales in 2015. Loans held at fair value. Year ended December 31, 2015 2014 Borrower Loans $ (21,594 ) $ (15,868 ) Loans Held for Sale (121 ) 73 Notes 21,774 16,391 Total $ 59 $ 596 Year ended December 31, 2015 2014 $ Change % Change Expenses Origination and Servicing $ 31,139 $ 14,098 17,041 121 % Sales and Marketing 112,284 41,971 70,313 168 % General and Administrative - Research and Development 18,014 5,981 12,033 201 % General and Administrative - Other 68,466 21,935 46,531 212 % Total Expenses $ 229,903 $ 83,985 145,918 174 % December 31, 2015 2014 Origination and Servicing 221 99 Sales and Marketing 115 15 General and Administrative - Research and Development 133 65 General and Administrative - Other 150 50 Total Headcount 619 229 department in 2015. The increase for stock based compensation costs was due to large grants to new employees who were granted options in late 2015 and due to additional expense as a result of the stock option reprice that occurred in May 2016, these increased the stock based compensation expense for these employees by $4.0 million or 156%. Salaries and wages for these employees increased 25% or $3.3 million, this was the result of increased employee levels for the first four months of 2016 before the restructuring that occurred in May of 2016 that significantly lowered the employee levels. The total increase in costs for the year ended December 31, 2016 is not as large as the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are amortized in origination and servicing. Prosper capitalized internal-use software and website development costs in the amount of $6.3 million and $7.3 million for the years ended December 31, 2016 and 2015, respectively. The increase in 2015 compared to 2014 of For the Year Ended December 31, 2015 2014 Net Loss $ (25,968 ) $ (2,669 ) Net cash provided by (used in) operating activities 5,444 (4,651 ) Net cash used in investing activities (174,213 ) (71,606 ) Net cash provided by financing activities 184,507 108,475 Net Increase (decrease) in cash and cash equivalents 15,738 32,218 Cash and cash equivalents at the beginning of the period 50,557 18,339 Cash and cash equivalents at the end of the period $ 66,295 $ 50,557 However, if the financial results anticipated as a result of the restructuring and cost-saving measures discussed previously in this section are not achieved, our current cash and equivalents may not be sufficient to meet our operating and capital requirements for at least the next twelve months without obtaining additional sources of liquidity which may not be available on favorable terms or at all. Our future operating and capital requirements will depend on numerous factors, including without limitation, future results of operations, ability to attract whole loan purchasers, and ability to sublease excess office space at favorable rates. If we are unable to generate positive cash flow from operations or to obtain funds from additional sources, this could have a material adverse effect on our business and financial condition. Arrangements On January 1, 2015, we elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition. Prior to January 1, 2015, we measured the servicing assets and liabilities using the amortized cost method. the time and expenses that would be necessary to recreate the asset; circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. During the periods presented no reporting units were at risk of failing step one of the impairment analysis. Year Ended December 31, 2015 2014 $ Change % Change Total Net Revenue $ 93,053 $ 40,265 52,788 131 % Total Expenses 67,718 26,981 40,737 151 % Net Income $ 25,335 $ 13,284 12,051 91 % Year ended December 31, 2015 2014 $ Change % Change Revenues Operating Revenues Administration Fee Revenue - Related Party $ 57,919 $ 28,519 29,400 103 % Servicing Fees, Net 16,218 4,168 12,050 289 % Gain on Sale of Borrower Loans 14,151 3,733 10,418 279 % Other Revenues 1,500 - 1,500 N/A Total Operating Revenues 89,788 36,420 53,368 147 % Interest Income on Borrower Loans $ 41,380 $ 42,370 (990 ) -2 % Interest Expense on Notes $ (38,174 ) $ (38,734 ) 560 -1 % Net Interest Income 3,206 3,636 (430 ) -12 % Change in Fair Value on Borrower Loans, Loans Held for Investment and Notes, Net 59 209 (150 ) (72 )% Total Revenues $ 93,053 $ 40,265 52,788 131 % 2016. The decrease in listings was the result of Prosper reducing marketing spend to reduce demand and maintain marketplace equilibrium. sales of Borrower Loans through the Whole Loan Channel over the past three years. $5.9 million in fiscal 2016 to encourage whole loan purchases. This compares to no rebates given to investors on purchase in fiscal 2015. less instances of whole loan purchasers securitizing loans in 2016 compared to 2015. Overall, the increase in net interest income Net Year ended December 31, 2015 2014 Borrower Loans $ (21,594 ) $ (15,868 ) Notes 21,774 16,391 Loans Held for Sale (121 ) 73 Total $ 59 $ 596 Year ended December 31, 2015 2014 $ Change % Change Expenses Administration Fee Expense – Related Party 62,786 24,966 37,820 151 % Servicing $ 3,705 $ 1,509 2,196 146 % General and Administrative 1,227 506 721 142 % Total Expenses 67,718 26,981 40,737 151 % volumes being serviced. December 31, 2015 2014 Net Income $ 25,335 $ 13,284 Net cash provided in operating activities 34,174 2,216 Net cash used in investing activities (52,815 ) (55,184 ) Net cash provided by financing activities 9,890 70,956 Net increase (decrease) in cash and cash equivalents (8,751 ) 17,988 Cash and cash equivalents at the beginning of the period 23,777 5,789 Cash and cash equivalents at the end of the period $ 15,026 $ 23,777 Net cash provided by financing activities increased in 2016 when compared to 2015 as Prosper Funding Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, Changes in Internal Control over Financial Reporting Position(s) Ronald Suber President Chief Chief Risk Officer Sachin D. Adarkar General Counsel and Secretary Aaron Vermut Director Rajeev V. Date Director Patrick W. Grady Director David R. Golob Director Nigel W. Morris Director investing in and serving on the boards of directors of technology companies, give him the qualifications and skills to serve as a director. To memorialize its commitment to these standards, on January 11, 2017, the Board of Directors of PMI adopted a “Code of Ethics and Business Conduct” that applies to all of PMI's employees, directors and officers, including the Chief Executive Officer, Chief Financial Officer and other executive officers. A copy of this code is available on our website at requirements and rules of the NYSE. person in connection with the investigation, defense or appeal of any proceeding to which such person may be made a party, a potential party, a non-party witness, or otherwise by reason of: (i) such person’s service as a director or officer of PMI; (ii) any action or inaction taken by such person or on such person’s part while acting as director, officer, employee or agent of PMI; or (iii) such person’s actions while serving at the request of PMI as a director, officer, employee, trustee, general partner, managing member, agent or fiduciary of PMI or any other entity, in each case, whether or not serving in any such capacity at the time any liability or expense is or was incurred. In addition, PMI is required to indemnify against any Expenses actually and reasonably incurred in connection with any action establishing or enforcing a right to indemnification or advancement of expenses under the indemnification agreement or under any directors’ and officers’ liability insurance policies maintained by PMI to the packages include: (1) base salary; (2) cash bonuses; and (3) equity-based compensation in the form of stock options and restricted stock units (RSUs). PMI believes that this compensation mix supports its objective of attracting, motivating and retaining a talented and entrepreneurial executive team who will provide leadership for Prosper’s success in dynamic and competitive markets. PMI's compensation program has been weighted toward equity-based compensation, rather than cash compensation, in order to maximize retention and ensure that a significant portion of the executives’ compensation is tied to the company's and its stockholders’ long-term interests. and Grants of Plan-Based Awards Table” and the "Potential Payments upon Termination or Change in Control" sections and related tables below. Name and Principal Position Year Salary ($) Bonus ($) Option Awards ($)(1) All Other Compensation ($)(2) Totals ($) Aaron Vermut (3) 2015 360 200 3,654 14 4,228 Chief Executive Officer 2014 300 140 191 — 631 Stephan P. Vermut (4) 2015 300 150 3,654 14 4,118 Executive Chairman 2014 300 128 221 — 649 Joshua Tonderys (5) 2015 300 200 4,458 14 4,972 Chief Operating Officer 2014 300 135 52 487 Parker Barrile (6) 2015 75 85 7,280 5 7,445 Chief Product Officer 2014 — — — — — “All Other Compensation” consists of compensation received from employer matching contributions to PMI’s 401(k) plan and Narrative Discussion of the Summary Compensation Table employees of PMI. Name Grant Date Vesting Commencement Date Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) (1) Aaron Vermut 8/20/2013(2) 3/30/2013 — — — — 2,889,205 1/28/2014(3) 1/28/2014 2,940,660 — 0.11 1/28/2024 — 2/27/2015(4) 2/27/2014 1,170,000 — 3.62 2/27/2025 — Stephan P. Vermut 8/20/2013(2) 1/22/2013 — — — — 2,503,980 1/28/2014(3) 1/28/2014 2,940,660 — 0.11 1/28/2024 — 2/27/2015(4) 2/27/2015 1,170,000 — 3.62 2/27/2025 — Josh Tonderys 8/5/2013(2) 3/19/2013 — — — — 479,680 8/20/2013(2) 3/19/2013 — — — — 14,925 2/20/2015(5) 2/13/2015 910,070 — 3.62 2/20/2025 — 2/27/2015(4) 2/27/2015 550,000 — 3.62 2/27/2025 — Parker Barrile 11/4/2015(6) 8/31/2015 — 1,596,160 5.52 11/4/2025 — 11/4/2015(7) 8/31/2015 — — — 11/4/2025 532,055 The 2005 Plan provided for grants in the form of non-qualified stock options and stock purchase rights, which were available for grant to PMI’s directors, consultants or employees, including officers, and incentive stock options, which were available for grant solely to Committee. fiscal year ended December 31, 2016, none of PMI's executive officers served as a member of the Board of Directors or Compensation Committee (or other board committee serving an equivalent function) of any unrelated entity that had one or more of its executive officers serving on PMI’s Board of Directors or Compensation Committee (or other board committee serving an equivalent function). Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Total Beneficial Ownership Name of Beneficial Owner Number of Shares Beneficial Ownership Percentage Directors and Executive Officers 2015 2015 Rajeev V. Date (1) 226,115 * Patrick W. Grady (2) 51,247,915 23.07 % Christopher M. Bishko (3) 2,172,955 0.98 % David R. Golob (4) 17,413,325 7.84 % Nigel W. Morris (5) 1,448,970 * Stephan P. Vermut (6) 14,325,925 6.33 % Aaron Vermut (7) 14,325,925 6.33 % Ronald Suber (8) 13,780,925 6.11 % Joshua Tonderys (9) 3,600,845 1.61 % Parker Barrile — * Sachin Adarkar (10) 1,080,890 * All directors and executive officers as a group (11) 119,623,790 50.47 % 5% Shareholders Accel Partners (12) 24,320,660 10.95 % IDG Capital Partners (13) 24,320,660 10.95 % Sequoia Capital (14) 51,247,915 23.07 % Francisco Partners (15) 17,413,325 7.84 % The following table sets forth information, as of December 31, Plan Category Number of shares of common stock to be issued upon exercise of outstanding options, warrants, RSUs and rights (1) Weighted average exercise price of outstanding options, warrants and rights Number of shares of common stock remaining available for future issuance under equity compensation plans Equity compensation plans approved by stockholders: Prosper Marketplace, Inc. 2005 Stock Plan, as amended and restated 30,523,105 $ 1.61 - Prosper Marketplace, Inc. 2015 Equity Incentive Plan 10,491,160 5.50 2,106,550 All stockholder approved plans 41,014,265 $ 2.61 2,106,550 Equity compensation plans not approved by stockholders: N/A N/A N/A N/A All non-stockholder approved plans N/A N/A N/A Total 41,014,265 $ 2.61 2,106,550 Certain Relationships and Related Transactions, and Director Independence PFL. fund any repurchase obligation with respect to the transferred Notes, and indemnify PFL for any other losses that arise out of any registration agreement related to the transferred Notes or Borrower Loans, including as a result of a breach by PMI of any of its representations or warranties made therein; fund any arbitration filing or administrative fees or arbitrator fees payable under any registration agreement related to the transferred Notes or Borrower Loans; and fund any indemnification obligations that arise under any registration agreement entered into by PMI prior to the date of the asset transfer. Agreements with Prosper Asset Holdings LLC Stephen Vermut. Under the terms of the amended and restated investor rights agreement, dated (a1) Report of Independent Registered Public Accounting Firm for PMI (a2) Report of Independent Registered Public Accounting Firm for Prosper Funding LLC (b) Documents List Prosper Marketplace, Inc. Prosper Funding LLC December 31, December 31, ASSETS 2015 2014 Cash and Cash Equivalents $ 66,295 $ 50,557 Restricted Cash 151,223 81,300 Available for Sale Investments, at Fair Value 73,187 - Accounts Receivable 2,434 3,152 Loans Held for Sale, at Fair Value 32 8,463 Borrower Loans, at Fair Value 297,273 273,243 Property and Equipment, Net 24,965 14,424 Prepaid and Other Assets 6,433 4,856 Servicing Assets 14,363 4,163 Goodwill 36,368 - Intangible Assets, Net 13,051 - Total Assets $ 685,624 $ 440,158 LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Accounts Payable and Accrued Liabilities $ 22,409 $ 12,787 Payable to Investors 136,507 64,494 Notes, at Fair Value 297,405 273,783 Other Liabilities 20,735 13,323 Total Liabilities 477,056 364,387 Commitments and Contingencies (see Note 16) Convertible Preferred Stock – $0.01 par value; 177,388,425 shares authorized; 177,388,425 issued and outstanding as of December 31, 2015; 160,775,110 shares authorized; 153,499,785 issued and outstanding as of December 31, 2014. Aggregate liquidation preference of $325,952 and $160,952 as of December 31, 2015 and 2014, respectively. 275,938 111,145 Stockholders' Deficit Common Stock – $0.01 par value; 270,326,075 shares authorized; 70,367,425 shares issued and 69,431,490 outstanding as of December 31, 2015; 239,644,415 shares authorized; 72,243,500 issued and outstanding as of December 31, 2014 127 102 Additional Paid-In Capital 102,971 86,340 Less: Treasury Stock (23,417 ) (303 ) Accumulated Deficit (146,907 ) (121,513 ) Accumulated Other Comprehensive Income (144 ) - Total Stockholders' Deficit $ (67,370 ) $ (35,374 ) Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit $ 685,624 $ 440,158 Year ended December 31, 2015 2014 Revenues Operating Revenues Transaction Fees, Net $ 161,708 $ 68,229 Servicing Fees, Net 17,238 4,552 Gain on Sale of Borrower Loans 14,151 3,227 Other Revenues 7,687 1,828 Total Operating Revenues 200,784 77,836 Interest Income Interest Income on Borrower Loans 41,606 42,087 Interest Expense on Notes (38,174 ) (38,734 ) Net Interest Income 3,432 3,353 Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net 59 128 Total Net Revenues 204,275 81,317 Expenses Origination and Servicing 31,139 14,098 Sales and Marketing 112,284 41,971 General and Administrative 86,480 27,917 Total Expenses 229,903 83,986 Net Loss Before Taxes (25,628 ) (2,669 ) Income Tax Expense 340 - Net Loss $ (25,968 ) $ (2,669 ) Excess Return to Preferred Shareholders on Repurchase - (14,892 ) Net Loss Applicable to Common Shareholders $ (25,968 ) $ (17,561 ) Net Loss Per Share – Basic and Diluted (0.47 ) $ (0.39 ) Weighted-Average Shares - Basic and Diluted 55,547,408 44,484,005 Year Ended December 31, 2015 2014 Net Loss $ (25,968 ) $ (2,669 ) Other Comprehensive Income (Loss), Before Tax Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value (144 ) - Other Comprehensive Income (Loss), Before Tax (144 ) - Income tax effect - - Other Comprehensive Income (Loss), Net of Tax (144 ) - Comprehensive Income/(Loss) (26,112 ) (2,669 ) Convertible Preferred Stock Common Stock Treasury Stock Shares Amount Shares Amount Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Balance as of January 1, 2014 136,370,340 $ 44,822 67,944,015 $ 75 (911,320 ) $ (291 ) $ 83,676 $ — $ (103,952 ) $ (20,492 ) Issuance of convertible preferred stock, Series C, net of issuance costs 24,404,770 69,958 — — — — — — — — Exercise of vested stock options — — 295,750 1 — — 76 — — 77 Exercise of nonvested stock options — — 4,328,585 — — — — — — — Repurchase of restricted stock — — (909,465 ) — (24,615 ) (12 ) — — — (12 ) Restricted stock vested — — — 25 — — 320 — — 345 Exercise of warrants — — 584,615 1 — — 226 — — 227 Stock-based compensation expense — — — — — — 2,042 — — 2,042 Repurchase of preferred stock (7,275,325 ) (3,635 ) — — — — — — (14,892 ) (14,892 ) Net Loss — — — — — — — — (2,669 ) (2,669 ) Balance as of December 31, 2014 153,499,785 $ 111,145 72,243,500 $ 102 (935,935 ) $ (303 ) $ 86,340 $ — $ (121,513 ) $ (35,374 ) Cumulative effect of adoption of fair value method for servicing rights — — — — — — — — 574 574 Issuance of convertible preferred stock, Series D, net of issuance costs 23,888,640 164,793 — — — — — — — — Exercise of vested stock options — — 3,125,890 8 — — 771 — — 779 Exercise of nonvested stock options — — 76,045 — — — — — — — Repurchase of restricted stock — — (1,493,775 ) — — — — — — — Repurchase of common stock — — — — (4,241,300 ) (23,114 ) — — — (23,114 ) Restricted stock vested — — — 17 — — 471 — — 488 Restricted stock units sold — — 450,000 — — — 1,630 — — 1,630 Exercise of warrants — — 207,065 — — — 125 — — 125 Stock-based compensation expense — — — — — — 13,634 — — 13,634 Change in net unrealized loss on available for sale investments, at fair value — — — — — — — (144 ) — (144 ) Net Loss — — — — — — — — (25,968 ) (25,968 ) Balance as of December 31, 2015 177,388,425 $ 275,938 74,608,725 $ 127 (5,177,235 ) $ (23,417 ) $ 102,971 $ (144 ) $ (146,907 ) $ (67,370 ) For the Year Ended December 31, 2015 2014 Cash Flows from Operating Activities: Net Loss $ (25,968 ) $ (2,669 ) Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes (59 ) (596 ) Depreciation and Amortization 7,649 2,097 Gain on Sales of Borrower Loans (14,561 ) (4,048 ) Amortization and Change in Fair Value of Servicing Rights 4,860 792 Stock-Based Compensation Expense 13,011 2,021 Change in Fair Value of Contingent Consideration 1,001 - Other, Net 216 444 Changes in Operating Assets and Liabilities: Purchase of Loans Held for Sale at Fair Value (3,517,467 ) (1,416,715 ) Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value 3,525,759 1,411,531 Restricted Cash Except for those Related to Investing Activities (68,896 ) (28,125 ) Accounts Receivable 865 (2,856 ) Prepaid and Other Assets (1,360 ) (2,840 ) Accounts Payable and Accrued Liabilities 6,493 8,047 Payable to Investors 72,013 26,469 Other Liabilities 1,888 1,797 Net cash provided by (Used in) Operating Activities 5,444 (4,651 ) Cash Flows from Investing Activities: Purchase of Borrower Loans Held at Fair Value (197,436 ) (177,088 ) Principal Payments of Borrower Loans Held at Fair Value 151,893 121,082 Purchases of Property and Equipment (15,977 ) (12,246 ) Maturities of Short Term Investments 1,274 1,271 Purchases of Short Term Investments (1,277 ) (1,274 ) Purchases of Available for Sale Investments, at Fair Value (77,538 ) - Proceeds from Sale of Available for Sale Securities 4,022 - Acquisition of Businesses, Net of Cash Acquired (38,147 ) - Changes in Restricted Cash Related to Investing Activities (1,027 ) (3,351 ) Net Cash Used in Investing Activities (174,213 ) (71,606 ) Cash Flows from Financing Activities: Proceeds from Issuance of Notes Held at Fair Value 197,228 176,865 Payments of Notes Held at Fair Value (151,838 ) (120,909 ) Repayment of Borrowings (5,047 ) - Proceeds from Issuance of Convertible Preferred Stock, Net 164,793 69,958 Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock 2,617 1,118 Repurchase of Preferred Stock - (18,527 ) Repurchase of Common Stock and Restricted Stock (23,246 ) (30 ) Net Cash Provided by Financing Activities 184,507 108,475 Net Increase in Cash and Cash Equivalents 15,738 32,218 Cash and Cash Equivalents at Beginning of the Year 50,557 18,339 Cash and Cash Equivalents at End of the Year $ 66,295 $ 50,557 Cash Paid for Interest $ 38,168 $ 41,053 Non-Cash Investing Activity- Accrual for Property and Equipment, Net 1,483 1,550 Non-Cash Investing Activity- Amount Payable for the Acquisition of Business $ 4,488 $ - estimates. As a result of the nature of the retained servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain special purposes entities that purchase these Borrower Loans. For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a potentially significant economic interest in the VIE. In no case are we the primary beneficiary, entities. We define fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs. The fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity 7 years Office equipment 5 years Computers and equipment 3 years Leasehold improvements 5-8 years Software and website development costs 1-5 years The costs to develop software for the website and other internal uses are capitalized when management has authorized and committed project funding, preliminary development efforts are successfully completed, and it is probable that the project will be completed and the software will be used as intended. Capitalized software and website development costs primarily include software licenses acquired, fees paid to outside consultants, and salaries and payroll related costs for employees directly involved in the development efforts. Intangible assets identified through the acquisitions of American Healthcare Lending and BillGuard include customer relationships, technology and a brand name. The customer relationship intangible assets are amortized on an accelerated basis over three to ten year periods. The technology and brand name intangible assets are amortized on a straight line basis over three to five years and one year, respectively. Prosper values the customer relationships, technology and brand name assets using the income approach. Significant assumptions in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and brand names from a market participant perspective, useful lives and discount rates. The measurement period has closed for all acquisitions. Loans when it sells Borrower Loans to third parties. Gains or losses on sales of Borrower Loans that are recognized at the time of sale and are determined by the difference between the net sales proceeds, fair value of any servicing rights retained and the carrying value of the Borrower Loans sold. The functional currency of our international subsidiary is the U.S. dollar. For this subsidiary, foreign currency denominated monetary assets and liabilities are remeasured into U.S. dollars at current exchange rates and foreign currency denominated statements. In February 2015, the FASB issued ASU statements. statements. December 31, 2015 2014 Property and equipment: Computer equipment $ 10,522 $ 3,824 Internal-use software and website development costs 10,990 4,486 Office equipment and furniture 2,442 1,904 Leasehold improvements 5,719 5,274 Assets not yet placed in service 3,242 4,361 Property and equipment 32,915 19,849 Less accumulated depreciation and amortization (7,950 ) (5,425 ) Total property and equipment, net $ 24,965 $ 14,424 Notes include default rates derived from historical performance, market conditions and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. The obligation to pay principal and interest on any series of Notes is equal to the payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the Notes is approximately equal to the fair value of the Borrower Loans At December 31, Borrower Loans Notes Loans Held for Sale December 31, 2015 December 31, 2014 December 31, 2015 December 31, 2014 December 31, 2015 December 31, 2014 Aggregate principal balance outstanding $ 296,945 $ 268,598 $ (294,331 ) $ (272,269 ) $ 42 $ 8,295 Fair value adjustments 328 4,645 (3,074 ) (1,514 ) (10 ) 168 Fair value $ 297,273 $ 273,243 $ (297,405 ) $ (273,783 ) $ 32 $ 8,463 2020. year ending December 31, 2016. For the year ended December 31, 2014, no impairment was recorded. 2020. for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider. OTTI. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fixed maturity securities: Corporate debt securities $ 50,327 $ 1 $ (94 ) $ 50,234 Commercial paper 9,493 - - 9,493 US Treasury securities 8,512 - (41 ) 8,471 Agency bonds 2,499 - (8 ) 2,491 Total fixed maturity securities 70,831 1 (143 ) 70,689 Short term bond funds 2,500 - (2 ) 2,498 Total Available for Sale Investments $ 73,331 $ 1 $ (145 ) $ 73,187 Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Fixed maturity securities: Corporate debt securities $ 45,375 $ (94 ) $ - $ - $ 45,375 $ (94 ) U.S. treasury securities 8,471 (41 ) - - 8,471 (41 ) Agency bonds 2,491 (8 ) - - 2,491 (8 ) Total fixed maturity securities 56,337 (143 ) - - 56,337 (143 ) Short term bond funds 2,498 (2 ) - - 2,498 (2 ) Total Investments with Unrealized Losses $ 58,835 $ (145 ) $ - $ - $ 58,835 $ (145 ) Within 1 year After 1 year through 5 years After 5 years to 10 years After 10 years Total Corporate debt securities $ 26,289 $ 23,945 $ - $ - $ 50,234 Commercial paper 9,493 - - - 9,493 US Treasury securities - 8,471 - - 8,471 Agency bonds 2,491 2,491 Total Fair Value $ 35,782 $ 34,907 $ - $ - $ 70,689 Total Amortized Cost $ 35,831 $ 35,000 $ - $ - $ 70,831 $12 thousand. 2016. December 31, 2015 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Assets: Borrower Loans $ - $ - $ 297,273 $ 297,273 Loans Held for Sale - - 32 32 Available for Sale Investments, at Fair Value - 73,187 - 73,187 Servicing Assets - - 14,363 14,363 Total Assets - 73,187 311,668 384,855 Liabilities: Notes $ - $ - $ 297,405 $ 297,405 Servicing Liabilities - - 484 484 Contingent Consideration - - 4,801 4,801 Total Liabilities $ - $ - $ 302,690 $ 302,690 December 31, 2014 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Assets: Borrower Loans $ - $ - $ 273,243 $ 273,243 Loans Held for Sale - - 8,463 8,463 Total Assets - - 281,706 281,706 Liabilities: Notes $ - $ - $ 273,783 $ 273,783 Total Liabilities $ - $ - $ 273,783 $ 273,783 2016: December 31, 2016 Discount rate 4.0% - 15.9% Default rate 1.7% - 14.9% Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Borrower Loans Notes Loans Held for Sale Total Balance at January 1, 2015 $ 273,243 $ (273,783 ) $ 8,463 $ 7,923 Purchase of Borrower Loans/Issuance of Notes 197,436 (197,228 ) 3,517,467 $ 3,517,675 Principal repayments (151,038 ) 151,025 (552 ) $ (565 ) Borrower Loans sold to third parties (855 ) 813 (3,525,207 ) $ (3,525,249 ) Other changes 81 (6 ) (18 ) $ 57 Change in fair value (21,594 ) 21,774 (121 ) $ 59 Balance at December 31, 2015 $ 297,273 $ (297,405 ) $ 32 $ (100 ) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Borrower Loans Notes Loans Held for Sale Total Balance at January 1, 2014 $ 233,105 $ (234,218 ) $ 3,206 $ 2,093 Purchase of Borrower Loans/Issuance of Notes 177,088 (176,865 ) 1,416,715 1,416,938 Principal repayments (121,082 ) 120,909 — (173 ) Borrower Loans sold to third parties — — (1,411,531 ) (1,411,531 ) Change in fair value (15,868 ) 16,391 73 596 Balance at December 31, 2014 $ 273,243 $ (273,783 ) $ 8,463 $ 7,923 Servicing Assets Servicing Liabilities Amortized Cost at January 1, 2014 $ 460 $ 167 Additions 4,700 662 Less: Changes in fair value (997 ) (205 ) Amortized Cost at December 31, 2014 4,163 624 Adjustment to adopt fair value measurement 545 (29 ) Fair Value at January 1, 2015 4,708 595 Additions 14,909 283 Less: Changes in fair value (5,254 ) (394 ) Fair Value at December 31, 2015 $ 14,363 $ 484 During the year ended December 31, 2016 there were fair value changes of $0.2 million that increased the fair value. The contingent consideration was paid in 2016 and at December 31, 2016 had a balance of $0. Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at December 31, Borrower Loans / Loans Held for Sale Notes Discount rate assumption: 6.97 % * 6.97 % * Resulting fair value from: 100 basis point increase $ 294,179 $ 294,305 200 basis point increase 291,165 291,284 Resulting fair value from: 100 basis point decrease $ 300,449 $ 300,589 200 basis point decrease 303,710 303,858 Default rate assumption: 10.11 % * 10.11 % * Resulting fair value from: 100 basis point increase $ 294,480 $ 294,601 200 basis point increase 291,741 291,851 Resulting fair value from: 100 basis point decrease $ 300,090 $ 300,235 200 basis point decrease 302,931 303,088 Servicing Assets Servicing Liabilities Weighted average market servicing rate assumptions 0.625 % 0.625 % Resulting fair value from: Market servicing rate increase to 0.65% $ 13,327 $ 533 Market servicing rate decrease to 0.60% $ 15,399 $ 435 Weighted average prepayment assumptions 18.9 % 18.9 % Resulting fair value from: Applying a 1.1 multiplier to default rate $ 14,000 $ 458 Applying a 0.9 multiplier to default rate $ 14,524 $ 476 Weighted average default assumptions 11 % 11 % Resulting fair value from: Applying a 1.1 multiplier to default rate $ 14,163 $ 484 Applying a 0.9 multiplier to default rate $ 14,565 $ 484 healthcare providers refer individuals who would like to finance medical procedures through Prosper’s marketplace. Through this acquisition Prosper expects to be able to more effectively offer affordable payment options to consumers who would like to finance elective medical procedures at the point of service. Prosper has included the financial results of PHL in the consolidated financial statements from the date of acquisition. The amounts of gross revenue and net loss of PHL included in Prosper’s consolidated financial statements from the merger date of January 23, 2015 to December 31, 2015 were $2.8 million and $(5.8) million, respectively. Prosper recorded acquisition-related expenses of $0.2 million for the year ended December 31, 2015, which is included in general and administrative expense. contingencies were met. the measurement period has ended. Years Ended December 31, 2015 2014 Total net revenue $ 204,350 $ 81,195 Net loss (1) (33,677 ) (16,728 ) Basic and diluted net loss per share attributable to common stockholders $ (0.61 ) $ (0.71 ) Goodwill - December 31, 2014 $ - 2015 acquisitions 36,368 Goodwill - December 31, 2015 $ 36,368 2016, 2015 and 2014. 2016. Year Ending December 31, 2016 $ 3,859 2017 3,205 2018 2,310 2019 1,789 2020 1,366 Thereafter 522 Total $ 13,051 Year Ending December 31, 2015 2014 Class action settlement liability $ 5,949 $ 7,861 Repurchase liability for unvested restricted stock awards 473 1,010 Contingent consideration 4,801 - Deferred revenue 1,591 - Servicing liabilities 484 624 Deferred rent 5,240 3,657 Other 2,197 171 Total Other Liabilities $ 20,735 $ 13,323 We compute Earnings per Share (“EPS”) using the two-class method. The two-class method allocates earnings that otherwise would have been available to common shareholders to holders of participating securities. We consider all series of our convertible preferred stock to be participating securities due to their rights to participate in dividends with common stock. As such, earnings allocated to these participating securities, which include participation rights in undistributed earnings, are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders. All participating securities are excluded from basic weighted-average common shares outstanding. Prior to any conversion to common shares, each series of PMI’s convertible preferred stock was entitled to participate on an if converted basis in distributions of earnings, when and if declared by the board of directors, that were made to common stockholders and as a result these shares were considered participating securities. During the year ended December 31, 2016, 2015 and 2014, certain shares issued as a result of the early exercise of stock options, which are subject to a repurchase right by PMI, were entitled to receive non-forfeitable dividends during the vesting period and as a result were considered participating securities. Year Ended December 31, 2015 2014 Numerator: Net loss $ (25,968 ) $ (2,669 ) Excess return to preferred shareholders on repurchase - (14,892 ) Net loss available to common stockholders for basic and diluted EPS (25,968 ) (17,561 ) Denominator: Weighted average shares used in computing basic and diluted net loss per share 55,547,408 44,484,005 Basic and diluted net loss per share $ (0.47 ) $ (0.39 ) Year Ended December 31, 2015 2014 (shares) (shares) Excluded securities: Convertible preferred stock issued and outstanding 177,388,425 153,499,785 Stock options issued and outstanding 34,358,106 24,974,990 Unvested stock options exercised 9,806,170 20,571,345 Restrictive Stock Units 190,517 - Warrants issued and outstanding 588,660 884,435 Total common stock equivalents excluded from diluted net loss per common share computation 222,331,878 199,930,555 In January 2013, PMI issued and sold 69,340,760 shares of New Series A (“New Series A”) convertible preferred stock in a private placement at a purchase price of $0.29 per share for $19.8 million, net of issuance costs. In connection with that sale, PMI issued 25,585,910 shares at par value $0.01 per share of Series A-1 (“Series A-1”) convertible preferred stock to the holders of shares of PMI’s convertible preferred stock that was outstanding immediately prior to the sale (“Old Preferred Shares”) in consideration for such stockholders participating in the sale. In connection with the New Series A sale, Old Preferred Shares were converted into shares of common stock at a ratio of 1:1 if the holder of the Old Preferred Shares participated in the New Series A sale or at a 10:1 ratio if the holder of the Old Preferred Shares did not so participate. In addition, each such participating holder received a share of New Series A-1 convertible preferred stock for every dollar of liquidation preference associated with an Old Preferred Share held by such holder. Each share of Series A-1 preferred stock has a liquidation preference of $2.00 and converts into common stock at a ratio of 1,000,000:1. The New Series A and Series A-1 convertible preferred stock were sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering. Convertible Preferred Stock Par Value Authorized shares Outstanding and Issued shares Liquidation Preference New Series A $ 0.01 68,558,220 68,558,220 $ 19,774 Series A-1 0.01 24,760,915 24,760,915 49,522 New Series B 0.01 35,775,880 35,775,880 21,581 New Series C 0.01 24,404,770 24,404,770 70,075 New Series D 0.01 23,888,640 23,888,640 165,000 177,388,425 177,388,425 325,952 paid or set aside for payment to the New Series A, New Series B, New Series C New Series D and New Series Early exercised options, unvested Weighted average exercise price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Balance as of January 1, 2014 27,970,670 $ 0.02 Exercise of non-vested stock options 4,328,585 0.19 Repurchase of restricted stock (909,465 ) 0.02 Restricted stock vested (10,828,445 ) 0.03 Balance as of December 31, 2014 20,561,345 0.05 Exercise of non-vested stock options 76,045 1.11 Repurchase of restricted stock (1,493,775 ) 0.10 Restricted stock vested (9,337,445 ) 0.05 Balance as of December 31, 2015 9,806,170 0.05 1.58 $ 54,620 Options expected to vest 9,614,920 $ 0.05 1.58 $ 53,555 Options Outstanding Range of Exercise Prices Number Outstanding Weighted –Avg. Remaining Life Weighted –Avg. Exercise Price $0.02 9,116,670 1.56 $ 0.02 0.11 511,180 1.69 0.11 1.13 165,820 2.58 1.13 3.62 12,500 3.17 3.62 $0.02 - $3.62 9,806,170 1.58 $ 0.05 Options Issued and Outstanding Weighted- Average Exercise Price Weighted Average Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Balance as of January 1, 2014 4,474,880 $ 0.29 Options granted 26,438,815 $ 0.35 Options exercised – vested (295,750 ) $ 0.26 Options exercised – nonvested (4,328,585 ) $ 0.19 Options forefeited (1,314,370 ) $ 0.36 Balance as of December 31, 2014 24,974,990 $ 0.37 Options granted 23,422,230 $ 4.51 Options exercised – vested (3,135,890 ) $ 0.25 Options exercised – nonvested (76,045 ) $ 1.11 Options forfeited (4,759,680 ) $ 1.52 Balance as of December 31, 2015 40,425,605 $ 2.64 8.80 $ 118,331 Options vested and expected to vest as of December 31, 2015 34,959,394 $ 2.64 8.80 $ 102,331 Options vested and exercisable at December 31, 2015 28,022,165 $ 1.67 8.45 $ 109,395 Options Outstanding Options Vested and Exercisable Weighted – Weighted – Weighted - Range of Avg. Avg. Avg. Exercise Number Remaining Exercise Number Exercise Prices Outstanding Life Price Vested Price $ 0.02 - $0.20 12,742,705 8.08 $ 0.11 12,742,705 $ 0.11 0.21 - 0.99 901,860 5.31 0.33 892,410 0.33 1.00 - 2.00 4,694,560 8.54 1.13 2,856,730 1.13 2.01 - 4.00 11,530,320 9.13 3.62 11,530,320 3.62 4.01 - 5.52 10,556,160 9.73 5.50 - - $ 0.02 - $5.52 40,425,605 8.80 $ 2.64 28,022,165 $ 1.67 Year ended December 31, 2015 2014 Volatility of common stock 55.69 % 68.28 % Risk-free interest rate 1.74 % 1.79 % Expected life 6.0 years 5.7 years Dividend yield 0 % 0 % 2014 Restricted Stock Unit Activity Number of Shares Weighted-Average Grant Date Fair Value Unvested at January 1, 2015 - Granted 2,407,060 $ 5.52 Vested (190,517 ) $ 5.52 Forfeited (381,033 ) Unvested - December 31, 2015 1,835,510 $ 5.52 December 31, 2015 2014 Origination and Servicing $ 1,231 $ 104 Sales and Marketing 2,561 767 General and Administrative 9,219 1,150 Total stock based compensation $ 13,011 $ 2,021 Year Ended December 31, 2015 2014 Current: Federal $ — $ — State — — Foreign (5 ) — Total Current Income Tax (Benefit) (5 ) — Deferred: Federal 320 — State 25 — Foreign — — Total Deferred Income Tax 345 — Total Income Tax $ 340 $ — Year Ended December 31, 2015 2014 Federal tax at statutory rate 34 % 34 % State tax at statutory rate (net of federal benefit) 12 % 1 % Change to Uncertain Tax Position 10 % 0 % Permanent Items (— )% (11 )% Incentive Stock Options (9 )% (9 )% Acquisition Related Costs (3 )% 0 % Change in valuation allowance (46 )% (25 )% Credits and Reserves (— )% 9 % Other 1 % 1 % (1 )% 0 % December 31, 2015 2014 Net operating loss carry forwards $ 44,632 $ 24,756 Research & other credits 502 421 Settlement liability 2,466 2,964 Stock compensation 3,193 344 Accrued liabilities 5,794 2,320 Other 126 45 Deferred tax assets 56,713 30,850 Fair value of loans (1,406 ) (1,160 ) Net servicing rights (5,752 ) (1,203 ) Fixed assets (721 ) - Intangible assets (4,246 ) - Deferred tax liabilities (12,125 ) (2,363 ) Net deferred tax assets 44,588 28,487 Valuation allowance (44,933 ) (28,487 ) Net deferred tax liabilities $ (345 ) $ — December 31, December 31, 2015 2014 Balance at January 1, $ 4,927 $ 4,927 Decrease related to current year tax position (4,014 ) - Balance at December 31, $ 913 $ 4,927 2016 $ 6,352 2017 9,408 2018 10,199 2019 10,556 2020 11,065 Thereafter 43,122 Total future operating lease obligations $ 90,702 the Company was in compliance with the covenant. the quarter ending March 31, 2017. Aggregate Amount of Interest Earned on Related Party Notes Purchased Notes 2015 2014 2015 2014 Executive officers and management $ 1,361 $ 1,127 $ 206 $ 163 Directors 244 42 9 10 Total $ 1,605 $ 1,169 $ 215 $ 173 Related Party Notes balance as of December 31, 2015 2014 Executive officers and management $ 1,912 $ 1,614 Directors 325 76 $ 2,237 $ 1,690 December 31, December 31, 2015 2014 Assets Cash and Cash Equivalents $ 15,026 $ 23,777 Restricted Cash 139,937 73,103 Short Term Investments 1,277 1,274 Loans Held for Sale at Fair Value 32 8,463 Borrower Loans Receivable at Fair Value 297,273 273,243 Property and Equipment, Net 8,419 1,125 Related Party Receivable - 1,135 Servicing Assets 13,605 3,116 Other Assets 122 4 Total Assets $ 475,691 $ 385,240 Liabilities and Member's Equity Accounts Payable and Accrued Liabilities $ 2,122 $ 612 Payable to Related Party 2,989 - Payable to Investors 135,661 63,809 Notes at Fair Value 297,405 273,783 Other Liabilities 1,209 745 Total Liabilities 439,386 338,949 Member's Equity Member's Equity - 29,619 Retained Earnings 36,305 16,672 Total Member's Equity 36,305 46,291 Total Liabilities and Member's Equity $ 475,691 $ 385,240 Year ended December 31, 2015 2014 Revenues Operating Revenues Administration Fee Revenue – Related Party $ 57,919 $ 28,519 Servicing Fees, Net 16,218 4,168 Gain on Sale of Borrower Loans 14,151 3,733 Other Revenues 1,500 — Total Operating Revenues 89,788 36,420 Interest Income on Borrower Loans 41,380 42,370 Interest Expense on Notes (38,174 ) (38,734 ) Net Interest Income 3,206 3,636 Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net 59 209 Total Net Revenues 93,053 40,265 Expenses Administration Fee – Related Party 62,786 24,966 Servicing 3,705 1,509 General and Administrative 1,227 506 Total Expenses 67,718 26,981 Total Net Income $ 25,335 $ 13,284 Retained Earnings Member’s (Accumulated Equity Deficit) Total Balance as of January 1, 2014 $ 15,836 $ 3,388 $ 19,224 Capital Infusion from Parent 15,000 — 15,000 Transfer of Servicing Rights to Parent (1,217 ) — (1,217 ) Net Income — 13,284 13,284 Balance as of December 31, 2014 $ 29,619 $ 16,672 $ 46,291 Distributions to Parent (29,370 ) (6,130 ) (35,500 ) Transfer of Servicing Rights to Parent (249 ) — (249 ) Adjustment to Servicing Rights on Transition to Fair Value — 428 428 Net Income — 25,335 25,335 Balance as of December 31, 2015 $ — $ 36,305 $ 36,305 For the Twelve Months Ended December 31, 2015 2014 Cash flows from operating activities: Net Income $ 25,335 $ 13,284 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes (59 ) (596 ) Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes (57 ) - Gain on Sale of Borrower Loans (14,561 ) (4,034 ) Amortization and Change in Fair Value of Servicing Rights 4,176 594 Depreciation and Amortization 3,161 1,331 Changes in Operating Assets and Liabilities: Purchase of Loans Held for Sale at Fair Value (3,517,467 ) (1,416,715 ) Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value 3,525,759 1,411,531 Restricted Cash Except for those Related to Investing Activities (68,776 ) (28,125 ) Other Assets (118 ) 3 Accounts Payable and Accrued Liabilities 1,510 405 Payable to Investors 71,852 25,788 Net Related Party Receivable/Payable 2,880 (1,340 ) Other Liabilities 539 90 Net Cash Provided by Operating Activities 34,174 2,216 Cash Flows From Investing Activities: Purchase of Borrower Loans Held at Fair Value (197,436 ) (177,088 ) Principal Payment of Borrower Loans Held at Fair Value 151,893 121,081 Purchase of Short Term Investments (1,277 ) (1,274 ) Maturities of Short Term Investments 1,274 1,271 Purchases of Property and Equipment (9,211 ) (846 ) Changes in Restricted Cash Related to Investing Activities 1,942 1,672 Net Cash Used in Investing Activities (52,815 ) (55,184 ) Cash Flows from Financing Activities: Proceeds from Issuance of Notes Held at Fair Value 197,228 176,865 Payments of Notes Held at Fair Value (151,838 ) (120,909 ) Cash Distributions to Parent (35,500 ) - Loan Advances to Parent (10,000 ) - Loan Repayments from Parent 10,000 - Member’s Equity Capital Infusion from Parent - 15,000 Net Cash Provided by Financing Activities 9,890 70,956 Net Increase (Decrease) in Cash and Cash Equivalents (8,751 ) 17,988 Cash and Cash Equivalents at Beginning of the Year 23,777 5,789 Cash and Cash Equivalents at End of the Year $ 15,026 $ 23,777 Supplemental Disclosure of Cash Flow Information: Cash Paid for Interest $ 38,168 $ 41,053 Non-Cash Operating Activity - Servicing Rights Fair Value Adjustment 428 - Non-Cash Investing Activity- Accrual for Property and Equipment, Net 1,436 192 Non-Cash Financing Activity, Distribution to Parent $ 249 $ 1,228 As a result Prosper Funding earns significant amounts of revenues and incurs significant expenses with a related party, its direct parent company, PMI. repurchase and indemnification obligation, and contingent liabilities. Prosper Funding bases its estimates on historical experience from all Borrower Loans, and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. entities. . As observable market prices are not available for the Borrower Loans, Loans Held for Sale and Notes, Prosper Funding believes the Borrower Loans, Loans Held for Sale and Notes should be considered Level 3 financial instruments under ASC Topic 820. In a hypothetical transaction as of the measurement date, Prosper Funding believes that differences in the principal marketplace in which the Borrower Loans are originated and the principal marketplace in which Prosper Funding might offer those loans may result in differences between the originated amount of the loans and their fair value as of the transaction date. For Borrower Loans and Loans Held for Sale, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including prepayment speeds, default rates and discount rates based on the perceived credit risk within each credit grade. Prosper Funding recognizes gains or losses on the sale of Borrower Loans when it Loans when it sells Borrower Loans to third parties. Gains or losses on sales of Borrower Loans that are recognized at the time of sale and are determined by the difference between the net sales proceeds, fair value of any servicing rights retained and the carrying value of the Borrower Loans sold. Servicing statements. software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper Funding is currently assessing the potential impact on its consolidated financial statements from adopting this new guidance. Cash Payments. December 31, 2015 2014 Property and equipment: Internal-use software and web site development costs $ 10,990 $ 4,042 Property and equipment 10,990 4,042 Less accumulated depreciation and amortization (2,571 ) (2,917 ) Total property and equipment, net $ 8,419 $ 1,125 Borrower Loans Notes Loans Held for Sale December 31, 2015 December 31, 2014 December 31, 2015 December 31, 2014 December 31, 2015 December 31, 2014 Aggregate principal balance outstanding $ 296,945 $ 268,598 $ (294,331 ) $ (272,269 ) $ 42 $ 8,295 Fair value adjustments 328 4,645 (3,074 ) (1,514 ) (10 ) 168 Fair value $ 297,273 $ 273,243 $ (297,405 ) $ (273,783 ) $ 32 $ 8,463 2020. recognition. 2016. Level 1 Level 2 Level 3 December 31, 2015 Inputs Inputs Inputs Fair Value Assets Borrower Loans $ — $ — $ 297,273 $ 297,273 Servicing Assets — — 13,605 $ 13,605 Loans Held for Sale — — 32 32 Total Assets — — 310,910 310,910 Liabilities Notes $ — $ — $ 297,405 $ 297,405 Servicing Liabilities — — 484 484 Total Liabilities $ — $ — $ 297,889 $ 297,889 Level 1 Level 2 Level 3 December 31, 2014 Inputs Inputs Inputs Fair Value Assets Borrower Loans — — 273,243 273,243 Loans Held for Sale — — 8,463 8,463 Total Assets — — 281,706 281,706 Liabilities Notes $ — $ — $ 273,783 $ 273,783 Total Liabilities $ — $ — $ 273,783 $ 273,783 Significant Unobservable Inputs 2016: December 31, 2016 Discount rate 4.0% - 15.9% Default rate 1.7% - 14.9% Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Loans Held for Borrower Loans Notes Sale Total Balance at January 1, 2015 $ 273,243 $ (273,783 ) $ 8,463 $ 7,923 Originations 197,436 (197,228 ) 3,517,467 3,517,675 Principal repayments (151,038 ) 151,025 (552 ) (565 ) Borrower loans sold to third parties (855 ) 813 (3,525,207 ) (3,525,249 ) Other changes 81 (6 ) (18 ) 57 Change in fair value (21,594 ) 21,774 (121 ) 59 Balance at December 31, 2015 $ 297,273 $ (297,405 ) $ 32 $ (100 ) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Loans Held for Borrower Loans Notes Sale Total Balance at January 1, 2014 $ 233,105 $ (234,218 ) $ 3,206 $ 2,093 Originations 177,088 (176,865 ) 1,416,715 1,416,938 Principal repayments (121,081 ) 120,909 - (172 ) Borrower loans sold to third parties - - (1,411,531 ) (1,411,531 ) Change in fair value (15,868 ) 16,391 73 596 Balance at December 31, 2014 $ 273,244 $ (273,783 ) $ 8,463 $ 7,924 Servicing Servicing Assets Liabilities Amortized Cost at January 1, 2014 $ 436 $ 167 Additions 4,700 662 Less: Transfers to PMI (1,221 ) Less: Amortization (799 ) (205 ) Amortized Cost at December 31, 2014 3,116 624 Adjustment to adopt fair value measurement 399 (29 ) Fair Value at Janaury 1, 2015 $ 3,515 $ 595 Additions 14,909 283 Less: Transfers to PMI (249 ) - Less: Changes in fair value (4,570 ) (394 ) Fair Value at December 31, 2015 $ 13,605 $ 484 Borrower Loans Notes Discount rate assumption: 6.97 % * 6.97 % * Resulting fair value from: 100 basis point increase $ 294,179 $ 294,305 200 basis point increase 291,165 291,284 Resulting fair value from: 100 basis point decrease $ 300,449 $ 300,589 200 basis point decrease 303,710 303,858 Default rate assumption: 10.11 % * 10.11 % * Resulting fair value from: 100 basis point increase $ 294,480 $ 294,601 200 basis point increase 291,741 291,851 Resulting fair value from: 100 basis point decrease $ 300,090 $ 300,235 200 basis point decrease 302,931 303,088 Servicing Assets Servicing Liabilities Weighted average market servicing rate assumptions 0.625 % 0.625 % Resulting fair value from: Servicing rate increase to 0.65% 12,878 533 Servicing rate decrease to 0.60% 14,880 435 Weighted average prepayment assumptions 18.9 % 18.9 % Resulting fair value from: Applying a 1.1 multiplier to default rate 14,061 458 Applying a 0.9 multiplier to default rate 14,460 476 Weighted average default assumptions 11.00 % 11.00 % Resulting fair value from: Applying a 1.1 multiplier to default rate 13,415 484 Applying a 0.9 multiplier to default rate 13,796 484 the Company was in compliance with the covenant. the quarter ended March 31, 2017. Aggregate Amount of Interest Earned on Related Party Notes Purchased Notes 2015 2014 2015 2014 Executive officers and management $ 1,361 $ 1,127 $ 206 $ 159 Directors — — — — Total $ 1,361 $ 1,127 $ 206 $ 159 Related Party Notes balance as of December 31, 2015 2014 Executive officers and management $ 1,912 $ 1,614 Directors — — Total $ 1,912 $ 1,614 David Kimball Chief Executive Officer (Principal Executive Officer); Director March 17, March 17, March 17, Director March 17, Christopher M. Bishko Director March 17, Rajeev V. Date Director March 17, Patrick W. Grady Director March 17, David R. Golob Director March 17, Nigel W. Morris David Kimball Chief Executive Officer (Principal Executive Officer); Director; Treasurer (Principal Financing and Accounting Officer) March 17, /s/ Ronald Suber President; Director March 17, Ronald Suber Director March 17, Bernard J. Angelo Director March 17, David V. DeAngelis 10.15 Indemnification Agreement, dated January 15, 2013, between Prosper Marketplace, Inc. and Patrick Grady (incorporated by reference to Exhibit 10.20 of PMI and PFL’s Annual Report on Form 10-K, filed on March 31, 2014) (3) 32.1 Certification of Principal Executive Officer and Principal Financial Officer of PMI pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)Investors in Notes will have no control over us and will not be able to influence our corporate matters. recently completed its first two acquisitions in 2015, and in the future PMI may continue to enter into acquisitions that may be difficult to integrate, fail to achieve their strategic objectives, disrupt our business or divert management attention. recently completed its first two acquisitions in 2015, and in the future PMI may continue to enter into acquisitions of businesses, technologies and products that it intends to complement its existing business, solutions, services and technologies. PMI cannot provide assurance that the acquisitions it has made or will make in the future will provide it with the benefits or achieve the results anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of risks, including: difficulties assimilating and retaining the management and other personnel, culture and operations of the acquired businesses; potential disruption of ongoing business and distraction of management; difficulties in maintaining acceptable standards, controls, procedures and policies, including integrating financial reporting and operating systems, particularly with respect to foreign and/or public subsidiaries; potential loss of existing or acquired strategic operating partners, users and customers following an acquisition; difficulties in integrating acquired technologies and products into our solutions and services; and unexpected costs and expenses resulting from the acquisition, and potential unknown liabilities associated with acquired businesses.In October 2015, PMI acquired all of the outstanding shares of BillGuard, a company with Israeli operations. Because of PMI’s acquisition of a company that has a foreign subsidiary, PMI faces additional risks, including the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with the country. In January 2015, PMI acquired all of the limited liability company interests of American HealthCare Lending. The purchases of BillGuard and American HealthCare Lending have required and will continue to require significant time and attention during the acquisition and integration process. In addition, both of the acquired businesses will require significant cash investment from us to support their current growth targets.ismay also be subject to other laws, such as:×the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans;
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans;×the federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act;
the federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act;×the federal Fair Credit Reporting Act, which regulates the use, reporting and disclosure of information related to each applicant’s credit history;
the federal Fair Credit Reporting Act, which regulates the use, reporting and disclosure of information related to each applicant’s credit history;×the federal Fair Debt Collection Practices Act, which regulates debt collection practices by “debt collectors” and prohibits debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans;
the federal Fair Debt Collection Practices Act, which regulates debt collection practices by “debt collectors” and prohibits debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans;×state counterparts to the above consumer protection laws;
state counterparts to the above consumer protection laws;×state and federal securities laws, which require that any non-exempt offers and sales of the Notes be registered;×Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service;×the federal Gramm-Leach-Bliley Act, which includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;
state and federal securities laws, which require that any non-exempt offers and sales of the Notes be registered;×the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;
Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service;×the federal Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties;
the federal Gramm-Leach-Bliley Act, which includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;×the federal Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts;
the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;×the federal Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures; and
the federal Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties;×the federal Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures.werewas found to violate a state’sstate's usury laws, we mightmay have to alter our business model and our business could be harmed.20152016 range from 5.32% to 31.25%33.04%, which equate to interest rates for Note investors that range from 4.32% to 30.25%32.04%. Some states where borrowers are located, including Utah, have no statutory interest rate limitations on personal loans, while other jurisdictions have a maximum rate less than the current maximum rate offered by WebBank through our marketplace. If a borrower were to successfully bring claims against us for state usury law violations, and the rate on that borrower's loan was greater than that allowed under applicable state law, we could be subject to fines and penalties. Further, if the current structure under which WebBank makes loans through our marketplace were successfully challenged, we may have to substantially modify our business operations and may be required to maintain state-specific licenses and only provide a limitedassignee’sassignee's (i.e., PFL's and/or an investor who purchases Borrower Loans from PFL) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their Borrower Loans. In particular, one recent judicial decision by the Court of Appeals for the Second Circuit, Madden v. Midland Funding, LLC (786 F.3d 246 (2d Cir. 2015)), concluded that the debt buyer of a charged off credit card account could not rely on the National Bank Act's preemption of state interest rate limits for interest at rates imposed by the debt buyer after chargeoff. The decision has created some uncertainty as to whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of state usury laws, and the decision may create an increased risk of litigation by plaintiffs challenging our ability to collect interest in accordance with the terms of Borrower Loans. Although the Madden decision specifically addressed preemption under the National Bank Act, such decision could support future challenges to federal preemption for other institutions, including an FDIC-insured, state chartered industrial bank like WebBank.casematter closely and, as developments warrant, we, of course, will consider any necessary changes to our marketplace required to avoid the impact of this case on our business model. A petition toBecause of investor demand, the United States Supreme Court to review the decision was filed on November 10, 2015 and is currently pending. Noncompliance with laws and regulations may impair our ability to facilitate the origination of or service Borrower Loans.state lendingall required licenses to lend in every state, we might be forced to limit the rates of interest charged on Borrower Loans in some states and we might not be able to originate loans in some states altogether. We also may face increased costs and compliance burdens if the agreements with WebBank are terminated.high-interest “payday loan” marketersthose firms and out-of-state banks. These lawsuits assert that paydaythe loan marketers use out-of-state lenders in order to evade the consumer protection laws imposed by the states where they do business. Such litigation has sought to re-characterize the loan marketer as the lender for purposes of state consumer protection law and usury restrictions. Similar civil actions have been brought in the context of gift cards and retail purchase finance. Although we believe that our activities are generally distinguishable from the activities involved in these cases, a court or regulatory authority could disagree.PMI’s previous administration of an automated bidding plan system and the by PMI under its previous offering and by PFLPFL’s administration of Quick Invest and Auto Invest under its current offering, could create additional liability for one or both of PMI and PFL and such liability could be material.PMI’s former automated plan system allowed investors to create their own automated bidding plans. By creating such plan, an investor could have bids placed automatically on his or her behalf on loan listings that met loan criteria selected by him or her. In creating an automated bidding plan, the investor could design those criteria himself or herself, use a group of model criteria selected by PMI, or customize one of those groups of model criteria as he or she saw fit. Each automated bidding plan consisted of a group of loan criteria, such as loan amount, minimum yield percentage, Prosper Rating, income and employment characteristics, and debt-to-income ratio. That group of criteria was divided into sub-groups, each of which were referred to as a “slice.” The specific Borrower Loans on which the investor bid through his or her automated bidding plan were determined by the criteria in each of his or her plan slices. If a loan listing was posted that satisfied all of the criteria in any one of his or her plan slices, a bid would automatically be placed on the listing on his or her behalf.On July 6, 2011, PMI replaced the former automated plan system with a new loan search tool called Quick Invest. Under Quick Invest,that allows investors are no longer able to create automated plans and instead must identify Notes that meet their investment criteria. An investor using Quick Invest is asked to indicate (i) the Prosper Rating or Ratings he or she wishes to use as search criteria, (ii) the total amount he or she wishes to invest, and (iii) the amount he or she wishes to invest per Note. Quick Invest then compiles a basket of Notes for his or her consideration that to the extent possible, meet his or her search criteria.an automated planAuto Invest or Quick Invest may become delinquent or default, and the estimated return and estimated loss for that loan individually, or the estimated loss or return for the planallocation target or the order or basket of Notes selected by Auto Invest or Quick Invest as a whole, may not accurately reflect the actual return or loss on such loan. If this were to occur, an investor who purchases a Note from PFL through Auto Invest or Quick Invest could pursue a claim against PFL in connection with its representations regarding the performance of the Borrower Loans bid upon through Auto Invest or Quick Invest.Invest, respectively. An investor could pursue such a claim under various antifraud theories under federal and state securities law. In addition, the SEC or an investor may take the position that the plans created pursuant to PMI’s former automated bidding plan model involved the offer and sale of a separate security. Since did not register the automated bidding plans as separate securities, such a claim, if successful, could give investors who invested in Notes through such plans a rescission right under state or federal law and possibly subject PMI to civil fines or criminal penalties under federal or state law. If such a theory were sustained, PMI could be liable for sales through automated bidding plans that took place prior to July 6, 2011. To date, no actions have been taken or threatened against Prosper on this theory. However, such actions could have a material adverse effect on Prosper’s business.PMIItem 1B. Item 2. 75,00077,000 square feet of office space under leases that will expire February 28, 2023. We also have entered into leases for approximately 170,00099,000 square feet of office space located in Arizona, Utah Delaware and Israel.Delaware. We believe that our facilities are adequate to meet our current needs and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.Item 3. Legal Proceedings not currently subject to any material legal proceedings. is not awareand PMI (collectively, "Prosper") and Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which Prosper agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of any litigation mattersthe Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis. On November 17, 2016, Prosper and Colchis entered into a Settlement and Release Agreement, pursuant to which have had, or are expectedColchis agreed to have,terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a material adverse effect on it. $9 million cash payment2015,2016, PMI has entered into consent orders with 34 states and the District of the Columbia and has paid an aggregate of $0.5$0.78 million in penalties to those states.2017.2017. On April 16, 2014, the Superior Court granted final approval of the Settlement. Subject to satisfaction of the conditions set forth in the Settlement, the defendants will be released by the plaintiffs from all claims concerning or arising out of the offering of promissory notes on the platform from January 1, 2006 through October 14, 2008. The reserve for the class action settlement liability is $5.9$3.0 million on PMI’s consolidated balance sheet as of December 31, 2015. 2016. Item 4. Part IIItem 5. PMI does not have publicly traded equity securities. At2015,2016, there were approximately 274312 holders of record of PMI’s common stock. As of December 31, 2016, PMI owns 100 % of PFL's membership interests.On May 1, 2014, PMI issued and sold 24,404,770 sharesSeries C convertible preferred stock, par value $0.01 per share,this Annual Report for aggregate gross proceedsinformation about securities authorized for issuance under our equity compensation plans.$70 million pursuant to Section 4(a)(2) of theUnregistered Securities Act. connection with our private placement of Series C convertible preferred stock, we incurred transaction expenses of $0.1 million that were recorded as an offset to the gross proceeds.In April 2015, PMI issued and sold 23,888,640 shares of new Series D (“New Series D”) convertible preferred stock in a private placement at a purchase price of $6.91 per share for proceeds of approximately $164.8 million, net of issuance costs. The New Series D convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering. The purpose of the New Series D private placement was to raise funds for general corporate needs and for share repurchases.On June 18, 2014,December 2016, PMI issued a Tender Offer Statementwarrant to purchase up to 6,963,785 shares, in the aggregate, of its Series A Preferred Stock and Series B Preferred Stock, at a price equal to $2.87 per share. Upon closure of the tender offer on July 16, 2014, 782,54020,267,135 shares of PMI's Series A Preferred Stock and 5,667,790 share of Series B Preferred Stock were purchasedE-1 convertible preferred stock. Please see PMI's Form 8-K filed on December 22, 2016 for a total price of $18.5 million.During 2015, PMI repurchased 4,225,490 shares of common stock at a price equal to $6.91 per share for an aggregate purchase price of $29.2 million.2014,2016, PMI issued 584,61552,566 shares of common stock upon the exercise of warrants for an aggregate exercise price per share of $0.39. During the year ended December 31, 2015, PMI issued 207,065 shares of common stock upon the exercise of warrants for an aggregate exercise price per share of $0.61.$0.38. These securities were sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder relative to sales by an issuer not involving a public offering.Period (a) Total Number of Shares Purchased (b) Average Price Paid Per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Approximate Dollar Value of Shares that May Yet by Purchased Under the Plans or Programs October 1 to October 31 — $ — — $ — November 1 to November 31 — — — — December 1 to December 31 385,230 0.02 — — Total 385,230 $ 0.02 — $ — athe 5-for-1 forward stock split that PMI effected on February 16, 2016.Item 6. Not applicable. Year Ended December 31, 2016 2015 2014 2013 2012 (dollar amounts in thousands, except per share information) Revenues Operating Revenues Transaction Fees, Net $ 95,130 $ 161,708 $ 68,229 $ 15,330 $ 6,272 Servicing Fees, Net 28,903 17,238 4,552 259 — Gain (Loss) on Sale of Borrower Loans 3,637 14,151 3,227 (193 ) — Other Revenues 5,245 7,687 1,828 1,130 385 Total Operating Revenues 132,915 200,784 77,836 16,526 6,657 Interest Income Interest Income on Borrower Loans 44,649 41,606 42,087 34,995 24,068 Interest Expense on Notes (41,187 ) (38,174 ) (38,734 ) (33,321 ) (23,027 ) Net Interest Income 3,462 3,432 3,353 1,674 1,041 Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net (372 ) 59 128 181 (32 ) Total Net Revenues 136,005 204,275 81,317 18,381 7,666 Expenses Origination and Servicing 33,944 31,139 14,098 6,384 3,568 Sales and Marketing 70,146 112,284 41,971 16,731 6,842 General and Administrative 102,735 86,480 27,917 22,273 13,310 Restructuring Charges 17,027 — — — — Other Expenses, Net 30,348 — — — — Total Expenses 254,200 229,903 83,986 45,388 23,720 Net Loss Before Taxes (118,195 ) (25,628 ) (2,669 ) (27,007 ) (16,054 ) Income Tax Expense 546 340 — Net Loss (118,741 ) (25,968 ) (2,669 ) (27,007 ) (16,054 ) Excess Return to Preferred Shareholders on Repurchase — — (14,892 ) — Net Loss Applicable to Common Shareholders $ (118,741 ) $ (25,968 ) $ (17,561 ) $ (27,007 ) $ (16,054 ) Net Loss Per Share – Basic and Diluted $ (1.85 ) $ (0.47 ) $ (0.39 ) $ (0.82 ) $ (1.10 ) Weighted-Average Shares - Basic and Diluted 64,196,537 55,547,408 44,484,005 32,984,135 14,628,055 Year Ended December 31, 2016 2015 2014 2013 2012 Origination and Servicing $ 2,004 $ 1,231 $ 104 $ 16 $ 54 Sales and Marketing 2,914 2,561 767 24 17 General and Administrative 14,824 9,219 1,150 182 282 Restructuring 45 — — — — Total stock based compensation $ 19,742 $ 13,011 $ 2,021 $ 222 $ 353 As of December 31, 2016 2015 2014 2013 2012 Consolidated Balance Sheet Data: Cash and cash equivalents $ 22,337 $ 66,295 $ 50,557 $ 18,339 $ 3,300 Restricted cash 163,907 151,223 81,300 49,824 22,552 Available for sale investments, at fair value 32,769 73,187 — — Borrower loans, at fair value 315,627 297,273 273,243 233,105 163,861 Total assets 623,846 685,624 440,158 310,259 191,663 Notes at fair value 316,236 297,405 273,783 234,218 164,840 Total liabilities 512,781 477,056 364,387 285,929 185,651 Total convertible preferred stock and stockholders' deficit 111,065 208,568 75,771 24,330 6,012 Item 7. 2015,2016, our marketplace facilitated $3.7$2.2 billion in Borrower Loan originations, of which $3.5$2.0 billion were fundedoriginated through our Whole Loan Channel, representing 95%90% of the total Borrower Loans originated through our marketplace during this period. During the quarter ended December 31, 2016, our marketplace facilitated $0.5 billion in Borrower Loan originations, of which $0.4 billion were originated through our Whole Loan Channel, representing 88% of the total Borrower Loans originated through our marketplace during this period. From inception through December 31, 2015,2016, our marketplace has facilitated $6.1$8.3 billion in Borrower Loan originations, of which $5.1$7.1 billion were fundedoriginated through our Whole Loan Channel, representing 84%85% of the total Borrower Loans originated through our marketplace during this period. more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.December 31, 2014 (in(dollar amounts in thousands): 2016 2015 % Change 2015 2014 % Change Total Revenue $ 136,005 $ 204,275 (33 )% $ 204,275 $ 81,317 151 % Total Expenses 254,200 229,903 11 % 229,903 83,986 174 % Net Loss Before Taxes (118,195 ) (25,628 ) 361 % (25,628 ) (2,669 ) 860 % Income Tax Expense 546 340 61 % 340 — 100 % Net Loss $ (118,741 ) $ (25,968 ) 357 % $ (25,968 ) (2,669 ) 873 % increasedhigher loan volume in 2015, which increased 133%. from 2014. Total expenses for the year ended December 31, 2015 increased $146 million, a 174% increase from the year ended December 31, 2014. This increase was primarily due to higher variable marketing expenses and business development expenses which increased by approximately $32 million and $25 million, respectively, from the year ended December 31, 2014 by approximately $32 million and $25 million, respectively. Other expense increases includedwere spent to generate the increased revenues experienced in 2015. The increased expenses for 2015 also resulted from higher compensation costs as we added more staff to support our business growth, additional facilities-related expenses we incurred in connection with our move into our new headquarters and expansion into Phoenix and Utah, and higher marketing and origination expenses required to support our higherincreased origination volume. Additionally, weWe also incurred $6.2 million in additional compensation costs as a result of purchasing common stock from certain employees at a price above the fair market value of such common stock. Net loss for the year ended December 31, 2015 increased $23.3 million, an 873% increase from the year ended December 31, 2015,2014, primarily due to the increased expenses.2015,2016, a total of 500,389661,686 Borrower Loans, totaling $6.1$8.3 billion, were originated through our marketplace.ended December 31, 2015, 86,767of 2016, 33,008 Borrower Loans totaling $1.1 billion$452.4 million were originated through the marketplace, compared to 40,65286,767 Borrower Loans totaling $540 million$1.1 billion during the fourth quarter of 2014.2015. This represented a “unit” or loan, decrease of 62% and a dollar decrease of 60%. As compared to the origination volume for the third quarter of 2016, where 22,963 Borrower Loans were originated through the marketplace, which represented a "unit" or loan increase of 113%44% and a dollar increase of 112%.45% over the fourth quarter of 2016. During 2015, 275,789the year ended December 31, 2016, 161,297 Borrower Loans totaling $3.7$2.2 billion were originated through our marketplace as compared to 123,208275,789 Borrower Loans totaling $1.6$3.7 billion originated during 2014,the year ended December 31, 2015 which represented a unit increasedecrease of 124%42% and a dollar decrease of 41%.133%capital; negative actions and publicity at competitors; and our limited use of investor rebates, which have become more prevalent in the industry.graph below shows quarterly dollar originationsorigination increases experienced during the year ended December 31, 2015, were the result of strong demand from whole loan investors to purchase whole loans and our ability to successfully attract more borrowers to the platform through our marketplace dating back to the first quarter of 2014:
(in(dollar amounts in thousands): 2016 2015 % Change 2015 2014 % Change Operating Revenues Transaction Fees, Net $ 95,130 $ 161,708 (41 )% $ 161,708 68,229 137 % Servicing Fees, Net 28,903 17,238 68 % 17,238 4,552 279 % Gain on Sale of Borrower Loans 3,637 14,151 (74 )% 14,151 3,227 339 % Other Revenues 5,245 7,687 (32 )% 7,687 1,828 321 % Total Operating Revenues 132,915 200,784 (34 )% 200,784 77,836 158 % Interest Income Interest Income on Borrower Loans 44,649 41,606 7 % 41,606 42,087 (1 )% Interest Expense on Notes (41,187 ) (38,174 ) 8 % (38,174 ) (38,734 ) (1 )% Net Interest Income 3,462 3,432 1 % 3,432 3,353 2 % Change in Fair Value of Borrower Loans, Loans Held for Investment and Notes, Net (372 ) 59 (731 )% 59 128 (54 )% Total Revenues 136,005 204,275 (33 )% 204,275 81,317 151 %
Transaction fees decreased by 41% for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to lower origination volume through our marketplace, as described above. The average transaction fee for the year ended December 31, 2016 was 4.35%, a slight increase from 4.34% for the year ended December 31, 2015.2015. The average transaction fee (gross of fees paid to WebBank) was 4.54% for the year ended December 31, 2015 which increased slightly from 4.43% for the year ended December 31, 2014.increasecumulative growth in sales of Borrower Loans sold through the Whole Loan Channel. such sales.consistsconsist primarily of credit referral fees, where partner companies pay usProsper an agreed upon amount for referrals of customers from our website. The decrease in other revenue for 2016 compared to 2015was primarily the result of decreased traffic to existing partners. As described below, Prosper decreased its sales and marketing efforts during the year, which resulted in less traffic to the marketplace and as a result less referrals to our existing partners. We recognizefundedoriginated through the Note Channel using the accrual method based on the stated interest rate to the extent we believe it to be collectable. We record interest expense on the corresponding Notes based on the contractual interest rates to the extent we believe they will be collectable.rates. The interest rate charged on the Borrower Loans is generally 1% higher than the corresponding interest rate on the Note to compensate us for servicing the Borrower Loans.Fair Valuefair value of Borrower Loans, Loans Heldloans held for Salesale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, Loans Heldloans held for Salesale and Notes include prepayment rates derived from historical prepayment rates for each credit grade, default rates derived from historical performance, recovery rates and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. Loans Heldheld for Salesale are primarily comprised of Borrower Loans held for short durations and are recordedvalued using the same approach as the Borrower Loans.(in(dollar amounts in thousands): Year ended December 31, 2016 2015 2014 Borrower Loans $ (25,934 ) $ (21,594 ) $ (15,868 ) Loans Held for Sale (7 ) (121 ) 73 Notes 25,569 21,774 16,391 Total $ (372 ) $ 59 $ 596 (in(dollar amounts in thousands): Year ended December 31, 2016 2015 % Change 2015 2014 % Change Expenses Origination and Servicing $ 33,944 $ 31,139 9 % 31,139 14,098 121 % Sales and Marketing 70,146 112,284 (38 )% 112,284 41,971 168 % General and Administrative - Research and Development 26,214 18,014 46 % 18,014 5,981 201 % General and Administrative - Other 76,521 68,466 12 % 68,466 21,935 212 % Restructuring Charges 17,027 — 100 % — — — % Other 30,348 — 100 % — — — % Total Expenses $ 254,200 $ 229,903 11 % 229,903 83,985 174 % full-time employees compared toand 229 full-time employees, as of December 31, 2014.respectively. The following table reflects full-time employees as of December 31, 2016, 2015 and 2014 by department. December 31, 2016 2015 2014 Origination and Servicing 151 221 99 Sales and Marketing 28 115 15 General and Administrative - Research and Development 78 133 65 General and Administrative - Other 98 150 50 Total Headcount 355 619 229 includingas well as the compensation costsexpenses such as wages, benefits and stock based compensation for the employees towho support these activities. For the year ended December 31, 2016 compared to the year ended December 31, 2015, the decrease of 38% in expenses was largely due to decreased variable costs and a decrease in personnel as Prosper slowed its marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium due to decreases in investor demand through the Whole Loan Channel. These decreases included a $9.2 million or 18% decrease in direct mailing costs as Prosper reduced the volume of its direct mail campaigns, a $25.8 million or 75% decrease in partnership costs as Prosper significantly reduced partnership activities and negotiated lower rates with existing partners and a $2.2 million or 42% decrease in online marketing costs as Prosper significantly reduced its efforts in this area. Compensation costs decreased during the year ended December 31, 2016 by $1.2 million or 10%. These reductions are not as large as the decrease in activity-based spending as Prosper increased sales and marketing headcount during the first four months of 2016 before making significant reductions in such headcount during the restructuring in May 2016.one hundred100 additional employees in this department. headcount.headcount in 2015.Quarters Ended December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 Revenues Operating Revenues Transaction Fees, Net $ 19,944 $ 14,086 $ 19,276 $ 41,824 Servicing Fees, Net 7,004 7,079 7,676 7,144 Gain (Loss) on Sale of Borrower Loans (228 ) 761 (687 ) 3,791 Other Revenues 683 973 816 2,773 Total Operating Revenues 27,403 22,899 27,081 55,532 Interest Income Interest Income on Borrower Loans 10,939 11,735 11,192 10,783 Interest Expense on Notes (10,731 ) (10,636 ) (10,098 ) (9,722 ) Net Interest Income 208 1,099 1,094 1,061 Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net (245 ) (47 ) (2 ) (78 ) Total Net Revenues 27,366 23,951 28,173 56,515 Expenses Origination and Servicing 7,029 7,633 8,833 10,449 Sales and Marketing 15,732 9,391 12,303 32,720 General and Administrative 18,851 24,740 28,499 30,645 Restructuring Charges, Net 3,436 (470 ) 14,061 — Other Expenses, Net 30,348 — — — Total Expenses 75,396 41,294 63,696 73,814 Net Loss Before Taxes (48,030 ) (17,343 ) (35,523 ) (17,299 ) Income Tax Expense 202 74 105 165 Net Loss Applicable to Common Shareholders $ (48,232 ) $ (17,417 ) $ (35,628 ) $ (17,464 ) Net Loss Per Share – Basic and Diluted $ (0.71 ) $ (0.27 ) $ (0.56 ) $ (0.29 ) Weighted-Average Shares - Basic and Diluted 67,713,630 65,393,175 63,270,058 60,357,488 Quarters Ended December 31, 2015 September 30, 2015 June 30, 2015 March 31, 2015 Revenues Operating Revenues Transaction Fees, Net $ 49,724 $ 46,842 $ 39,800 $ 25,342 Servicing Fees, Net 6,442 4,652 3,575 2,569 Gain on Sale of Borrower Loans 4,270 4,263 3,696 1,922 Other Revenues 2,752 2,229 1,630 1,076 Total Operating Revenues 63,188 57,986 48,701 30,909 Interest Income Interest Income on Borrower Loans 10,685 10,280 10,165 10,476 Interest Expense on Notes (9,613 ) (9,550 ) (9,448 ) (9,563 ) Net Interest Income 1,072 730 717 913 Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net 152 (87 ) 95 (101 ) Total Net Revenues 64,412 58,629 49,513 31,721 Expenses Origination and Servicing 8,804 8,357 7,126 6,852 Sales and Marketing 35,290 31,844 26,580 18,570 General and Administrative 28,910 22,236 21,832 13,502 Other Expenses, Net — — — — Total Expenses 73,004 62,437 55,538 38,924 Net Loss Before Taxes (8,592 ) (3,808 ) (6,025 ) (7,203 ) Income Tax Expense 56 35 176 73 Net Loss Applicable to Common Shareholders $ (8,648 ) $ (3,843 ) $ (6,201 ) $ (7,276 ) Net Loss Per Share – Basic and Diluted $ (0.15 ) $ (0.07 ) $ (0.11 ) $ (0.14 ) Weighted-Average Shares - Basic and Diluted 57,922,593 55,907,765 55,612,485 52,766,255 (in(in thousands): 2016 2015 2014 Net Loss $ (118,741 ) $ (25,968 ) $ (2,669 ) Net cash provided by (used in) operating activities (62,667 ) 5,444 (4,651 ) Net cash used in investing activities (21,542 ) (174,213 ) (71,606 ) Net cash provided by financing activities 40,251 184,507 108,475 Net Increase (decrease) in cash and cash equivalents (43,958 ) 15,738 32,218 Cash and cash equivalents at the beginning of the period 66,295 50,557 18,339 Cash and cash equivalents at the end of the period $ 22,337 $ 66,295 $ 50,557 and cash equivalents increaseddecreased for the year ended December 31, 20152016, primarily due to the $165$54.4 million raised throughloss, net of non-cash items, $10.0 million for purchase of Property and Equipment, an additional $7.2 million for investing activity restricted cash which includes $5.5 million in additional collateral for WebBank, a $5 million payment for the issuance of New Series D convertible preferred shares, which wasBillGuard contingent liability and a $3 million scheduled payment to reduce our settlement liability. These decreases are offset by the $19 million paid net of cash acquired to purchase American HealthCare Lending, $19 million paid net of cash acquired to purchase BillGuard, $77.5 million in purchases ofproceeds from available for sale securities and $29.2 million paidbeing converted to repurchase common stock from certain employees. We used the $165 million raised for general corporate needs and for the common stock repurchase described previously. Net cash provided by operating activities primarily represents an increase in funds payable to marketplace investors, offset by the net loss for the period and increases in restricted cash due to additional dedicated funding from investors.of $40.3 million. Net cash used in investing primarily represents the acquisition of American HealthCare Lending, the acquisition of BillGuard, purchases of available for sale securities and acquisitions of BorrowerLoans.Loans and $40.3 million of available for sale securities that have been converted into cash. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes. In the year ended December 31, 2015 cash provided by financing activities consisted primarily of $165 million raised through the issuance of Series D preferred convertible shares, which was offset by $29.2 million paid to repurchase common stock from certain employees.our financing and operating activities,operations, will be sufficient to meet our workingoperating and capital and other cash needsrequirements for at least the next 12twelve months. 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 operationsArrangementspurposespurpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as we are not the primary beneficiary. Other than these special purpose entities we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes. Payments Due by Period Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years Operating lease obligations $ 59,710 $ 7,660 $ 25,448 $ 17,657 $ 8,945 WebBank purchase obligations 18,559 18,559 — — — Total contractual obligations $ 78,269 $ 26,219 $ 25,448 $ 17,657 $ 8,945 assets andassets; (vi) impairment of goodwill and intangible assets.assets and convertible preferrred stock warrant liability. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material. For a full description of all accounting policies adopted by us, please see Note 2 to our consolidated financial statements.fundedoriginated through the Note Channel and the related Notes. The fair value election for these Borrower Loans and Notes allows for the use of the same measurement approach for both Borrower Loans and the related Notes, consistent with the borrower payment dependent design of such Notes. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans fundedoriginated through the Note Channel and the related Notes to be valued using the same methodology. A specific allowance account is not recorded relating to the Borrower Loans in which we have elected the fair value option, but rather we estimate the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for the expected payment, loss and recovery rates.fundedoriginated through the Note Channel and the related Notes using a discounted cash flow valuation methodology. The valuation methodology considers projected prepayments and uses the historical defaults, losses and recoveries on Borrower Loans to project future losses and net cash flows on such Borrower Loans.Stock-Basedrecognizedrecognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. As a result, we estimate the amount of stock-based compensation we expect to be forfeited based on our historical experience. If actual forfeitures differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially impacted.••the profit margin a market participant would receive;•cash flows that an asset is expected to generate in the future; and•discount rates.20152016 and December 31, 20142015 (in thousands): 2016 2015 $ Change % Change Total Net Revenue $ 72,439 $ 93,053 (20,614 ) (22 )% Total Expenses 99,623 67,718 31,905 47 % Net Income (Loss) $ (27,184 ) $ 25,335 (52,519 ) (207 )% 2015 increased $532016 decreased $20.6 million, a 131% increase22% decrease from the year ended December 31, 2014,2015, primarily due to increaseddecreased loan listings which increaseddecreased the administrative fee revenue –related party. Total expenses for the year ended December 31, 20152016 increased $41$31.9 million, a 151%47% increase from the year ended December 31, 2014,2015, primarily due to higher administrativethe $30.7 million non-recurring Colchis contract termination charge described in other expenses and depreciation charges.below. Net income for the year ended December 31, 2015 increased $122016 decreased $52.5 million, a 91% increase207% decrease from the year ended December 31, 2014,2015, primarily due to increased loan listings.the decrease in revenues and the non-recurring contract termination charge. Prosper Funding would have been profitable for the year if the Colchis contract termination charge had not been incurred.
Revenues20152016 and 20142015 (in thousands): Year ended December 31, 2016 2015 $ Change % Change Revenues Operating Revenues Administration Fee Revenue - Related Party $ 36,630 $ 57,919 (21,289 ) (37 )% Servicing Fees, Net 28,604 16,218 12,386 76 % Gain on Sale of Borrower Loans 3,637 14,151 (10,514 ) (74 )% Other Revenues 478 1,500 (1,022 ) (68 )% Total Operating Revenues 69,349 89,788 (20,439 ) (23 )% Interest Income on Borrower Loans $ 44,649 $ 41,380 3,269 8 % Interest Expense on Notes $ (41,187 ) $ (38,174 ) (3,013 ) 8 % Net Interest Income 3,462 3,206 256 8 % (372 ) 59 (431 ) (731 )% Total Revenues $ 72,439 $ 93,053 (20,614 ) (22 )% increasesdecreases in the administration fee revenue were the result of higherlower listing volume during 2015. increasecumulative growth in loan originations.increasedecrease was due to an increasea decrease in volume originated through the platform as described previously and the related sales and rebates given to investors of such sales.increasedecrease was due to 2015 being the first time that such securitizations occurred. fundedoriginated through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes it to be collectable. Prosper Funding records interest expense on the corresponding Notes based on the contractual interest rates to the extent Prosper Funding believes theydid not change significantly asfor the underlyingyear was primarily driven by the increase in volume of Borrower Loans and Notes balances did not increase significantly andoriginated through the average interest rate on the Borrower Loans and Notes held on Prosper’s Balance Sheet decreased due to a change in the composition of these Borrower Loans and Notes. Note Channel.Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net20152016 and 2014,2015, respectively (in thousands): Year ended December 31, 2016 2015 Borrower Loans $ (25,934 ) $ (21,594 ) Notes 25,569 21,774 Loans Held for Sale (7 ) (121 ) Total $ (372 ) $ 59 20152016 and 20142015 (in thousands): Year ended December 31, 2016 2015 $ Change % Change Expenses Administration Fee Expense – Related Party $ 62,203 $ 62,786 $ (583 ) (1 )% Servicing 5,395 3,705 1,690 46 % General and Administrative 1,321 1,227 94 8 % Other 30,704 — 30,704 100 % Total Expenses $ 99,623 $ 67,718 $ 31,905 47 % volumes.amount equal to one-twelfth (1/12) of the specified annual Corporate Administration Fees equal to 50% of finance and legal personnel costs,$500 thousand per month, (b) a fee for each Borrower Loan originated through the marketplace, (c) 90%62.5% of all servicing fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of Prosper Funding.increasedecrease in the administration fee expense was primarily due to the growth ofless loans being originated on the marketplace in 2016, resulting in increaseddecreased fees owed to PMI by Prosper Funding.
Other(in(in thousands): December 31, 2016 2015 Net Income $ (27,184 ) $ 25,335 Net cash provided in operating activities 8,836 34,174 Net cash used in investing activities (52,242 ) (52,815 ) Net cash provided by financing activities 35,309 9,890 Net increase (decrease) in cash and cash equivalents (8,097 ) (8,751 ) Cash and cash equivalents at the beginning of the period 15,026 23,777 Cash and cash equivalents at the end of the period $ 6,929 $ 15,026 2015. Operating cash2016. Cash flows were positivenegative primarily due to a cash distribution to the cash generated from the Loans Held for Sale at fair valueparent of $8.5 million and the positivepurchases of property and equipment of $5.6 million, these were offset of net income forof $3.5 million when excluding the period of $25 million.non-cash loss on contract termination. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties which is included in cash flow from operations along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes and distributions to the parent.20152016 and 2014.2015. Prosper Funding is a US disregarded entity and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses and historical inability to achieve profitable operations, it is difficult to accurately forecast how Prosper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.purposespurpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as Prosper Funding is not the primary beneficiary. Item 7A. Not applicablesmaller reporting companies.trading purposes.Item 8. statementsinformation required by this Item are8 is included in Item 157 under the caption "Quarterly Results of this Annual Report on Form 10-K and are presented beginning on page F-2.Operations."Item 9. On October 23, 2014, Burr Pilger Mayer Inc. (“BPM”), the independent registered public accounting firm of Prosper and Prosper Funding was dismissed by each of Prosper and Prosper Funding. Prosper and Prosper Funding engaged Deloitte & Touche L.L.P. (“Deloitte”) as each entity’s independent registered public accounting firm for the third quarter ended September 30, 2014 and fiscal year ended December 31, 2014. Prosper and Prosper Funding’s decision to dismiss BPM and to engage Deloitte was approved by the Audit Committee of PMI on October 23, 2014 and by the Board of Directors of PFL on October 23, 2014. Such change was reported by Prosper and Prosper Funding in a Current Report on Form 8-K dated October 23, 2014, which was filed with the SEC on October 28, 2014 and amended on November 4, 2014.Item 9A. 2015. 2016. Based upon this evaluation, the PEO and the PFO of each Registrant have concluded that these disclosure controls and procedures are effective to provide reasonable assurance that material information relating to each Registrant and its subsidiaries that is required to be disclosed in reports filed with, or submitted to, the SEC under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms, and (ii) is accumulated and communicated to management, including its PEO and PFO, as appropriate to allow timely decisions regarding required disclosure.2015.2016. In making this assessment the Registrants used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework (1992)(2013).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Each Registrant’s assessment included documenting and evaluating the effectiveness of its internal control over financial reporting. Based on this evaluation, the person serving as each Registrant’s principal executive officer and principal financial officer has concluded that such Registrant’s internal controls were effective as of December 31, 2015.Remediation of Previously-Reported Material WeaknessesManagement of the Registrants concluded that the Registrants’ internal control over financial reporting was not effective as of December 31, 2014. For the year ended December 31, 2014, it was concluded that the following material weaknesses existed in the Registrants’ internal control over financial reporting:·The Registrants had insufficient appropriate accounting department resources to develop and operate effective internal controls over financial reporting and an insufficient number of personnel appropriately qualified to perform control monitoring activities. The lack of appropriate resources led to control deficiencies in the Registrants’ financial reporting process and contributed significantly to the errors identified that led to the corrections of prior financial information referred to in note 16 and note 9 in the Consolidated Financial Statements of Prosper Marketplace, Inc. and Prosper Funding LLC, respectively.·Because of an inefficient data system with certain limitations, the reconciliation of data related to cash, Borrower Loans, and Notes to the general ledger required substantial effort from personnel in the Registrants’ financial reporting and business operations groups. As a result, these reconciliations were not completed in a timely manner. During 2015, the Registrants committed to remediating these material weaknesses and as such, implemented changes to their internal control over financial reporting. The Registrants implemented additional procedures to address the underlying causes of the material weaknesses, continued to implement changes and improvements in their internal control over financial reporting with the intent to remediate the control deficiencies that caused the material weaknesses.During the year ending December 31, 2015, the changes and improvements in the Registrants’ internal control over financial reporting included the following:
2016.·Hired additional IT and finance personnel with technical accounting expertise to address management-identified gaps in skills base and expertise of staff necessary to meet financial reporting requirements.·Formalized accounting policies and internal controls documentation and strengthened supervisory reviews by management.·Conducted a review of the Registrants’ organization structures, reporting relationships and adequacy of staffing levels and made specific staffing changes as a result of this review, which included significantly expanding the number of employees responsible for financial reporting and the development of a business intelligence department, which improved the source data and reports that the Registrants use for financial reporting.·Performed a comprehensive assessment of the Registrants’ financial reporting risks. Controls were then identified that adequately address these risks and where necessary new controls were implemented. ·Implemented enhanced accounting and reconciliation processes and control procedures, including enhancements to the Registrants’ data system to allow for daily reconciliations of data, earlier identification of reconciling items, improved aggregation and greater automation. Based on the measures taken and implemented, management of the Registrants have assessed the newly implemented control activities and found them to be effective and has concluded that each of the material weaknesses described above has been remediated as of December 31, 2015.Other than with respect toremediationfourth quarter of the material weaknesses identified2016, there were no changes in the prior year as described above, there has been no change to the Registrants’ internal control over financial reporting during their most recent fiscal quarter that has materially affected, or isare reasonably likely to materially affect, the Registrants’Registrant's internal control over financial reporting.20152016 Form 10-K, the Registrants’ management, under the supervision and with the participation of each Registrant’s Principal Executive Officer (PEO) and Principal Financial Officer (PFO), evaluated the effectiveness of the design and operation of each Registrant’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2015.2016. Each Registrant’s PEO and PFO have concluded that, as of December 31, 2015,2016, each Registrant’s disclosure controls and procedures were effective.Item 9B. Other Information Report:Report on Form 10-K:NameAgePosition(s)Stephan P. Vermut69Executive Chairman and DirectorAaron Vermut43David Kimball 46 Chief Executive Officer and Director 51Joshua M. Tonderys39OperatingFinancial OfficerJohn Hiestand48Kunal Kaul 39 Executive Vice President, FinanceOperations4944 Director Christopher M. Bishko 4644334857Stephan P. Vermut served as PMI’s Executive Chairman since March 2014. Prior to his appointment as Executive Chairman, Mr. Vermut served as Chief Executive Officer from January 2013 until March 2014. Mr. Vermut is alsoand a director of PMI and Executive Chairman and a director of PFL. Priorsince December 2016. From March 2016 to joining PMI,February 2017, Mr. VermutKimball served as Managing Director, co-Head of Prime Services, at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC) from August 2012 until January 2013. Mr. Vermut was one of the founders of Merlin Securities, LLC and servedPMI's Chief Financial Officer. He also currently serves as its Chairman of the Board and Chief Executive Officer and as one of its Managing Partners from 2004 until it was acquired by Wells Fargo Securities in August 2012. Prior to that, Mr. Vermut served as President and Chief Executive Officer of Montgomery/Bank of America Prime Brokerage from 1995 to 2003. Prior to that, Mr. Vermut was a Partner of Furman Selz in New York and Managing Director of the Prime Brokerage Division of Furman Selz. Mr. Vermut received a B.S. in Business Administration from Babson College. PMI believes that Mr. Vermut’s financial and business expertise, including his background of founding, managing and directing financial and technology-enabled service companies, give him the qualifications and skills to serve as a director.Aaron Vermut has served as PMI’s Chief Executive Officer since March 2014. Aaron Vermut is the son of Stephan Vermut. Prior to his appointment as Chief Executive Officer, Mr. Vermut served as President of PMI from April 2013 until March 2014. Mr. Vermut is also a director of PMI and Chief Executive Officer and a director of PFL. Prior to joining PMI, Mr. Vermut servedKimball was Senior Financial Officer of United Services Automobile Association's (USAA) Chief Operating Office, with financial responsibility for the real estate unit, the bank, the P&C and life insurance companies, the investment management company, and the call centers/distribution functions. Before his position as Managing Director, co-HeadSenior Financial Officer of Prime Services,USAA's Chief Operating Office, Mr. Kimball spent eight years in various finance roles at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC) from August 2012 until April 2013. Mr. Vermut was oneUSAA, including Senior Vice President of the foundersCorporate Finance, Chief Financial Officer of Merlin Securities, LLCUSAA Federal Savings Bank, and served as oneAssistant Vice President of its Managing Partners and directors from 2004 until it was acquired by Wells Fargo Securities in August 2012.Capital Markets. Prior to that,his time at USAA, Mr. Vermut served as PrincipalKimball spent ten years at Ford Motor Company and Ford Motor Credit Company in both the U.S. and U.K., working on their securitization programs, debt issuance, and a variety of New Enterprise Associates from 2000 to 2003. Prior to that,financial planning and analysis positions. Mr. Vermut served as Senior Consultant of Cambridge Technology Partners from 1995 to 1998. Mr. Vermut hasKimball holds an M.B.A. in Finance from The Wharton School, University of Pennsylvania and a B.A. in History and German LiteratureEnglish from Washington University in St. Louis.Brigham Young University. PMI believes that Mr. Vermut’sKimball's financial and business expertise including his background of founding, managing and directing a financial and technology-enabled service company, give him the qualifications and skills to serve as a director.Joshua M. TonderysUsama Ashraf has served as Chief OperatingFinancial Officer of PMI since February 2017. Prior to joining PMI, from February 2016 to February 2017, Mr. Ashraf served as Deputy Chief Financial Officer and Treasurer at Annaly Capital Management, Inc. (“Annaly") with responsibility for treasury, tax, management reporting and financial planning & analysis. Prior to his time at Annaly, Mr. Ashraf worked at United Services Automobile Association (“USAA”), where he served as Corporate Treasurer from November 2014 to February 2016 and Assistant Corporate Treasurer from January 2015.2014 to October 2014. Before joining USAA, Mr. TonderysAshraf spent 13 years at CIT Group, where he held various positions in the Treasury and Corporate M&A departments, most recently serving as Deputy Treasurer with responsibility for the firm’s Treasury activities in the United States.also serveshas served as PMI’s Chief Risk Officer of PMI since May 2016. Prior to his appointment as Chief Risk Officer, Mr. Pennington served as PMI’s Vice President of Risk Analysis from April 2015 to May 2016 and Director of Risk Analysis from February 2012 to April 2015. Before joining PMI, from August 2010 to February 2012, Mr. Pennington was Assistant Director of Risk Management Services with Moody’s Analytics, where he worked with large global and U.S. bank clients focusing on Economic Capital, Basel Compliance and PD, LGD and EAD model development. Prior to his time at Moody’s, Mr. Pennington spent 6 years at First Equity Card, a positionsmall-business credit card specialty finance start-up, where he served as Manager of Predictive Analytics from June 2005 to July 2010. Mr. Pennington received a B.S. in Economics from the Wharton Undergraduate School where he completed a self-directed course of study, obtaining minors in Finance, Statistics, Mathematics, Econometrics and Operations Research.heldserved as PMI’s Executive Vice President, Operations since September 2012 and Chief Operating Officer of PFL.late December 2015. Prior to joining PMI, Mr. TonderysKaul spent more than 13 years at Capital One, where he served in various positions, including Senior Business Director, Senior Business Manager and Senior Product Manager, across a number of departments. In his most recent roles at Capital One, Mr. Kaul served as Senior Business Director at Barclaycard US (formerly Juniper Bank)- Head of Home Loans Originations Operations Excellence from September 2002February 2015 to September 2012, with responsibilities that included general management, marketing, analytics, risk management,December 2015 and operations. PriorSenior Business Director - Retail Bank Mortgage & Home Equity Lending from January 2014 to that,February 2015. Mr. Tonderys served as Risk Analyst at BankOne (now Chase Card Services) from July 1999 to September 2002. Mr. Tonderys holds a B.A. in economics from Hobart College andKaul has an M.B.A.MBA from the UniversityIndian Institute of North Carolina at Chapel Hill.Management (Bangalore, India) and a degree in Chemical Engineering from Bombay University.John Hiestand PMI’s Vice Presidenta director of FinancePMI since May 2015. In July 2015,2014. From March 2014 to December 2016, Mr. Hiestand was appointed Treasurer of PFLVermut served as PMI's Chief Executive Officer, and designatedbefore that, from April 2013 until March 2014, he served as the principal financial and accounting officer of both PFL and PMI.its President. Prior to joining PMI, Mr. HiestandVermut served as Managing Director, Chief Operating Officerco-Head of Prime Services, at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC) from August 2012 until April 2015.2013. Mr. HiestandVermut was a Senior Partnerone of the founders of Merlin Securities, LLC and served as one of its Chief Financial OfficerManaging Partners and directors from 20082004 until it was acquired by Wells Fargo Securities in August 2012. Prior to that, Mr. Hiestand held various financial positions including management positions at KPMG, CienaVermut served as Principal of New Enterprise Associates from 2000 to 2003. Prior to that, Mr. Vermut served as Senior Consultant of Cambridge Technology Partners from 1995 to 1998. Mr. Vermut has an M.B.A. in Finance from The Wharton School, University of Pennsylvania and Merriman Capital. Mr. Hiestand received a B.A. in AccountingHistory and German Literature from Cal Poly San Luis ObispoWashington University in St. Louis. PMI believes that Mr. Vermut's financial and isbusiness expertise, including his background of founding, managing and directing a Certified Public Accountantfinancial and Chartered Financial Analyst.technology-enabled service company, give him the qualifications and skills to serve as a director.a U.S. consumer financial advisoryan investment firm, and investment firm.as the Managing Director of Fenway Summer Ventures, Fenway Summer’s venture capital affiliate. From January 2012 to January 2013, Mr. Date served as the Deputy Director of the United States Consumer Financial Protection Bureau (“CFPB”). Before being appointed Deputy Director, Mr. Date was appointed the Special Advisor to the Secretary of the Treasury for the CFPB, and, in that capacity, acted as the interim leader of the CFPB. From October 2010 to August 2011, Mr. Date served as Associate Director of Research, Markets, and Regulations of the CFPB. Prior to joining the CFPB, Mr. Date served as Chairman & Executive Director of Cambridge Winter Center for Financial Institutions Policy, a non-profit nonpartisan think tank focused on financial institutions policy, from March 2009 to September 2010. From 2007 to 2009, Mr. Date served as a Managing Director in the Financial Institutions Group at Deutsche Bank Securities, where his key responsibility was acting as a coverage officer for, from Harvard Law School and a B.S. (highest honors) from University of California, Berkeley. PMI believes that Mr. Date’s financial, business and regulatory expertise give him the qualifications and skills to serve as a director. Mr. Date qualifies as an "audit committee financial expert" under SEC guidelines.seveneight seats, with one vacancy to be filled by a designee of QPL Holdings (PF) LP. All of the current members all of whomPMI's board of directors were elected as directors pursuant to the terms of a voting rights agreement entered into among certain of PMI’s stockholders. In selecting the composition of its board of directors, PMI seeks to ensure that its board of directors collectively has a balance of expertise in the following areas: internet based business, consumer financial products and experience directing public and start-up companies. Based on these criteria, PMI believes that its board of directors has been effective in identifying diverse directors. The board of directors’ composition provisions of PMI’s voting rights agreement are still in effect. For more information regarding the terms of the voting rights agreement, see “Item 13. – Certain Relationships and Related Transactions, and Director Independence.” Holders of the Notes offered through our marketplace, and the accompanying PMI Management Rights, will have no ability to elect or influence PMI’s directors or approve significant corporate transactions, such as a merger or other sale of PMI or its assets.Aaron Vermut, Chief Executive Officer and a director of PMI, is the son of Stephan P. Vermut, Executive Chairman and a director of PMI.PMI currently does not have a formal, written code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Thenot analyzeddetermined the independence of PMI’seach director based on the independence criteria set forth in the listing standards of the New York Stock Exchange (“NYSE”). In making its determinations, the Board considered the current and prior relationships that each non-employee director has with Prosper and all other facts and circumstances the board of directors deemed relevant in determining their independence, including any transactions between each director or any member of his or her family, and Prosper, its senior management or our independent registered public accounting firm. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, the board of directors determined that each of Messrs. Date, Grady, Golob and Morris do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under any applicable stock exchangethe listing standards. 2015,2016, the members of the Compensation Committee were Patrick W. Grady (Chair) and Christopher M. Bishko. The Compensation Committee oversees PMI’s executive officer compensation arrangements, plans, policies and programs maintained by PMI and administers PMI’s equity-based compensation plan for employees generally (including issuance of stock options, RSUs and other equity-based awards granted other than pursuant to a plan). The Compensation Committee meets at such times as determined appropriate by the Chair of the Compensation Committee.2015,2016, the members of the Audit Committee were Rajeev V. Date (Chair) and Patrick W. Grady. The Audit Committee oversees financial risk exposures, including monitoring the integrity of PMI’s consolidated financial statements, internal controls over financial reporting and the independence of PMI’s Independent Registered Public Accounting Firm. The Audit Committee receives internal control related assessments and reviews and discusses PMI’s annual and quarterly consolidated financial statements with management. In fulfilling its oversight responsibilities with respect to compliance matters, the Audit Committee meets at least quarterly with management, PMI’s Independent Registered Public Accounting firm and PMI’s internal legal counsel to discuss risks related to PMI’s financial reporting function.×any breach of the director’s duty of loyalty to PMI or PMI’s stockholders;
any breach of the director’s duty of loyalty to PMI or PMI’s stockholders;×any act or omission not in good faith, believed to be contrary to the interests of PMI or its shareholders, involving reckless disregard for the director’s duty, for acts that involve an unexcused pattern of inattention that amounts to an abdication of duty, or that involves intentional misconduct or knowing or culpable violation of law;
any act or omission not in good faith, believed to be contrary to the interests of PMI or its shareholders, involving reckless disregard for the director’s duty, for acts that involve an unexcused pattern of inattention that amounts to an abdication of duty, or that involves intentional misconduct or knowing or culpable violation of law;×any unlawful payments related to dividends, unlawful stock repurchases, redemptions, loans, guarantees or other distributions; or
any unlawful payments related to dividends, unlawful stock repurchases, redemptions, loans, guarantees or other distributions; or×any transaction from which the director derived an improper personal benefit.×PMI will indemnify its directors and officers to the fullest extent permitted by law;
PMI will indemnify its directors and officers to the fullest extent permitted by law;×PMI may indemnify its other employees and other agents to the same extent that PMI indemnifies its officers and directors; and×PMI will advance expenses to its directorsPMI may indemnify its other employees and other agents to the same extent that PMI indemnifies its officers and directors; and officers in connection with a legal proceeding, and may advance expenses to any employee or agent; provided, however, that such advancement of expenses shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person was not entitled to be indemnified.Item 11. Name 2016 Base Salary David Kimball (1) $ 500,000 Aaron Vermut (2) $ 27,000 John Hiestand (3) $ 240,000 Brad Pennington (4) $ 350,000 Cheryl Law (5) $ 350,000 Kunal Kaul $ 300,000 Parker Barrile (6) $ 300,000 (1) In March of 2016, PMI hired Mr. Kimball as its new Chief Financial Officer, with an annual base salary of $375,000. Effective December 1, 2016, Mr. Kimball was appointed Chief Executive Officer of PMI. The table reflects Mr. Kimball’s annual base salary in effect immediately after his appointment as Chief Executive Officer. (2) In early 2016, PMI’s Compensation Committee reviewed executive base salaries and decided to keep Mr. Vermut’s annual base salary at $360,000, the same level as the previous year. Effective July 1, 2016, Mr. Vermut voluntarily reduced his annual base salary to $27,000. Mr. Vermut resigned as Chief Executive Officer of PMI effective December 1, 2016. The table reflects Mr. Vermut’s annual base salary in effect immediately prior to his resignation as Chief Executive Officer. (3) Mr. Hiestand’s annual base salary was increased from $225,000 to $240,000 in December of 2016. (4) Mr. Pennington’s annual base salary was increased from $250,000 to $350,000 in May of 2016. (5) Ms. Law’s annual base salary was increased from $300,000 to $350,000 in November of 2016. (6) In early 2016, PMI’s Compensation Committee reviewed executive base salaries and decided to keep Mr. Barrile’s annual base salary at $300,000, the same level as the previous year. Mr. Barrile resigned as PMI’s Chief Product Officer effective September 30, 2016. The table reflects Mr. Barrile’s annual base salary in effect immediately prior to his resignation as Chief Product Officer. yearyears ended December 31, 2016, December 31, 2015 and December 31, 2014 by each of PMI’s named executive officers (in thousands): Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($)(1) Totals ($) David Kimball (3) 2016 $ 305 $ 383 $ 1,510 $ 3,351 $ 31 $ 5,580 Chief Executive Officer and Aaron Vermut (4) 2016 191 — — 364 11 566 Former Chief Executive 2015 360 200 — 3,654 14 4,228 2014 300 140 — 191 — 631 John Hiestand (5) 2016 226 72 — 254 11 480 Vice President, Finance and 2015 152 25 — 1,454 — 1,631 Brad Pennington 2016 316 263 — 2,572 11 3,162 Chief Risk Officer Cheryl Law (6) 2016 313 — — 2,200 13 2,526 Former Chief Marketing Kunal Kaul (7) 2016 300 225 268 1,185 31 2,009 Executive Vice President, Parker Barrile (8) 2016 225 — — 2,699 9 2,933 Former Chief Product Officer 2015 75 85 2,937 4,343 5 7,445 (1) CalculatedThe amounts reported represent the grant date fair value of the restricted stock units and stock options granted to the named executive officers as calculated in accordance with the Financial Accounting Board’s Topic ASC 718, Compensation –Stock Compensation (“ASC 718”) using a Black-Scholes model to purchase shares of PMI’s common stock. The key assumptions used in PMI’s ASC 718 calculation are discussed in Note 2 of PMI’s consolidated financial statements, which are incorporated by reference into this Annual Report.(2) life insurance premiumsrelocation reimbursement paid by PMI for each named executive officer. (3)(3) Mr. Aaron VermutDavid Kimball joined PMI in April 2013March 2016 as its President andChief Financial Officer. He was promoted toappointed PMI's Chief Executive Officer in March 2014. December 2016. Mr. Kimball's Total Compensation for 2016 includes relocation expenses of $31,141 and a sign-on bonus of $125,000.(4) Mr. Aaron Vermut received awards of 2,940,660 stock options in the year ended December 31, 2014 with an exercise price of $0.11 per share and 1,170,000 stock options in the year ended December 31, 2015 with an exercise price of $3.62 per share, which are subject to the terms and conditions of the 2005 Plan, as set forth below.(4)Mr. Stephan P. Vermut joined PMI in January 2013 as its Chief Executive Officer and, in connection with Mr. Aaron Vermut’s appointmentresigned as Chief Executive Officer was appointed PMI’s Executive Chairmanof PMI effective December 1, 2016.(5) Mr. John Hiestand joined PMI in May 2015 as its Vice President of Finance. Mr. Hiestand served as the Principal Financial Officer of PMI until March 2014. 2016.(6) Ms. Cheryl Law resigned as Chief Marketing Officer of PMI effective January 6, 2017. (7) Mr. Stephan P. Vermut receivedKaul's Total Compensation for 2016 includes relocation expenses of $20,583.(8) Mr. Parker Barrile resigned as Chief Product Officer of PMI effective September 30, 2016. Name Grant Date (2) David Kimball 05/03/16 705,465 1,410,925 $ 2.14 $ 2,737 06/17/16 — 2,115,703 2.14 1,873 Aaron Vermut 1,170,000 2.14 364 John Hiestand 05/03/16 — 103,000 2.14 93 475,000 2.14 137 Brad Pennington 06/17/16 — 2,764,149 2.14 2,447 400,000 2.14 125 Cheryl Law 06/17/16 — 2,484,778 2.14 2,200 Kunal Kaul 05/03/16 125,000 250,000 2.14 529 06/17/16 — 1,043,916 2.14 924 Parker Barrile 06/17/16 — 2,103,878 2.14 1,862 05/03/16 — 1,596,160 2.14 837 (1) The following columns are intentionally omitted from this table: Estimated Future Payouts under Non-Equity Incentive Plan Awards, and Estimated Future Payouts under Equity Incentive Plan Awards. (2) The equity awards granted to the NEOs in 2016 were granted under, and governed by the terms of, 2,940,660PMI's 2015 Incentive Plan and the applicable award agreements. See the footnotes to the Outstanding Equity Awards at 2016 Fiscal Year-End table below for a description of the vesting schedule of the equity awards granted in 2016 and reported in the Table above.(3) The amounts reported represent the grant date fair value of the restricted stock units and stock options granted to the named executive officers as calculated in accordance with the year ended December 31, 2014 withFinancial Accounting Board’s Topic ASC 718, Compensation –Stock Compensation (“ASC 718”) using a Black-Scholes model to purchase shares of PMI’s common stock. The key assumptions used in PMI’s ASC 718 calculation are discussed in Note 2 of PMI’s consolidated financial statements, which are incorporated by reference into this Annual Report.(4) On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved the repricing of all outstanding stock options held by employees and directors that had an exercise prices above the then current fair market value of PMI’s common stock (the "Reprice"), effectively reducing the exercise price of $0.11such options to $2.14 per shareshare. These options were granted in prior periods and 1,170,000 stock optionsrepriced in connection with the year ended December 31, 2015 with an exercise price of $3.62 per share, which are subject to the terms and conditionsReprice.(5) The incremental fair value of the 2005 Plan,holder's eligible outstanding options as set forth below.(5)Mr. Joshua Tonderys joined PMI in September 2012 as its Chief Risk Officer and was promoted to Chief Operating Officer in January 2015. Mr. Tonderys received awards of 802,500 stock options in the year ended December 31, 2014 with an exercise price of $0.11 per share and 1,460,070 stock options in the year ended December 31, 2015 with an exercise price of $3.62, which are subject to the terms and conditions of the 2005 Plan,repricing date are as set forth below.(6)Mr. Parker Barrile joined PMI in August 2015 as its Chief Product Officer. Mr. Barrile received awards of 1,596,160 stock options in the year ended December 31, 2015 with an exercise price of $5.52 per share and 532,055 RSUs, which are subject to the terms and conditions of 2015 Plan, as set forth below.At December 31, 2015, and Grants of Plan-Based Awards TableAaron Vermut’sKimball in connection with his appointment as its Chief Executive Officer. In addition to his initial base salary, was $360 thousand per yearMr. Kimball's offer letter provided for (i) up to $500,000 in bonus payments, subject to achievement of certain performance targets; (ii) reimbursement of certain relocation expenses; and he is eligible(iii) eligibility to participate in the benefit programs generally available to employees of PMI. PMI also committed to grant Mr. Kimball an equity award of options exercisable into shares of PMI common stock representing up to 7.1% of PMI’s capitalization on a fully diluted basis, subject to the terms and conditions of the offer letter. In addition, the offer letter included certain severance arrangements, the terms of which are described under "Post-Employment Compensation" above.bonus. Thebonus in a target amount of Mr. Aaron Vermut’s bonus, if any, shall be determined by PMI’s Compensation Committee40% of his base salary; (iii) reimbursement of certain relocation expenses; and (iv) eligibility to participate in its sole discretion. Mr. Aaron Vermut is also entitled to receive all customary and usual fringe benefitsthe benefit programs generally available to PMI’s employees.employees of PMI.At December 31,John Hiestand. In April 2015, PMI entered into an offer letter with Mr. Stephan P. Vermut’sHiestand in connection with his appointment as its Director, Operations & Innovation. In addition to his initial base salary was $300 thousand per year and he is eligibleequity grant, Mr. Hiestand's offer letter provided for (i) eligibility to receive an annual performance bonus. Thebonus in a target amount of Mr. Stephan P. Vermut’s bonus, if any, shall be determined by PMI’s Compensation Committee43% of his base salary; and (ii) eligibility to participate in its sole discretion. Mr. Stephan P. Vermut is also entitled to receive all customary and usual fringe benefitsthe benefit programs generally available to PMI’s employees. employees of PMI.At December 31,Tonderys’Barrile in connection with his appointment as its Chief Product Officer. In addition to his initial base salary was $300 thousand per year and he is eligibleequity grant, Mr. Barrile's offer letter provided for (i) eligibility to receive an annual performance bonus. Thebonus in a target amount of Mr. Tonderys’ bonus, if any, shall be determined by PMI’s Compensation Committee40% of his base salary; and (ii) eligibility to participate in its sole discretion. Mr. Tonderys is also entitled to receive all customary and usual fringe benefitsthe benefit programs generally available to PMI’s employees.At December 31, 2015, Mr. Barrile’semployees of PMI.was $300 thousand per year and he is eligibleequity grant, Ms. Law's offer letter provided for eligibility to receive an annual performance bonus. The amount of Mr. Barrile’s bonus, if any, shall be determined by PMI’s Compensation Committeeparticipate in its sole discretion. Mr. Barrile is also entitled to receive all customary and usual fringe benefitsthe benefit programs generally available to PMI’s employees.has no formal incentive compensation programsentered into an offer letter with Mr. Pennington in placeconnection with his appointment as its Director, Credit Risk Management. In addition to his initial base salary and equity grant, Mr. Pennington's offer letter provided for its officers. PMI’s Compensation Committee is responsible for evaluating(i) a one-time sign-on bonus of $15,000; (ii) reimbursement of certain relocation expenses; and approving compensation for PMI’s executive officers, including the “named executive officers” identified(iii) eligibility to participate in the Summary Compensation Tablebenefit programs generally available to employees of PMI. In November 2016, PMI amended Mr. Pennington's offer letter to provide for certain severance arrangements, the terms of which are described under "Post-Employment Compensation" above. The compensation pays to its named executive officers generally consists of three components: base salary, a discretionary bonus and equity awards. Base salary is a fixed amount, and is not tied to any metric relating to the performance of PMI’s business as a whole. Discretionary bonuses are likewise not tied to any specific metrics regarding PMI’s performance, and are determined by PMI’s Compensation Committee in its sole discretion. PMI’s equity awards are generally structured so that they vest over multiple years, which align the interests of the grantees with the long-term interests of PMI’s stockholders. PMI believes that its compensation policies do not create or promote inappropriate or excessive risk taking.The named executive officers identified above have been granted equity awards upon employment with PMI and for merit increases as further discussed below under “Outstanding Equity Awards.” The options granted to Mr. Aaron Vermut, Mr. Stephan P. Vermut and Mr. Tonderys in the year ended December 31, 2014 vested in full upon the achievement of certain performance objectives. The options granted to Mr. Aaron Vermut and Mr. Stephan P. Vermut in the year ended December 31, 2015 vest over four years, with 1/2 vesting on the second anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following two years, except that, upon a change in control, any unvested options will vest immediately upon their termination of employment without cause within the twelve month period following the change in control.In the year ended December 31, 2015, Mr. Tonderys was granted (i) 910,070 options that vest over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years, except that, upon a change in control, any unvested options will vest immediately upon Mr. Tonderys’ termination of employment without cause within the twelve month period following the change in control, and (ii) 550,000 options that vest over four years, with 1/2 vesting on the second anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following two years, except that, upon a change in control, any unvested options will vest immediately upon Mr. Tonderys’ termination of employment without cause within the twelve month period following the change in control. The options granted to Mr. Barrile vest over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years, except that, upon a change in control, any unvested options will vest immediately upon Mr. Barrile’s termination of employment without cause within the twelve month period following the change in control. The RSUs granted to Mr. Barrile will initially vest, if at all, when PMI files for an initial public offering and the lock-up period expires or there is a change in control, whichever occurs first (each, a “Triggering Event”). The number of RSUs that vest upon a Triggering Event will be equal to the number of RSUs that would have vested had the RSUs been subject to only the following vesting condition: vesting over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years, except that, upon a change in control, any unvested RSUs will vest immediately upon Mr. Barrile’s termination of employment without cause within the twelve month period following the change in control (the “Time-Based Vesting Schedule”). Thereafter, the RSUs shall vest pursuant to the Time-Based Vesting Schedule until the RSUs are fully vested. PMI has grantedgrants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2, which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, the "2015 Plan"). The 2005 Plan and 2015 Plan (each,are collectively referred to in this Annual Report as defined below), which were adoptedthe "Equity Plans".boardBoard of directors and stockholders to permitDirectors, the grant2015 Plan will expire ten years from the date of equity awards to PMI’s officers, directors, employees and consultants.its adoption. All stock options granted to PMI’s named executive officersNEOs are incentive stock options, to the extent permissible under the Internal Revenue Code, as amended. All equity awards to PMI’s employees and directors were granted at no less than the fair market value of PMI’sits common stock on the date of each award. In the absence of a public trading market for PMI’sPMI common stock, PMI’s boardBoard of directors,Directors, acting on its own or through the Compensation Committee, has determined the fair market value of PMI’sits common stock in good faith based upon consideration of a number of relevant factors including the status of PMI’sits development efforts, financial status and market conditions. See “Item 15.—Notes15.-Notes to Consolidated Financial Statements”.The following table sets forth certain information regarding outstanding equity awards granted to PMI’s named executive officers that remained outstanding as of December 31, 2015. (1)Represents (i) shares of restricted stock issued upon the early exercise of stock options (“Restricted Stock”) and (ii) restricted stock units (“RSUs”), in each case that remained unvested as of December 31, 2015. PMI has a right to repurchase any shares of Restricted Stock that remain unvested at the time the holder of such shares ceases to provide services to PMI.(2)This Restricted Stock was issued upon early exercise of stock options granted to the executive officer on the applicable Grant Date, and shall vest and be released from PMI’s repurchase right over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years.(3)This option vested in full upon the achievement of certain performance objectives.(4)This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/2 vesting on the second anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following two years.(5)This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years.(6)This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years.(7)These RSUs will vest in accordance with a Time-Based Vesting Schedule, as described in the “Narrative Discussion of the Summary Compensation Table” above.Potential Payments Upon Termination or a Change In Control of PMIAs of December 31, 2015, there were no material contracts, agreements, plans or arrangements, written or unwritten, that provided for payments or equity awards to the named executive officers above in connection with their respective resignation, retirement or other termination. Certain of the stock options granted to our named executive officers will fully vest upon a change in control of PMI, while others will fully vest in the event that such officer is subject to a termination of employment without cause within 12 months after a change in control of PMI. In addition, the RSUs granted to our named executive officers will fully vest in the event that such officers are subject to termination of employment without cause within 12 months after a corporate transaction. All equity awards made to PMI’s named executive officers were granted under the 2005 Plan or the 2015 Plan.Equity Incentive PlansPMI has equity awards outstanding under two plans: the Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by PMI’s stockholders on December 1, 2010; and the 2015 Equity Incentive Plan (the “2015 Plan”, which was approved by PMI’s stockholders on April 7, 2015 (collectively, the “Equity Plans”). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms. Unless sooner terminated by PMI’s board of directors, the 2015 Plan will expire ten years from the date of its adoption.PMI’sits employees, including officers. The 2015 Plan provides for grants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and unrestricted stock. Under the 2015 Plan, incentive stock options may be granted solely to PMI’s employees, including officers. Awards other than incentive stock options may be granted to PMI’sits directors, consultants or employees, including officers. The Equity Plans are administered by PMI’s boardBoard of directors,Directors, which in turn has delegated authority to administer the plans to the Compensation Committee (the “Administrator”).2015, a total of 29,869,445 shares of common stock were subject to options outstanding under the 2005 Plan and are reserved for issuance thereunder. As of December 31, 2015, there were zero stock options available for grant under the 2005 Plan. As of December 31, 2015,2016, an aggregate of 13,194,76549,820,740 options to purchase PMI’sour common stock were authorized for issuance under the 2015 Plan. Of such authorized options, as of December 31, 2015,2016, a total of 11,088,21522,397,078 options were outstanding under the 2015 Plan and 2,106,55027,423,662 options were available for grant, including 519,50021,486,492 shares that were forfeited under the 2015 Plan. As of December 31, 2015, none of the outstanding2016, 6,097,552 options under the 2015 Plan have vested and 2,300 have been exercised. As of December 31, 2016, there were zero stock options available for grant under the 2005 Plan.Name Grant Date Vesting Commencement Date Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) (1) David Kimball 5/3/2016 3/18/2016 — 1,410,925 2.14 5/2/2026 5/3/2016 3/18/2016 — — — — 705,465 6/17/2016 4/28/2016 470,156 1,645,547 2.14 6/16/2026 — Aaron Vermut 8/20/2013 3/30/2013 — — — — 265,435 1/28/2014 1/28/2014 2,940,660 — 0.11 1/28/2024 — 2/27/2015 2/27/2014 1,170,000 — 2.14 2/27/2025 — John Hiestand 3/5/2016 3/1/2015 475,000 — 2.14 3/4/2025 — 5/3/2016 4/28/2016 22,889 80,111 2.14 5/2/2026 — Brad Pennington 3/28/2012 2/27/2012 62,500 — 0.34 2/27/2022 — 8/5/2013 3/19/2013 — — 0.02 — 14,220 1/28/2014 1/1/2014 125,000 — 0.11 1/28/2024 — 1/23/2015 1/16/2015 200,000 — 2.14 1/22/2025 — 2/20/2015 2/13/2015 85,000 — 2.14 2/19/2025 — 2/27/2015 2/27/2015 115,000 — 2.14 2/26/2025 — 6/17/2016 4/28/2016 614,225 2,149,894 2.14 6/16/2026 — Cheryl Law 11/7/2014 10/6/2014 1,747,315 800,855 1.13 11/6/2024 — 6/17/2016 4/28/2016 552,173 1,932,605 2.14 6/16/2026 — Kunal Kaul 3/15/2016 12/28/2015 — — — 3/14/2026 125,000 5/3/2016 12/28/2015 62,500 187,500 2.14 5/2/2026 — 6/17/2016 4/28/2016 231,981 811,935 2.14 6/16/2026 — Parker Barrile — — — — — — — (1) Represents (i) shares of restricted stock issued upon the early exercise of stock options (“Restricted Stock”) and (ii) restricted stock units (“RSUs”), in each case that remained unvested as of December 31, 2016. PMI has a right to repurchase any shares of Restricted Stock that remain unvested at the time the holder of such shares ceases to provide services to PMI. (2) This option vests over four years, with 1/4 vesting on the first anniversary of the applicable vesting commencement date set forth in the table (the "Vesting Commencement Date") and 1/48 vesting each month thereafter for the following three years, except that, in the event of a change in control of PMI, a sale of all or substantially all of PMI's assets, or a liquidation, dissolution or winding up of PMI (each, a "Corporate Transaction"), any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction. (3) These RSUs initially vest, if at all, when PMI files for an initial public offering and the lock-up period expires or there is a change in control, whichever occurs first (each, a “Triggering Event”). The number of RSUs that vest upon a Triggering Event will be equal to the number of RSUs that would have vested had the RSUs been subject to only the following vesting condition: vesting over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years; except that, in the event of a change in control, any unvested RSUs will vest immediately prior to the effective time of the change in control (the “Time-Based Vesting Schedule”). Thereafter, the RSUs shall vest pursuant to the Time-Based Vesting Schedule until the RSUs are fully vested. (4) This option vests over three years, with 1/36 vesting on the one month anniversary of the Vesting Commencement Date and 1/36 vesting each month thereafter on the same day of the month as the Vesting Commencement Date (and if there is no corresponding day, on the last day of the month), except that, in the event of a Corporate Transaction, any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction. (5) This Restricted Stock was issued upon early exercise of stock options granted to the executive officer on the applicable Grant Date, and shall vest and be released from PMI’s repurchase right over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years. (6) This option vested in full upon the achievement of certain performance objectives. (7) This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/2 vesting on the second anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following two years. (8) This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years. (9) This option vests over three years, with 1/36 vesting on the one month anniversary of the Vesting Commencement Date and 1/36 vesting each month thereafter on the same day of the month as the Vesting Commencement Date (and if there is no corresponding day, on the last day of the month). (10) This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years, except that, in the event of a Corporate Transaction, any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction. (11) This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/2 vesting on the second anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following two years, except that, in the event of a Corporate Transaction, any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction. been exercised. 401(k) PlanPMI hassettled during 2016 (dollar amounts in thousands): Option Awards Stock Awards Name David Kimball — — — — Aaron Vermut — — 2,311,360 $ 4,080 John Hiestand — — — — Brad Pennington — — 56,875 $ 100 Cheryl Law — — — — Kunal Kaul — — — — Parker Barrile — — — — (1) The amount reported as value realized on vesting/settlement of restricted stock units is calculated by multiplying the fair value of PMI's common stock as of the vesting date of the award by the number of RSUs. 401(k) plan that covers all employees meeting certain eligibility requirements. Change In Control of PMI401(k) plan is designed to provide tax-deferred retirement benefits in accordance withfollowing table provides the provisions of Section 401(k)estimated value of the Internal Revenue Code. Eligible employees may defer uppayments that PMI would provide to 90%its named executive officers in connection with a change in control of eligible compensation upPMI and/or a termination of employment. In determining amounts payable, we have assumed in all cases that the change in control or termination of employment, as applicable, occurred on December 31, 2016. With respect to a termination of employment, we have assumed in all cases that the annual maximum as determined by the Internal Revenue Service. PMI’s contributions to the 401(k) plan are discretionary. termination was without cause.Name Cash Severance ($) Number of Unvested Options (#) Estimated Value of Unvested Options at December 31, 2016 ($) (1) Number of Unvested RSUs and Stock Awards (#) Estimated Value of Unvested RSUs and Stock Awards at December 31, 2016 ($) Total Estimated Value ($) (dollar amounts in thousands) David Kimball Involuntary Termination $ 250 — — $ 250 Change in Control 2,869,560 — 705,465 $ 162.3 $ 162.3 Involuntary Termination following Change in Control — — — — — — Aaron Vermut Change in Control — — — — — — Involuntary Termination following Change in Control — 1,170,000 — — — — John Hiestand Change in Control — — — — — — Involuntary Termination following Change in Control — — — — — — Brad Pennington — Involuntary Termination $ 175 $ 175 Change in Control 2,448,964 $ 4 14,220 $ 3 $ 7 Involuntary Termination following Change in Control — — — — — — Cheryl Law (2) Change in Control — 2,733,460 — — — — Involuntary Termination following Change in Control — — — — — Kunal Kaul — 999,435 — 125,000 $ 29 $ 29 Change in Control Involuntary Termination following Change in Control — — — — — — Parker Barrile (3) Change in Control — — — — — — Involuntary Termination following Change in Control — — — — — — (1) All unvested options of Mr. Kimball, Mr. Vermut, Ms. Law, and Mr. Kaul are out of the money (exercise price above stock price as of May 29, 2016) and therefore there is no value to the acceleration. (2) Ms. Cheryl Law resigned as Chief Marketing Officer of PMI effective January 6, 2017. (3) Mr. Parker Barrile resigned as Chief Product Officer of PMI effective September 30, 2016. 2015,2016, Patrick W. Grady served as the Chairman, and Christopher M. Bishko served as a member, of PMI’s Compensation Committee. No member of the Compensation Committee is or has been an officer or employee of PMI contributed $1.9 million toat any time or had any relationship with PMI requiring disclosure as a related party transaction. During the 401(k) plan.20152016 to PMI’s directors who were not also named executive officers at the time they received compensation as directors (in thousands):Name Total Patrick W. Grady — — — Rajeev V. Date (1) — $ 743 $ 743 Christopher M. Bishko — — — David R. Golob — — — Nigel W. Morris (2) — $ 743 $ 743 Stephan P. Vermut (3) — — — NameFeesearned orpaid incashStockawardsOptionawards($)Non-equityincentive plancompensationNonqualifieddeferredcompensationearningsAll othercompensationTotalPatrick W. GradyOn May 3, 2016, Mr. Date received a non-statutory option to purchase 705,349 shares of common stock. The option vests over four years, with 1/4 vesting on the first anniversary of the vesting commencement date of April 28, 2016, and 1/48 vesting each month thereafter for the following three years, subject to Mr. Date's continued service on PMI's Board of Directors. $—$—$—$—$—$—$—Rajeev V. DateMr. Morris is associated with QED Fund II, L.P. On May 3, 2016, PMI issued QED Fund II, L.P. a warrant to purchase 705,349 shares of common stock at an exercise price of $2.14 per share. The warrant vests over four years, with 1/4 vesting on the first anniversary of the vesting commencement date of April 28, 2016, and 1/48 vesting each month thereafter for the following three years, subject to Mr. Morris' continued service on PMI's Board of Directors. ———————Christopher M. Bishko———————David R. Golob———————Nigel W. Morris$—$—$—$—$—$—$—Mr. Vermut resigned as an employee of PMI on April 1, 2016 and as a Director of PMI effective December 1, 2016. Item 12. 2016,2017, by:×each of PMI’s directors;
each of PMI’s directors;×each of PMI’s named executive officers;
each of PMI’s named executive officers;×each person, or group of affiliated persons, who is known by PMI to beneficially own more than 5% of PMI’s common stock; and×all of PMI’s directorseach person, or group of affiliated persons, who is known by PMI to beneficially own more than 5% of PMI’s common stock; and executive officers as a group.222,136,555222,330,214 shares of common stock outstanding as of March 3, 2016,2017, assuming the conversion of all of PMI’s convertible preferred stock. Each share of PMI preferred stock is convertible at any time at the discretion of the holder. Shares of PMI’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series DF Preferred Stock convert into shares of PMI common stock at a ratio of 1 to 1. Shares of PMI’s Series A-1 Preferred Stock convert into shares of PMI common stock at a ratio of 1,000,000 to 1.RSUs and warrants held by that person or entity that are currently exercisable or vesting within 60 days of March 3, 2016.2017. Except as set forth in footnote 17 below, PMI did not deem these shares outstanding however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than 1.0% is denoted with an asterisk (*). Except as otherwise indicated in the footnotes to the table below, addresses of named beneficial owners and officers are in care of Prosper Marketplace, Inc., 221 Main Street, 3rd Floor, San Francisco, CA 94105.Name of Beneficial Owner Number of Shares Underlying Options, and Warrants Exercisable Currently or Within 60 Days (2) Total Number of Shares Beneficially Owned (3) Directors and Executive Officers Rajeev V. Date (4) 26,115 376,337 402,452 * Patrick W. Grady (5) 51,247,915 — 51,247,915 23.05 % Christopher M. Bishko (6) 2,172,955 — 2,172,955 * David R. Golob (7) 17,413,325 — 17,413,325 7.83 % Nigel W. Morris (8) 1,073,970 551,337 1,625,307 * David Kimball — 1,087,360 1,087,360 * Aaron Vermut (9) 10,215,265 4,110,660 14,325,925 6.33 % Ronald Suber (10) 10,215,265 3,565,660 13,780,925 6.10 % Brad Pennington (11) 175,095 1,508,883 1,683,978 * Sachin Adarkar — 1,287,792 1,287,792 * Kunal Kaul — 431,305 431,305 * John Hiestand — 509,333 509,333 * Parker Barrile (12) — — — * Cheryl Law (13) — 1,535,033 1,535,033 * All directors and executive officers as a group (14) 92,539,905 14,963,700 107,503,605 45.30 % 5% Shareholders Sequoia Capital (15) 51,247,915 — 51,247,915 23.05 % Pinecone Investments LLC (16) — 35,544,141 35,544,141 13.78 % Accel Partners (17) 24,320,667 — 24,320,667 10.94 % IDG Capital Partners (18) 24,320,667 — 24,320,667 10.94 % (1)(1) Includes shares of common stock (including common stock issuable upon the conversion of preferred stock) owned directly or indirectly, but does not include shares subject to options and warrants. (2) Includes shares subject to options or warrants owned directly or indirectly that are currently exercisable or will become exercisable within 60 days of March 3, 2017. (3) (4) Consists of 200,000376,337 shares of common stock issuable upon the exercise of stock options and 26,115 shares of common stock issuable upon the conversion of preferred stock held by Mr. Date or his affiliate. (2)(5) Consists of 51,247,915 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Mr. Grady is a partner of Sequoia Capital and therefore may be deemed to share voting and investment power over these shares. Mr. Grady disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein. (3)(6) Consists of 1,086,975 shares of common stock and 2,172,9551,085,980 shares of common stock issuable upon the conversion of preferred stock held by Omidyar Network through certain of its affiliates. Mr. Bishko is a partner of Omidyar Technology Ventures and therefore may be deemed to share voting and investment power over these shares. Mr. Bishko disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein.(4)(7) Consists of 17,413,325 shares of common stock issuable upon the conversion of preferred stock held by Francisco Partners through certain of its affiliates. Mr. Golob is a partner of Francisco Partners and therefore may be deemed to share voting and investment power over these shares. Mr. Golob disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein. (5)(8) Consists of 1,005,935 shares of common stock, 1,073,97068,035 shares of common stock issuable upon the conversion of preferred stock and 171,875551,337 shares of common stock issuable upon the exercise of warrants held by QED Investors through certain of its affiliates. Mr. Morris is a partner of QED Investors and therefore may be deemed to share voting and investment power over these shares. Mr. Morris disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein.(6)Consists of 8,231,990(9) Includes 1,983,275 shares of common stock 10,215,265issuable upon the conversion of preferred stock. Mr. Vermut's holdings include 192,260 shares of restricted common stock that were purchased through the early exercise of stock options and remain unvested.(10) Consists of 4,385,445 shares of common stock, 1,983,275 shares of common stock issuable upon the conversion of preferred stock and 4,110,660 shares of common stock issuable upon the exercise of stock options held by Mr. Stephan Vermut or his affiliate. Mr. Vermut is deemed to have voting and investment power over these shares. Mr. Vermut disclaims beneficial ownership with respect to the shares held by his affiliate except to the extent of his pecuniary interest therein. 2,503,980 of the shares of common stock are considered to be restricted as they were purchased through the early exercise of stock options and remain unvested.(7)Consists of 8,231,990 shares of common stock, 10,215,265 shares of common stock issuable upon the conversion of preferred stock and 4,110,660 shares of common stock issuable upon the exercise of stock options held by Mr. Aaron Vermut. 2,889,205 of the shares of common stock are considered to be restricted as they were purchased through the early exercise of stock options and remain unvested.(8)Consists of 8,231,990 shares of common stock, 10,215,265 shares of common stock issuable upon the conversion of preferred stock and 3,565,66013,780,925 shares of common stock issuable upon the exercise of stock options held by Mr. Suber or his affiliate. Mr. Suber is deemed to have voting and investment power over these shares. Mr. Suber disclaims beneficial ownership with respect to the shares held by his affiliate except to the extent of his pecuniary interest therein. 2,503,980 of the(11) Mr. Pennington's holdings include 4,740 shares of restricted common stock are considered to be restricted as theythat were purchased through the early exercise of stock options and remain unvested.(9)(12) Mr. Barrile resigned as PMI’s Chief Product Officer effective September 30, 2016. (13) Cheryl Law resigned as PMI's Chief Marketing Officer effective January 6, 2017. (14) Consists of 2,140,77518,731,985 shares of common stock, and 1,460,070 shares of common stock issuable upon the exercise of stock options held by Mr. Tonderys. 494,605 of the shares of common stock are considered to be restricted as they were purchased through the early exercise of stock options and remain unvested.(10)Consists of 1,080,890 shares of common stock issuable upon the exercise of stock options held by Mr. Adarkar. (11)Consists of 28,929,655 shares of common stock, 104,720,85073,807,920 shares of common stock issuable upon the conversion of preferred stock, 16,656,15514,412,363 shares of common stock issuable upon the exercise of stock options and 375,000551,337 shares of common stock issuable upon the exercise of warrants.(12)(15) Represents 51,247,915 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Sequoia Capital is deemed to have voting and investment power over the shares. The address for Sequoia Capital is 3000 Sand Hill Road, 4-250, Menlo Park, California 94025. (16) (17) Represents 5,703,470 shares of common stock and 12,949,3257,245,859 shares of common stock issuable upon the conversion of preferred stock held by Accel Partners through certain of its affiliates (collectively, the “Accel Shares”); 3,498,765 shares of common stock and 8,221,4954.722,733 shares of common stock issuable upon the conversion of preferred stock held by IDG Capital Partners through certain of its affiliates (the “IDG Shares”); and 877,185 shares of common stock and 3,149,8402,272,655 shares of common stock issuable upon the conversion of preferred stock held by Breyer Capital, LLC and James W. Breyer 2005 Trust dated 2/25/2005 (collectively, the “Breyer Shares”). Accel Partners is deemed to have voting and investment power over the Accel Shares. Accel Partners is an affiliate of IDG Capital Partners and may also therefore be deemed to share voting and investment power over the IDG Shares. Mr. Breyer is a partner of Accel Partners and therefore Accel Partners may also be deemed to share voting and investment power over the Breyer Shares. Accel Partners disclaims beneficial ownership of the IDG Shares and Breyer Shares except to the extent of its pecuniary interest therein. The address of Accel Partners is 428 University Avenue, Palo Alto, California 94301. (13)(18) Represents 3,498,765 shares of common stock and 8,221,4954,722,733 shares of common stock issuable upon the conversion of preferred stock held by IDG Capital Partners through certain of its affiliates (“IDG Shares”); 5,703,470 shares of common stock and 12,949,3257,245,859 shares of common stock issuable upon the conversion of preferred held by Accel Partners through certain of its affiliates (collectively, the “Accel Shares”); and 877,185 shares of common stock and 3,149,8402,272,655 shares of common stock issuable upon the conversion of preferred stock held by Breyer Capital, LLC and James W. Breyer 2005 Trust dated 2/25/2005 (collectively, the “Breyer Shares”). IDG Capital Partners is deemed to have voting and investment power over the IDG Shares. IDG Capital Partners is an affiliate of Accel Partners and may also therefore be deemed to share voting and investment power over the Accel Shares. Mr. Breyer is a partner of Accel Partners, which is an affiliate of IDG Capital Partners, and therefore IDG Capital Partners may also be deemed to share voting and investment power over the Breyer Shares. IDG Capital Partners disclaims beneficial ownership of the Accel Shares and Breyer Shares except to the extent of its pecuniary interest therein. The address for IDG Capital Partners is 99 Queen’s Road Central, Unit 1509, The Center, Hong Kong, China.(14)Represents 51,247,915 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Sequoia Capital is deemed to have voting and investment power over these shares. The address for Sequoia Capital is 3000 Sand Hill Road, 4-250, Menlo Park, California 94025.(15)Represents 17,413,325 shares of common stock issuable upon the conversion of preferred stock held by Francisco Partners through certain of its affiliates. Francisco Partners is deemed to have voting and investment power over these shares. The address for Francisco Partners is One Letterman Drive Building C – Suite 140 San Francisco, CA 94129.2015,2016, with respect to shares of PMI common stock that may be issued under PMI’s existing equity compensation plans.Plan Category Equity compensation plans approved by stockholders: Prosper Marketplace, Inc. 2005 Stock Plan, as amended and restated 20,755,795 $ 0.82 — Prosper Marketplace, Inc. 2015 Equity Incentive Plan, as amended 22,397,078 $ 2.14 27,423,662 All stockholder approved plans 43,152,873 $ 1.48 27,423,662 Equity compensation plans not approved by stockholders: Outstanding Common Stock Warrants 1,203,344 $ 1.64 — All non-stockholder approved plans 1,203,344 $ 1.64 — Total 44,356,217 $ 1.48 27,423,662 (1)(1) Includes option and RSU issuances to employees, directors and certain consultants, advisors or vendors; however it does not include warrants granted to outside individuals, consultants, advisors and vendors. The information set forth in Note 14 to the “Notes to Consolidated Financial Statements” below under the caption “Stock-based Compensation” is incorporated herein by reference.Item 13. (the(as amended to date, the “PMI Administration Agreement”), pursuant to which PMI agreed to provide certain administrative services relating to the marketplace. Under the PMI Administration Agreement, PFL is required to pay PMI (a)(a) an amount equal to one-twelfth (1/12) of the specified annual Corporate Administration Fees equal to 50% of finance and legal personnel costs, (b) a fee for each Borrower Loan originated through the marketplace, (c) 90% of all servicing fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of PFL.(i) (ii) (iii) fundedinvested in portions of borrowers’ loan requests from time to time in the past via purchases of Notes, and may do so in the future. The Notes and Borrower Loans were obtained on terms and conditions that were not more favorable than those obtained by other investors.In May 2014,issued and sold an aggregate of 24,404,770 shares of PMI’s Series C convertible preferred stock for an aggregate consideration of $69.9 million. None of these shares were issued to a related party.In June 2014, PMI issued a tender offer to purchase up to 6,963,785 shares of PMI’s Series A convertible preferred stock and Series B convertible preferred stock at a price equal to $2.87 per share. In July 2014, the tender offer expired as scheduled. Upon expiration of the tender offer, 782,540 shares of Series A convertible preferred stock and 5,667,790 shares of Series B convertible preferred stock had been validly tendered. As a result, in July 2014, PMI purchased these shares for an aggregate consideration of $18.5 million. The following table presents the number of shares sold to PMI by holders (whether held directly or through one or more affiliates) of more than 5% any class of PMI’s voting securities at the time the transaction was consummated: ParticipantSharesBlackrock (1)2,263,235Garrison (2)1,740,950(1)Includes shares held by Special Credit Opportunities (Offshore) Master, L.P., Special Credit Opportunities (Parallel) II, L.P., Special Credit Opportunities (Parallel) Master IV, L.P., Special Credit Opportunities – Series A, Special Credit Opportunities – Series B, and Facultas Fund, L.P.(2)Includes shares held by Garrison Capital Equity Holdings II LLC and GLC GOF Onshore Holdings LLC.In June 2015, as part of a share repurchase, PMIhas repurchased 3,885,125 shares of common stock from participating employees who, as of the determination date, had been employed by PMI for at least two years. The shares were repurchased at a price equal to $6.91 per share for an aggregate purchase price of $26.8 million. As part of this transaction, PMI repurchased 3,607,095385,230 shares for a total of $24.9 million$7,704.60 from the following directors and officers of PMI: Mr. Aaron Vermut, Mr. Stephan Vermut, Mr. Ronald Suber, Mr. Joshua Tonderys, and Mr. Sachin Adarkar.April 7, 2015,February 27, 2017, the holders of a majority of the registrable securities of PMI have the right to demand that PMI file a registration statement under the Securities Act, so long as the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $20 million. These registration rights are subject to specified conditions and limitations. In addition, PMI is promptly required to give written notice to all holders of registrable securities prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of PMI. The amended and restated investor rights agreement also provides that if PMI registers any of its shares for public sale, stockholders with registration rights will have the right to include their shares in the registration statement, subject to specified conditions and limitations. Further, in the amended and restated investor rights agreement, if PMI receives from any holders of registrable securities a written request that PMI effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement, PMI is required to use reasonable best efforts to file a Form S-3 registration statement and to effect such registration as would permit or facilitate the sale and distribution of all or such portion of such holder’s registrable securities as are specified in the request, so long as the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $2.5 million.Item 14. 20142016 and is serving in such capacity for the current fiscal year. Deloitte was engaged in October 2014.$400 thousand in 2015, and 2014, respectively.Burr Pilger Mayer, Inc. (“BPM”) served as PMI and PFL’s independent registered public accounting firm for the period from January 2013 through September 2014. The aggregate fees billed by BPM to PMI and PFL were $246 thousand during the fiscal years ended December 31, 2014.$400 thousand in 2015, and 2014, respectively. BPM billed $155 thousand for such fees in 2014.$0 in 2015, and 2014, respectively. These fees include merger and acquisition related due diligence, service organization control readiness assessment and service organization control readiness assessment. No aggregate fees were billed by BPM for 2015 and 2014 for professional assurance and related services reasonably related to the performance of the audit of the PMI and PFL’s financial statements, but not included under Audit Fees.There were noThe aggregate fees billed by Deloitte for 20152016 and 20142015 for professional services for tax compliance, tax advice and tax planning were $44 thousand and $0 in 20152016 and 2014. BPM billed $59 thousand for 2014 for professional services for tax compliance, tax advice and tax planning.2015. $0,$2 thousand, in 20152016 and 2014,2015, respectively, related to fees not included in “Audit”, “Audit Related Fees” or “Tax Fees.” BPM billed $32 thousand for 2014 for an ISO gap analysis.PART IVItem 15. (a) Reports of Independent Registered Public Accounting Firms 20152016F-40F-41F-42F-43F-44REPORT20152016 and 2014,2015, and the related consolidated statements of operations, other comprehensive loss, convertible preferred stock and stockholders’ deficit, and cash flows for each of the twothree years in the period ended December 31, 2015.2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.2015,2016 and 2014,2015, and the results of their operations and their cash flows for each of the twothree years in the period ended December 31, 2015,2016, in conformity with accounting principles generally accepted in the United States of America.20162017 December 31, December 31, ASSETS 2016 2015 Cash and Cash Equivalents $ 22,337 $ 66,295 Restricted Cash 163,907 151,223 Available for Sale Investments, at Fair Value 32,769 73,187 Accounts Receivable 757 2,434 Loans Held for Sale, at Fair Value 624 32 Borrower Loans, at Fair Value 315,627 297,273 Property and Equipment, Net 24,853 24,965 Prepaid and Other Assets 4,606 6,433 Servicing Assets 12,786 14,363 Goodwill 36,368 36,368 Intangible Assets, Net 9,212 13,051 Total Assets $ 623,846 $ 685,624 Accounts Payable and Accrued Liabilities $ 15,017 $ 22,409 Payable to Investors 142,644 136,507 Notes, at Fair Value 316,236 297,405 Other Liabilities 17,173 20,735 Convertible Preferred Stock Warrant Liability 21,711 — Total Liabilities 512,781 477,056 Commitments and Contingencies (see Note 18) 275,938 275,938 Stockholders' Deficit Common Stock – $0.01 par value; 338,222,103 shares authorized; 70,843,044 shares issued and 69,907,109 outstanding as of December 31, 2016; 270,326,075 shares authorized; 70,367,425 issued and 69,431,490 outstanding as of December 31, 2015 212 127 Additional Paid-In Capital 123,988 102,971 Less: Treasury Stock (23,417 ) (23,417 ) Accumulated Deficit (265,648 ) (146,907 ) Accumulated Other Comprehensive Loss (8 ) (144 ) Total Stockholders' Deficit $ (164,873 ) $ (67,370 ) Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit $ 623,846 $ 685,624 Prosper Year ended December 31, 2016 2015 2014 Revenues Operating Revenues Transaction Fees, Net $ 95,130 $ 161,708 $ 68,229 Servicing Fees, Net 28,903 17,238 4,552 Gain on Sale of Borrower Loans 3,637 14,151 3,227 Other Revenues 5,245 7,687 1,828 Total Operating Revenues 132,915 200,784 77,836 Interest Income Interest Income on Borrower Loans 44,649 41,606 42,087 Interest Expense on Notes (41,187 ) (38,174 ) (38,734 ) Net Interest Income 3,462 3,432 3,353 Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net (372 ) 59 128 Total Net Revenues 136,005 204,275 81,317 Expenses Origination and Servicing 33,944 31,139 14,098 Sales and Marketing 70,146 112,284 41,971 General and Administrative 102,735 86,480 27,917 Restructuring Charges, Net 17,027 — — Other Expenses, Net 30,348 — — Total Expenses 254,200 229,903 83,986 Net Loss Before Taxes (118,195 ) (25,628 ) (2,669 ) Income Tax Expense 546 340 — Net Loss $ (118,741 ) $ (25,968 ) $ (2,669 ) Excess Return to Preferred Shareholders on Repurchase — — (14,892 ) Net Loss Applicable to Common Shareholders $ (118,741 ) $ (25,968 ) $ (17,561 ) Net Loss Per Share – Basic and Diluted $ (1.85 ) $ (0.47 ) $ (0.39 ) Weighted-Average Shares - Basic and Diluted 64,196,537 55,547,408 44,484,005 Year ended December 31, 2016 2015 2014 Net Loss $ (118,741 ) $ (25,968 ) $ (2,669 ) Other Comprehensive Income (Loss), Before Tax Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value 148 (144 ) — Realized (Gain) Loss on Sale of Available for Sale Investments, at Fair Value (12 ) — — Other Comprehensive Income (Loss), Before Tax 136 (144 ) — Income tax effect — — — Other Comprehensive Income (Loss), Net of Tax 136 (144 ) — Comprehensive Loss $ (118,605 ) $ (26,112 ) $ (2,669 ) Convertible Preferred Stock Common Stock Treasury Stock Shares Amount Shares Amount Shares Amount Accumulated Other Comprehensive Income Total Balance as of January 1, 2014 136,370,340 $ 44,822 67,944,015 $ 75 (911,320 ) $ (291 ) $ 83,676 $ — $ (103,952 ) $ (20,492 ) Issuance of convertible preferred stock, Series C, net of issuance costs 24,404,770 69,958 — — — — — — — — Exercise of vested stock options — — 295,750 1 — — 76 — — 77 Exercise of nonvested stock options — — 4,328,585 — — — — — — — Repurchase of restricted stock — — (909,465 ) — (24,615 ) (12 ) — — — (12 ) Restricted stock vested — — — 25 — — 320 — — 345 Exercise of warrants — — 584,615 1 — — 226 — — 227 Stock-based compensation expense — — — — — — 2,042 — — 2,042 Repurchase of preferred stock (7,275,325 ) (3,635 ) — — — — — — (14,892 ) (14,892 ) Net loss — — — — — — — — (2,669 ) (2,669 ) Balance as of January 1, 2015 153,499,785 $ 111,145 72,243,500 $ 102 (935,935 ) $ (303 ) $ 86,340 $ — $ (121,513 ) $ (35,374 ) Cumulative effect of adoption of fair value method for servicing rights — $ — — $ — — $ — $ — $ — $ 574 $ 574 23,888,640 164,793 — — — — — — — — — — 3,125,890 8 — — 771 — — 779 — — 76,045 — — — — — — — Repurchase of restricted stock — — (1,493,775 ) — — — — — — — Repurchase of common stock — — — — (4,241,300 ) (23,114 ) — �� — — (23,114 ) Restricted stock vested — — — 17 — — 471 — — 488 Restricted stock units sold — — 450,000 — — — 1,630 — — 1,630 Exercise of warrants — — 207,065 — — — 125 — — 125 — — — — — — 13,634 — — 13,634 Change in net unrealized loss on available for sale investments, at fair value — — — — — — — (144 ) — (144 ) Net Loss — — — — — — — — (25,968 ) (25,968 ) Balance as of December 31, 2015 177,388,425 275,938 74,608,725 127 (5,177,235 ) (23,417 ) 102,971 (144 ) (146,907 ) (67,370 ) — — 466,300 6 — — 305 — — 311 Repurchase of restricted stock — — (673,750 ) — — — — — — — Restricted stock vested — — — 79 — — 196 — — 275 Issuance of common stock, for settlement of vested RSUs — — 635,068 — — — — — — — Exercise of warrants — — 48,001 — — — 11 — — 11 — — — — — — 20,505 — — 20,505 Change in net unrealized loss on available for sale investments, at fair value — — — — — — — 136 — 136 Net Loss — — — — — — — — (118,741 ) (118,741 ) Balance as of December 31, 2016 177,388,425 $ 275,938 75,084,344 $ 212 (5,177,235 ) $ (23,417 ) $ 123,988 $ (8 ) $ (265,648 ) $ (164,873 ) Prosper For the Year
Ended December 31, 2016 2015 2014 Cash Flows from Operating Activities: Net Loss $ (118,741 ) $ (25,968 ) $ (2,669 ) Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes 372 (59 ) (596 ) Depreciation and Amortization 13,220 7,649 2,097 Gain on Sales of Borrower Loans (9,634 ) (14,561 ) (4,048 ) Amortization and Change in Fair Value of Servicing Rights 11,053 4,860 792 Stock-Based Compensation Expense 19,787 13,011 2,021 Restructuring Liability 6,052 — — Change in Fair Value of Contingent Consideration 199 1,001 — Other, Net 1,534 216 444 Warrants Issued for Contract Termination 21,711 — — Changes in Operating Assets and Liabilities: Purchase of Loans Held for Sale at Fair Value (1,979,952 ) (3,517,467 ) (1,416,715 ) Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value 1,979,352 3,525,759 1,411,531 Restricted Cash Except for those Related to Investing Activities (5,459 ) (68,896 ) (28,125 ) Accounts Receivable 1,677 865 (2,856 ) Prepaid and Other Assets 1,825 (1,360 ) (2,840 ) Accounts Payable and Accrued Liabilities 379 6,493 8,047 Payable to Investors 6,137 72,013 26,469 Other Liabilities (12,179 ) 1,888 1,797 Net cash provided by (Used in) Operating Activities (62,667 ) 5,444 (4,651 ) Cash Flows from Investing Activities: Purchase of Borrower Loans Held at Fair Value (217,582 ) (197,436 ) (177,088 ) Principal Payments of Borrower Loans Held at Fair Value 173,710 151,893 121,082 Purchases of Property and Equipment (10,760 ) (15,977 ) (12,246 ) Maturities of Short Term Investments 1,279 1,274 1,271 Purchases of Short Term Investments (1,277 ) (1,277 ) (1,274 ) Purchases of Available for Sale Investments, at Fair Value (11,725 ) (77,538 ) — Proceeds from Sale of Available for Sale Securities 12,445 4,022 — Maturities of Available for Sale Securities 39,593 — — Acquisition of Businesses, Net of Cash Acquired — (38,147 ) — Changes in Restricted Cash Related to Investing Activities (7,225 ) (1,027 ) (3,351 ) Net Cash Used in Investing Activities (21,542 ) (174,213 ) (71,606 ) Cash Flows from Financing Activities: Proceeds from Issuance of Notes Held at Fair Value 217,767 197,228 176,865 Payments of Notes Held at Fair Value (173,958 ) (151,838 ) (120,909 ) Repayment of Borrowings — (5,047 ) — Proceeds from Issuance of Convertible Preferred Stock, Net — 164,793 69,958 Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock 541 5,004 1,118 Repurchase of Common Stock and Restricted Stock (80 ) (23,246 ) (30 ) Repurchase of Preferred Stock — — (18,527 ) Taxes Paid for Awards Vested Under Equity Incentive Plans (219 ) (2,387 ) — Contingent Consideration Paid (3,800 ) — — Net Cash Provided by Financing Activities 40,251 184,507 108,475 Net Increase (Decrease) in Cash and Cash Equivalents (43,958 ) 15,738 32,218 Cash and Cash Equivalents at Beginning of the Year 66,295 50,557 18,339 Cash and Cash Equivalents at End of the Year $ 22,337 $ 66,295 $ 50,557 Cash Paid for Interest $ 40,369 $ 38,168 $ 41,053 Non-Cash Investing Activity- Accrual for Property and Equipment, Net 382 1,483 1,550 Non-Cash Investing Activity- Amount Payable for the Acquisition of Business $ — $ 4,488 $ — (in thousands, except for share and per share amounts)1.1. Organization and Business new model of consumer lending, where individuals and institutions can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional consumer lender.2015,2016, the marketplace is open to investors in 30 states and the District of Columbia. Additionally, as of December 31, 2015,2016, the marketplace is open to borrowers in 4645 states and the District of Columbia. Currently our marketplace does not operate internationally.2.2. Summary of Significant Accounting Policies accordanceconformity with U.Saccounting principles generally accepted accounting principlesin the United States of America (“U.S. GAAP”).estimates, and those differences could be material.concentrations of credit risk consist primarily of cash, cash equivalents, available for sale investments, Borrower Loans held for investment and restricted cash. Prosper places cash, cash equivalents, and restricted cash with high-quality financial institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds federally insured amounts. Prosper performs periodic evaluations of the relative credit standing of these financial institutions and has not recognized any losses in earnings from instruments held at these financial institutions.Duringperiod ended December 31, 2015, Prosper changedearly adoption of ASU 2016-09 on January 1, 2016, reclassifications were made to the presentationfinancing section of its revenue in the consolidated statements of operations. A new line called “Gain on Sales of Borrower Loans” was created withcash flows to reflect employee taxes paid to a tax authority to satisfy the amounts includedemployer's statutory income tax withholding obligation in this line previously classified as “Other Revenue”. Prior period amounts have been reclassified to conformrelation to the current presentation.Prosper changed the presentationexercise of the servicing assets on its Consolidated Balance Sheet by reclassifying them from “Prepaid and Other Assets” to “Servicing Assets”. Prosper also changed the presentation of liabilities by creating “Other Liabilities” and reclassified deferred rent and servicing liabilities from “Accounts Payable and Accrued Liabilities”, the “Class Action Settlement Liability” and “Repurchase Liability for Unvested Stock Awards” to “Other Liabilities”. stock awards. Prior period amounts have been reclassified to conform to the current presentation. Management believes these changes make our financial statements more useful for the readers of the financial statements and comparable with Prosper’s competitors. Certain prior period amounts have been reclassified on the Consolidated Statements of Cash Flows to reflect the above changes to the Balance Sheet. Additionally the lines “Proceeds from the Early Exercise of Stock Options”, “Proceeds from the Exercise of Vested Stock Options” and “Proceeds from Exercise of Common Stock Warrants” were combined into one line item. and as a result none oftherefore, we do not consolidate these entities are consolidated on Prosper’s consolidated financial statements. statedrecorded at cost, which approximates fair valuevalue. .RestrictedRestricted Cashtemporarily impairedtemporary impairment (“OTTI”) on a quarterly basis. Debt securities with unrealized losses are considered OTTI if Prosper intends to sell the investment or if it is more likely than not that it will be required to sell such investment before any anticipated recovery. If management determines that an investment is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and then-current fair value.yearyears ended December 31, 2016 and December 31, 2015.1%1.0% of the outstanding balance. The fair value election for Notes and Borrower Loans allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to investors that are dependent upon borrower payments. As such, the fair value of a series of Notes is approximately equal to the fair value of the corresponding Borrower Loan, adjusted for the 1.0% servicing fee and the timing of loan purchase, note issuance and borrower payments subsequently disbursed to such Note holders. As a result, the valuation of the Notes uses the same methodology and assumptions as the Borrower Loans, except that the Notes incorporate the 1% servicing fee and any differences in timing in payments. Any unrealized gains or losses on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations. The effective interest rate associated with a group of Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee. See Note 4 for a roll-forward and further discussion of the significant assumptions used to value Borrower Loans and Notes.fundedoriginated through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes fundedoriginated through the Note Channel are carried on Prosper’s consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for the expected prepayment, loss, recovery and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes. certain financial instruments and certain other itemsLoans Held for Sale at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows for the Loans Held for Sale to be measured at fair value similar to Borrower Loans and Notes. The fair value election, with respect to an item, may not be revoked once an election is made. Furniture and fixtures Prosper’s fee is determined by the term and credit grade of the Borrower Loans that Prosper facilitates on its marketplace and WebBank originates. The transaction fee Prosper earns is determined by the term and credit grade of the Borrower Loan that is facilitated on Prosper’s marketplace, and ranges from 1.00% to 5.00% of the original principal amount of such Borrower Loan that WebBank originates. Prosper records the transaction fee net of any fees paid to WebBank because Prosper does not receive an identifiable benefit from WebBank other than the Borrower Loan that has been recognized at fair value. 1%1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. Historically the servicing fee was set at 1.0% per annum and was increased to 1.075% per annum in August 2016 for loans originated after July 2016. The servicing fee compensates Prosper for the costs incurred in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Prosper records servicing fees from Investors as a component of operating revenue when received. The amortization of servicing rights and the change in fair value is also included in servicing fees.retainsis retained for the servicing assetsof Borrower Loans by WebBank. Additionally, Prosper recognizes gains or liabilities uponlosses on the sale of Borrower Loans.fundedoriginated through the Note Channel and interest expense on the corresponding Notes using the accrual method based on the stated interest rate to the extent Prosper believes it to be collectable.$24.124.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.Stock-Basedfair value of our common stock, the expected common stock price volatility over the term of the option awards, the expected term of the awards, risk-free interest rates and the expected dividend yield. Israel and other state income tax returns are filed. Prosper is currently not undergoing any income tax examinations. Due to the net operating loss, generally all tax years remain open.RevenuesIncome in the Consolidated Statements of Operations. Unrealized gains and losses, net of taxes, are included in Accumulated Other Comprehensive Income, which is reflected as a separate component of stockholders’ deficit in our Consolidated Balance Sheet. If we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to an identified loss is recognized in income. Prosper monitors its investment portfolio for potential impairment on a quarterly basis.Recent Accounting PronouncementsFinancial Accounting Standards Board (“FASB”)“FASB” issued Accounting Standards Update (“ASU”) 2014-09,2014-9, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper may adopt the standard in either Prosper’s fiscal year ending December 31, 2017 or 2018. Prosper intends to adopt the guidance for Prosper's fiscal year ending December 31, 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Prosper expects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018. Our evaluation of this ASU is ongoing and not complete. The FASB has not yet selected a transition methodissued and is evaluatingmay issue in the impactfuture, interpretative guidance, which may cause our evaluation to change. Our preliminary results indicate that transaction fees are included in the scope of adopting thisthe new accounting standard updateguidance, while servicing fees and gain or loss on the consolidatedsale ofstatements and related disclosures. EarlyProsper adopted this guidance on January 1, 2016, and the adoption is permitted. Prosper is currently assessing the potentialof this standard did not have a material impact on its consolidatedProsper’s financial statements from adopting this new guidance.statements.2015-02,2015-2, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-022015-2 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-022015-2 is effective for periods beginning after December 15, 2015 with early adoption permitted. Prosper has decided to early adopt this guidance effective January 1, 2015, and the adoption of this standard had no impact on Prosper’s financial statements.2015-052015-5 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which will be effective for the annual reporting period beginning after December 15, 2015.2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper is currently assessingadopted this guidance on January 1, 2016, and the potentialadoption of this standard did not have a material impact on its consolidatedProsper’s financial statements from adopting this new guidance.Adjustments.Adjustments". The new guidance simplifies the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. Prosper is currently assessingadopted this guidance on January 1, 2016, and the potentialadoption of this standard did not have a material impact on its consolidatedProsper’s financial statements from adopting this new guidance.2016-01, 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial LiabilitiesLiabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements.2016-02, 2016-2, "Leases (Topic 842)", which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements, however we do expect that this guidance will have a material impact on Prosper's consolidated financial statements. As of December 31, 2016, Prosper has a total of $59.7 million in non-cancelable operating lease commitments.3.3. Property and Equipment, Net December 31, 2016 2015 Property and equipment: Computer equipment $ 14,107 $ 10,522 Internal-use software and website development costs 16,750 10,990 Office equipment and furniture 3,010 2,442 Leasehold improvements 7,038 5,719 Assets not yet placed in service 1,222 3,242 Property and equipment 42,127 32,915 Less accumulated depreciation and amortization (17,274 ) (7,950 ) Total property and equipment, net $ 24,853 $ 24,965 $2,0972,097 thousand, respectively. Prosper capitalized internal-use software and website development costs in the amount of $6,251 thousand, $7,348 thousand and $846 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. Prosper recorded internal-use software and website development impairment charges of $1,083 thousand, $0 thousand and $322 thousand for the years endedprojects.projects and to cease the use of certain leased properties and related leasehold improvements, computer equipment and furniture at these locations.4.4. Borrower Loans, Loans Held for Sale, and Notes Held at Fair Value fundedoriginated and Notes issued through the Note Channel is estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used to value such Borrower Loans andfundedoriginated through the Note Channel, adjusted for the servicing fee and the timing of borrower payments subsequently disbursed to the Note holders. The effective interest rate associated with a series of Notes will be less than the interest rate earned on the corresponding Borrower Loan due to the servicing fee.20152016 and 2014,2015, Borrower Loans, Notes and Loans Held for Sale (in thousands) were: Borrower Loans Notes Loans Held for Sale December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 $ 319,143 $ 296,945 $ (323,358 ) $ (294,331 ) $ 641 $ 42 Fair value adjustments (3,516 ) 328 7,122 (3,074 ) (17 ) (10 ) Fair value $ 315,627 $ 297,273 $ (316,236 ) $ (297,405 ) $ 624 $ 32 2015,2016, outstanding Borrower Loans had original maturities between 36 and 60 months, had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2020.2021. At December 31, 2014,2015, Loans Held for Sale and Borrower Loans had original terms between 36 months and 60 months, had monthly payments with fixed interest rates ranging from 5.77%5.32% to 33.04% and had various maturity dates through December 2019.gainloss of approximately $2.8$2.4 million that is attributable to changes in the credit risks associated withrelated to Borrower Loans during the instrument.As December 31, 2014 the Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of $1.7 million and a fair value of $0.6 million. We place loans on non-accrual status when they are over 120 days due. As of December 31, 20152016 and 2014,2015, Borrower Loans in non-accrual status had a fair value of $0.5 million and $0.1 million, and zero, respectively.5.5. Loan Servicing Assets and Liabilities 2014 no impairment was recorded. For the year ended December 31,2016 and 2015, servicing assets and liabilities were measured at fair value subsequent to the initial recognition. 2015,2016, Borrower Loans that were sold to unrelated third parties, but for which we retained servicing rights had a total outstanding principal balance of $3.8$3.5 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90%35.52% and maturity dates through December 2020.2021. At December 31, 2014,2015, Borrower Loans that were sold but for which we retained servicing rights had a total outstanding principal balance of $1.4$3.8 billion,6.05%5.32% to 31.34%31.90% and maturity dates through December 2019.22.138.9 million, $22.1 million and $5.3 million of contractually specified servicing fees, late charges and ancillary fees are included on our Statement of Operations in Servicing Fees, Net for the years ended December 31, 2016, 2015 and 2014, respectively. Prepayment of the loans has historically been insignificant and therefore does not currently have a material impact on the fair value of servicing assets and liabilities. 6. Available for Sale Investments, at Fair Value6. Available for Sale Investments, at Fair Value Income (Loss)Loss included in Stockholders' Equity (Deficit)Deficit unless management determines that an investment is other-than-temporarily impaired (“OTTI”).follows:follows (in thousands):December 31, 2016 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fixed maturity securities: Corporate debt securities $ 21,762 $ 1 $ (10 ) $ 21,753 US Treasury securities 8,516 3 (3 ) 8,516 Agency bonds 2,499 1 — 2,500 Total Available for Sale Investments $ 32,777 $ 5 $ (13 ) $ 32,769 December 31, 2015 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fixed maturity securities: Corporate debt securities $ 50,327 $ 1 $ (94 ) $ 50,234 Commercial paper 9,493 — — 9,493 US Treasury securities 8,512 — (41 ) 8,471 Agency bonds 2,499 — (8 ) 2,491 Total fixed maturity securities 70,831 1 (143 ) 70,689 Short term bond funds 2,500 — (2 ) 2,498 Total Available for Sale Investments $ 73,331 $ 1 $ (145 ) $ 73,187 2015,2016, aggregated by category and period of continuous unrealized loss, is as follows:follows (in thousands):
Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ — $ — $ 14,651 $ (10 ) $ 14,651 $ (10 ) — — 4,499 (3 ) 4,499 (3 ) $ — $ — $ 19,150 $ (13 ) $ 19,150 $ (13 ) 2015,2016, are as follows:follows (in thousands): Within 1 year After 1 year through 5 years After 5 years to 10 years After 10 years Total Corporate debt securities 21,753 — — — 21,753 US Treasury securities 8,516 — — — 8,516 Agency bonds 2,500 — — — 2,500 Total Fair Value $ 32,769 $ — $ — $ — $ 32,769 Total Amortized Cost $ 32,777 $ — $ — $ — $ 32,777 $4.0$12.4 million during the year ended December 31, 2015.7. Fair Value2016 which resulted in a gain of Assets and Liabilities7. Fair Value of Assets and Liabilities 2015.governmentagency bonds. When available, Prosper uses quoted prices in active markets to measure the fair value of securities available for sale.sale securities. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.December 31, 2016 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Assets: Borrower Loans $ — $ — $ 315,627 $ 315,627 Loans Held for Sale — — 624 624 Available for Sale Investments, at Fair Value — 32,769 — 32,769 Servicing Assets — — 12,786 12,786 Total Assets — 32,769 329,037 361,806 Liabilities: Notes $ — $ — $ 316,236 $ 316,236 Servicing Liabilities — — 198 198 Convertible Preferred Stock Warrant Liability — — 21,711 21,711 Loan Trailing Fee Liability — — 665 665 Total Liabilities $ — $ — $ 338,810 $ 338,810 December 31, 2015 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Assets: Borrower Loans $ — $ — $ 297,273 $ 297,273 Loans Held for Sale — — 32 32 Available for Sale Investments, at Fair Value — 73,187 — 73,187 Servicing Assets — — 14,363 14,363 Total Assets — 73,187 311,668 384,855 Liabilities: Notes $ — $ — $ 297,405 $ 297,405 Servicing Liabilities $ — $ — $ 484 $ 484 Contingent Consideration $ — $ — $ 4,801 $ 4,801 Total Liabilities $ — $ — $ 302,690 $ 302,690 loan servicing rightsLoan Trailing Fee Liability, do not trade in an active market with readily observable prices, Prosper uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.2015:RangeRange Unobservable Input December 31, 2015 December 31, 20144.3% - 14.5% 3.2% - 10.6%1.4% - 14.4% 2.6% - 19.7%Rights:Assets and Liabilities:RangeUnobservable InputDecember 31, 2015December 31, 2014Discount rate15% - 25%15% - 25%Default rate1.2% - 14.7%2.6% - 26.3%Prepayment rate14.3% - 25.6%8.0% - 25.8%Market servicing rate0.625%0.625% - 0.70% Range Unobservable Input December 31, 2016 December 31, 2015 Discount rate 15% - 25% 15% - 25% Default rate 1.5% - 15.2% 1.2% - 14.7% Prepayment rate 13.6% - 26.6% 14.3% - 25.6% 0.625 % 0.625 % basis: basis (in thousands): Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Notes Total Balance at January 1, 2016 $ 297,273 $ (297,405 ) $ 32 $ (100 ) 217,582 (217,767 ) 1,979,952 $ 1,979,767 (171,195 ) 173,958 (447 ) $ 2,316 (2,515 ) — (1,978,905 ) $ (1,981,420 ) Other changes 416 (591 ) (1 ) $ (176 ) (25,934 ) 25,569 (7 ) $ (372 ) Balance at December 31, 2016 $ 315,627 $ (316,236 ) $ 624 $ 15 Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Notes Total Balance at January 1, 2015 $ 273,243 $ (273,783 ) $ 8,463 $ 7,923 Purchase of Borrower Loans/Issuance of Notes 197,436 (197,228 ) 3,517,467 3,517,675 Principal repayments (151,038 ) 151,025 (552 ) (565 ) Borrower Loans sold to third parties (855 ) 813 (3,525,207 ) (3,525,249 ) Other changes 81 (6 ) (18 ) 57 Change in fair value (21,594 ) 21,774 (121 ) 59 Balance at December 31, 2015 $ 297,273 $ (297,405 ) $ 32 $ (100 ) levelthe Level 3 servicing assets and liabilities measured at fair value on a recurring basis:basis (in thousands): Amortized Cost at January 1, 2015 $ 4,163 $ 624 Adjustments to adopt fair value measurement $ 545 $ (29 ) Fair Value at January 1, 2015 $ 4,708 $ 595 Additions 14,909 283 Less: Changes in fair value (5,254 ) (394 ) Fair Value at January 1, 2016 14,363 484 Additions 9,833 9 Less: Changes in fair value (11,410 ) (295 ) Fair Value at December 31, 2016 $ 12,786 $ 198 Balance at January 1, 2016 $ — Add Issuances of Preferred Stock Warrant 21,704 Change in fair value of the preferred stock warrant liability 7 Balance at December 31, 2016 $ 21,711 Balance at January 1, 2016 $ — Issuances 647 Cash payment of Loan Trailing Fee (21 ) Change in fair value 39 Balance at December 31, 2016 $ 665 willwas to be determined over a one-year period from the date of purchase. Total contingent consideration was due in October 2016 iswas based on revenues generated and other criteria. Certain criteria were met that resulted in full payout of the contingent consideration. We measured the fair value of the contingent consideration using a probability-weighted discounted cash flow approach. Some of the significant inputs used for the valuation are not observable in the market and are thus Level 3 inputs. Contingent consideration is recorded in the consolidated balance sheet under "Other Liabilities." Significant increases or decreases in certain underlying assumptions used to value the contingent consideration could significantly increase or decrease the fair value estimates recorded in the Consolidated Balance Sheets. On October 9, 2015, the fair value of the contingent consideration was $3.8 million, during the year ended December 31, 2015 there were fair value changes of $1.0 million resulting in a fair value of $4.8 million at December 31, 2015. 20152016 for Borrower Loans, Loans Held for Sale and Notes fundedoriginated through the Note Channel are presented in the following table (in thousands, except percentages): Borrower Loans / Loans Held for Sale Notes Discount rate assumption: 7.30 % * 7.30 % * Resulting fair value from: 100 basis point increase $ 312,424 $ 313,022 200 basis point increase 309,302 309,888 Resulting fair value from: 100 basis point decrease $ 318,913 $ 319,535 200 basis point decrease 322,288 322,921 Default rate assumption: 11.94 % * 11.94 % * Resulting fair value from: 100 basis point increase $ 312,171 $ 312,759 200 basis point increase 308,833 309,401 Resulting fair value from: 100 basis point decrease $ 319,112 $ 319,743 200 basis point decrease 322,640 323,294 20152016 (in thousands, except percentages). Weighted average market servicing rate assumptions 0.625 % 0.625 % Resulting fair value from: Market servicing rate increase to 0.65% $ 11,918 $ 217 Market servicing rate decrease to 0.60% $ 13,654 $ 177 Weighted average prepayment assumptions 20.02 % 20.02 % Resulting fair value from: Applying a 1.1 multiplier to prepayment rate $ 12,581 $ 194 Applying a 0.9 multiplier to prepayment rate $ 12,992 $ 201 Weighted average default assumptions 11.59 % 11.59 % Resulting fair value from: Applying a 1.1 multiplier to default rate $ 12,592 $ 198 Applying a 0.9 multiplier to default rate $ 12,984 $ 198 8. American HealthCare Lending Acquisition8. American HealthCare Lending Acquisition will receivereceived $0.8 million in cash one year after the closing date subject to general representations and warranties. Fair Value Assets: Cash $ 1,219 Accounts receivable, net 147 Property, equipment and software, net 6 Other assets 63 Identified intangible assets: Customer relationships 2,650 Developed technology 810 Brand name 60 Goodwill 16,825 Liabilities: Accrued expenses and other liabilities 708 Total purchase consideration $ 21,072 9. BillGuard Acquisition will receive up toreceived $5 million in cash one yearin October 2016 after the closing date subject to general representations and warranties. The contingent consideration has a maximum value of $5 million, and the events that would trigger the payout include the revenues of BillGuard during a specific three month period in 2016 and other criteria as described in the purchase agreement. The consideration is to be paid in October 2016. The liability for the fair value of the contingent consideration is included in Other Liabilities on the Consolidated Balance Sheets. Changes in the fair value of the contingent consideration is recognized in earnings through General and Administrative expense. The liability had a fair value of $3.8 million and $4.8 million at October 9, 2015 and December 31, 2015, respectively. Fair Value Assets: Cash $ 811 Property and equipment 82 Prepaid and other assets 152 Identified intangible assets: Developed technology 7,500 Customer relationships 3,600 Goodwill 19,543 Liabilities: Accounts payable and accrued expenses (1,635 ) Long term debt (1,395 ) Convertible loan (3,652 ) Deferred revenue (1,400 ) Total purchase consideration $ 23,606 is preliminary and subject to further adjustmenthas been finalized as information relative to closing date balances and related tax balances are finalized.2014,2015, nor is it indicative of future operating results. The pro forma results presented below include, amortization of acquired intangible assets and compensation expense related to the post-acquisition compensation arrangements entered into with the continuing employees (in thousands, except per share data)information):Year Ended December 31, 2015 2014 Total net revenue $ 204,350 $ 81,195 Net loss (1) (33,677 ) (16,728 ) Basic and diluted net loss per share attributable to common stockholders $ (0.61 ) $ (0.71 ) (1)(1) Net loss for the year ended December 31, 2015 excludes $1.6 million of one-time acquisition-related costs expenses incurred in 2015. Net loss for the year ended December 31, 2014 was adjusted to include these numbers.10.10. Goodwill and Other Intangible Assets GoodwillGoodwill - January 1, 2015 $ — 2015 acquisitions $ 36,368 Goodwill - December 31, 2015 $ 36,368 2016 acquisitions — Goodwill - December 31, 2016 $ 36,368 We did not record any goodwill in the year ended December 31, 2014.yearyears ended December 31, 2015. December 31, 2016 Developed technology $ 8,310 $ (2,393 ) $ 5,917 3.8 User base and customer relationships 6,250 (2,955 ) 3,295 8.3 Brand name 60 (60 ) — 0.0 Total intangible assets subject to amortization $ 14,620 $ (5,408 ) $ 9,212 December 31, 2015 Developed technology $ 8,310 $ (622 ) $ 7,688 4.8 User base and customer relationships 6,250 (892 ) 5,358 9.1 Brand name 60 (55 ) 5 0.1 Total intangible assets subject to amortization $ 14,620 $ (1,569 ) $ 13,051 intangiblesintangible additions for the year ended December 31, 2014. yearyears ended December 31, 2016, 2015 and 2014 was $3.8 million, $1.6 million.million and $0 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):11. Other LiabilitiesYear Ending December 31, 2017 $ 3,260 2018 2,329 2019 1,779 2020 1,344 Thereafter 500 Total $ 9,212 11. Other Liabilities following:following (in thousands): Year Ending December 31, 2016 2015 Class action settlement liability $ 2,996 $ 5,949 Repurchase liability for unvested restricted stock awards 118 473 Contingent consideration — 4,801 Deferred revenue 226 1,591 Servicing liabilities 198 484 Deferred rent 4,469 5,240 Restructuring liability 6,052 — Other 3,114 2,197 Total Other Liabilities $ 17,173 $ 20,735 12.12. Net Loss Per Share (“ (“ASC Topic 260”). Under ASC Topic 260, basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.The adjustment from net loss to net loss available to common shareholders represents the excess over the carrying value of such shares paid to certain preferred shareholders upon repurchase of their preferred shares as described below in Note 13 Convertible Preferred Stock and Stockholders’ Deficit. Year ended December 31, 2016 2015 2014 Numerator: Net loss $ (118,741 ) $ (25,968 ) $ (2,669 ) Excess return to preferred shareholders on repurchase — — (14,892 ) Net loss available to common stockholders for basic and diluted EPS (118,741 ) (25,968 ) (17,561 ) Denominator: 64,196,537 55,547,408 44,484,005 Basic and diluted net loss per share $ (1.85 ) $ (0.47 ) $ (0.39 ) method, in accordance with ASC Topic 260:method: Year ended December 31, 2016 2015 2014 (shares) (shares) (shares) Excluded securities: Convertible preferred stock issued and outstanding 177,388,425 177,388,425 153,499,785 Stock options issued and outstanding 44,099,577 34,358,106 24,974,990 Unvested stock options exercised 1,126,210 9,806,170 20,571,345 Restricted Stock Units 351,721 190,517 — Warrants issued and outstanding 988,513 588,660 884,435 Series E Convertible Preferred Stock warrants 1,254,111 — — 225,208,557 222,331,878 199,930,555 13.13. Convertible Preferred Stock, Warrant Liability and Stockholders’ Deficit and Stockholders’ DeficitConvertible Preferred Stock20152016 are disclosed in the table below (dollars(dollar amounts in thousands)thousands, except per share information):Convertible Preferred Stock Par Value Outstanding and Issued
shares New Series A $ 0.01 68,558,220 68,558,220 $ 19,774 Series A-1 0.01 24,760,915 24,760,915 49,522 New Series B 0.01 35,775,880 35,775,880 21,581 New Series C 0.01 24,404,770 24,404,770 70,075 New Series D 0.01 23,888,640 23,888,640 165,000 New Series E 0.01 40,000,000 — — 217,388,425 177,388,425 $ 325,952 DE convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the New Series A, New Series B, New Series C, New Series D and New Series DE convertible preferred stock have beenDE convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights. To date, no dividends have been declared on any of the PMI’s preferred stock or common stock. DE convertible preferred stock converts into PMI common stock at a 1:1 ratio while the Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio.and $6.91 for the New Series D convertible preferred stock and $1.48 for the New Series E convertible preferred stock.As of December 31, 2016 Volatility 40.0% Risk-free interest rate 2.45% Remaining contractual term (in years) 9.96 Dividend yield 0% 454,989,825,555,610,528, consisting of 270,326,075338,222,425 shares of common stock, $0.01 par value per share, and 184,663,750217,388,425 shares of preferred stock, $0.01 par value per share,69,340,760 68,558,220 of which are designated as New Series A preferred stock, 25,585,91024,760,915 of which are designated as Series A-1 preferred stock, 41,443,67035,775,880 of which are designated New Series B preferred stock, 24,404,770 of which are designated as Series C preferred stock, and 23,888,640 of which are designated New Series D preferred stock, and 40,000,000 of which are designated New Series E preferred stock. As of December 31, 2016, 70,843,044 shares of common stock were issued and 69,907,109 shares of common stock were outstanding. As of December 31, 2015, 70,367,425 shares of common stock were issued and 69,431,490 shares of common stock were outstanding. As of December 31, 2014, 72,243,500 shares of common stock were issued and outstanding. Each holder of common stock is entitled to one vote for each share of common stock held. Also,on October 29, 2013, PMI amended and restated its certificate of incorporation to effect a 1-for-10 reverse stock split. the repurchase, Prosper recognized compensation costs of $6.2 million of which $0.33 million is recorded in Origination and Servicing, $0.07 million in Sales and Marketing and $5.7 million in General and Administrative on the Consolidated Statements of Operations. As part of the transactions, PMI repurchased 3,607,095 shares for a total of $24.9 million from Prosper’s executive officers.20152016 and 2014,2015, PMI issued 3,211,935466,300 and 4,624,3353,211,935 shares of common stock, respectively, upon the exercise of options for cash proceeds of $0.88$0.31 million and $0.89$0.88 million, respectively, of which 76,045 and 4,328,585 were unvested respectively.in 2015. Certain options are eligible for exercise prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the same vesting schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the holder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At December 31, 20152016 and 2014,2015, there were 9,806,1701,126,210 and 20,571,3459,806,170 shares respectively of restricted stock outstanding that remain unvested and subject to PMI’s right of repurchase.20152016 and 2014,2015, PMI issued 207,06556,480 and 584,615207,065 shares of common stock upon the exercise of warrants, for $0.38 per share and $0.61 per share and $0.39 per share respectively.14.14. Stock-based Compensation In 2005, PMI’s stockholders approved the adoption of the 2005 Stock Plan. On December 1, 2010, PMI’s stockholders approved the adoption of theDuring the year ended December 31,In March 2015, the 2005 Plan expired, and PMI’s stockholders approvedexcept that any awards granted under the adoption of the 2015 Equity Incentive2005 Plan (the “2015 Plan”).prior to its expiration remain in effect pursuant to their terms. As of December 31, 2015,2016, under the 2015 Plan, options to purchase up to 13,194,76550,458,108 shares of PMI's common stock are reserved and may be granted to employees, directors, and consultants by PMI’s Board of Directors and stockholders to promote the success of Prosper’s business. Options generally vest 25% one year from the vesting commencement date and 1/4848tthh per month thereafter or vest 50% two years from the vesting commencement date and 1/48 per month thereafter. thereafter or vest 1/36th per month from the vesting commencement date. In no event are options exercisable more than ten years after the date of grant.
Stock Option Reprice Balance as of January 1, 2016 9,806,170 0.05 Repurchase of restricted stock (673,750 ) 0.12 Restricted stock vested (8,006,210 ) 0.03 Balance as of December 31, 2016 1,126,210 0.11 0.42 Options expected to vest 1,086,592 $ 0.11 0.42 20152016 is as follows: Options Outstanding $0.02 881,295 0.20 $ 0.02 0.11 171,855 1.05 0.11 1.13 73,060 1.61 1.13 $0.02 - $1.13 1,126,210 0.42 $ 0.11 Balance as of January 1, 2016 40,425,605 $ 2.64 Options granted 19,655,338 $ 2.14 Options exercised – vested (466,300 ) $ 0.65 Options forfeited (18,218,924 ) $ 2.43 Balance as of December 31, 2016 41,395,719 $ 1.48 8.28 Options vested and expected to vest as of December 31, 2016 33,019,875 $ 1.48 8.28 Options vested and exercisable at December 31, 2016 24,589,730 $ 1.06 7.65 2015,2016, we granted stock options to purchase 23,422,23019,655,338 shares of common stock at a weighted average grant date fair value of $5.14$2.04 per share.20152016 is as follows: Options Outstanding Options Vested and Exercisable 0.02 - $0.99 12,236,805 6.88 $ 0.12 12,236,805 $ 0.12 1.00 - 1.99 2,788,790 7.61 1.13 1,987,935 1.13 2.00 - 3.62 26,370,124 9.00 2.14 10,364,990 2.14 0.02 - 3.62 41,395,719 8.28 $ 1.48 24,589,730 $ 1.06 Year ended December 31, 2016 2015 2014 Volatility of common stock 50.88 % 55.69 % 68.28 % Risk-free interest rate 1.29 % 1.74 % 1.79 % Expected life 5.8 years 6.0 years 5.7 years Dividend yield — % — % — % 2014.2014. The vesting of these performance-based stock options was contingent upon the achievement of certain revenue targets or target ratios of marketing expenditures to revenues for the year ended December 31, 2014. PMI granted 10,164,480 performance-based stock options with an exercise price of $0.11 per share during 2014. The contractual term of these options is 10 years. Since the performance targets were achieved, 9,624,480 performance-based stock options became fully vested and 540,000 performance-based stock options were forfeited on the termination of employment. The aggregate expense recognized during 2014 related to these performance-based stock options was $587 thousand. PMI did not grant any performance-based options in 2015.$13.3$7.8 million. The following table summarizes the activities for PMI’s RSUs during 2015:2016: Number of Shares Weighted-Average Grant Date Fair Value Unvested at January 1, 2016 1,835,510 5.52 Granted 3,818,225 2.07 Vested (444,553 ) 5.52 Forfeited (3,214,023 ) 3.45 Unvested - December 31, 2016 1,995,159 2.16 December 31, 2016 2015 2014 Origination and Servicing $ 2,004 $ 1,231 $ 104 Sales and Marketing 2,914 2,561 767 General and Administrative 14,824 9,219 1,150 Restructuring 45 — — Total stock based compensation $ 19,787 $ 13,011 $ 2,021 Management modified or accelerated the vesting terms for certain employee options, which resulted in an additional $0.1 million and $0.6 million of stock-based compensation expense for the year ended December 31, 2015 and 2014, respectively. As of December 31, 2015,2016, the unamortized stock-based compensation expense related to Prosper employees’ unvested stock-based awards was approximately $46.3$28.8 million, which will be recognized over the remaining weighted-average vesting period of approximately 3.22.3 years. Severance Related Facilities Related Total Balance January 1, 2016 $ — $ — $ — Adjustments to expense 7,256 8,735 15,991 Transfer from deferred rent — 764 764 Less: Cash paid (6,659 ) (3,447 ) (10,106 ) Balance December 31, 2016 $ 597 $ 6,052 $ 6,649 15.16. Income Taxes Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2014, Prosper identified errors that affected the effective tax rate reconciliation and our deferred income tax tables as of December 31, 2014. The errors were the result of treating servicing assets and liabilities as permanent differences rather than as temporary differences. The effective tax rate reconciliation and deferred income tax tables below for the year ended December 31, 2014 have been revised to reflect the correction of the errors. There was no effect on Prosper's effective tax rate due to the full valuation allowance and management does not believe these errors were material to the financial statements taken as a whole.Prosper did not have any current or deferred federal or state income tax expense for the year ended December 31, 2014. Year Ended December 31, 2016 2015 2014 Current: Federal $ — $ — $ — State — — — Foreign 124 (5 ) — Total Current Income Tax (Benefit) 124 (5 ) — Deferred: Federal 394 320 — State 28 25 — Foreign — — Total Deferred Income Tax 422 345 — Total Income Tax $ 546 $ 340 $ — Year Ended December 31, 2016 2015 2014 Federal tax at statutory rate 34 % 34 % 34 % State tax at statutory rate (net of federal benefit) 7 % 12 % 1 % Change to Uncertain Tax Position — % 10 % — % Permanent Items (1 )% — % (11 )% Incentive Stock Options (2 )% (9 )% (9 )% Acquisition Related Costs — % (3 )% — % Change in valuation allowance (37 )% (46 )% (25 )% Credits and Reserves — % — % 9 % Other (1 )% 1 % 1 % — % (1 )% — % 20152016 and 20142015 are as follows (in thousands): December 31, 2016 2015 Net operating loss carry forwards $ 85,759 $ 44,632 Research & other credits 626 502 Settlement liability 1,230 2,466 Stock compensation 7,300 3,193 Accrued liabilities 4,884 5,794 Restructuring liability 2,424 — Other 62 126 Deferred tax assets 102,285 56,713 Fair value of loans (1,045 ) (1,406 ) Net servicing rights (4,895 ) (5,752 ) Fixed assets (1,226 ) (721 ) Intangible assets (3,226 ) (4,246 ) Foreign Earnings (270 ) — Deferred tax liabilities (10,662 ) (12,125 ) Net deferred tax assets 91,623 44,588 Valuation allowance (92,389 ) (44,933 ) Net deferred tax liabilities $ (766 ) $ (345 ) 2015,2016, increased by $16.4$47.5 million to ($44.9)$92.4 million from ($28.5)$44.9 million in the prior fiscal year, an increase of 58%.year. Under ASC 740,Accounting for Income Taxes(“ (“ASC Topic 740”), a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The amount of valuation allowance would be based upon management’s best estimate of Prosper’s ability to realize the net deferred tax assets. A valuation allowance can subsequently be reduced when management believes that the assets are realizable on a more-likely-than-not basis.$144.4$233.6 million and $161.6$257.1 million respectively as of December 31, 2015,2016, available to reduce future income subject to income taxes. Prosper has $10.8 million of net operating losses that will be credited to additional paid in capital when realized related to equity compensation. The federal net operating loss carryforwards will begin to expire in 2025. The state net operating loss carryforwards will begin to expire in 2016.2017. Prosper has federal and California research and development tax credits of approximately $429$428 thousand and $450 thousand, respectively. The federal research credits will begin to expire in 20252034 and the California research credits have no expiration date. Prosper also has California enterprise zone credits of $1.1 million that will begin to expire in 2024.Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2014, Prosper identified an error that affected the disclosure of Unrecognized Tax Benefits as of December 31, 2014. The error was the result of presenting a portion of the unrecognized tax benefit gross of the application of the applicable tax rate. The amount of unrecognized tax benefits as of January 1, 2014 has been revised to reflect the correction of the error. All unrecognized tax benefits are netted against deferred tax assets with a full valuation allowance. Management does not believe this error was material to the financial statements taken as a whole. December 31,
2016 December 31,
2015Balance at January 1, $ 913 $ 4,927 Decrease related to current year tax position (4,014 ) Balance at December 31, $ 913 $ 913 2015,2016, Prosper has not incurred any interest or penalties.three3 years and four4 years, respectively, from the date of utilization of any net operating loss carryforwards or research and development credits.16.17. Colchis Agreement 18. Commitments and Contingencies 20152016 are as follows (in thousands):2017 $ 7,660 2018 8,129 2019 8,538 2020 8,781 2021 8,835 Thereafter 17,767 Total future operating lease obligations $ 59,710 amended and restated has entered into an agreement with WebBank, under which all Borrower Loans originated through the platformmarketplace are made by WebBank under its bank charter. The arrangement allowsPursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for Borrower Loans to be offered to borrowers at uniform nationwide terms. the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the greater of a monthly minimum fee or a fee calculated based on a certain percentage of monthly Borrower Loan origination volume. The minimum annual fee for the year ended December 31, 2017 is $1.7 million. The minimum fee is $1.7 million and $0.9 million in each of the years 2018 and 2019, respectively. Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At December 31, 2016 is $1.4 million.$32.7$18.6 million of Borrower Loans that WebBank originated during the last two business daydays of fiscal 2015the year ended December 31, 2016 and the first business day of fiscal 2016. the quarter ending March 31, 2017. Prosper will purchase these Borrower Loans within the first twothree business days of fiscal 2016.20152016 is $3,804 million. $3.5 billion. Prosper had accrued $510 thousand$0.6 million and $171 thousand$0.5 million as of December 31, 20152016 and 20142015 respectively in regard to this obligation. $5.9$3.0 million in the Consolidated Balance Sheets as of December 31, 2015.2016.17.19. Related Parties 20152016 and 20142015 are summarized below (in thousands): 2016 2015 2016 2015 $ 1,065 $ 1,361 $ 225 $ 206 508 244 34 9 Total $ 1,573 $ 1,605 $ 259 $ 215 Related Party Notes balance as of December 31, 2016 2015 Executive officers and management $ 1,620 $ 1,912 Directors 537 325 $ 2,157 $ 2,237 18.20. Postretirement Benefit Plans $0.66$0.7 million, respectively to the 401(k) plan, respectively.19.21. Significant Concentrations 2015, 37%2016, 20%, 19%16% and 11%9% were purchased by three different parties. This compares to 37%, 22%19% and 13%11% for the year ended December 31, 2014.2015. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which 95%90% and 89%95% of Borrower Loans were fundedoriginated through the Whole Loan Channel in the years endingended December 31, 2016 and 2015, and 2014, respectively. 20.22. Segments segment and operating unit structure.segment.21.23. Subsequent Events 16, 2016,27, 2017, PFL entered into a Loan Purchase Agreement (the “Purchase Agreement”) with PF LoanCo Funding LLC (the “Beneficiary”) and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee (the “Trustee”) of PF LoanCo Trust (the “Purchaser”). The Purchase Agreement sets forth the terms and conditions pursuant to which PFL may sell eligible consumer loans in an aggregate amount of up to $5.0 billion (including certain loans purchased by an affiliate of the Beneficiary prior to the date of the Purchase Agreement (the “Pre-Purchased Loans”)) to the Purchaser for the benefit of the Beneficiary over a two-year period. Under the Purchase Agreement, PFL will be obligated to (i) offer for purchase minimum monthly volumes of eligible loans to the Purchaser, and (ii) deliver a minimum percentage of the monthly volume of such loans that the Purchaser elects to purchase for the benefit of the Beneficiary, if any (together, the “Volume Requirements”).amendedentered into a Warrant Agreement with PF WarrantCo Holdings, LP, an affiliate of the Beneficiary (the “Warrant Holder”), and, restatedfor certain limited purposes, New Residential Investment Corp. (the “Warrant Agreement”). Pursuant to the Warrant Agreement, PMI issued to Warrant Holder three warrants (together, the “Series F Warrant”) to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).CertificateVolume Requirements under the Purchase Agreement for such month. Under the terms of Incorporationthe Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI and upon the occurrence of certain events set forth in the Warrant Agreement.effect a 5-for-1 forward stock split.vested Warrant Shares, in whole or in part, at any time prior to the tenth anniversary of their date of issuance. The total number of shares ofunderlying the Series F Warrant may be adjusted following certain events such as stock which thesplits, dividends, reclassifications, and certain other issuances by PMI.shall have the authorityissued to issue is 464,214,500, consisting of 286,826,075Pinecone Investments LLC, a warrant (the “Series E Warrant”) to purchase 15,277,006 shares of Common Stock, $0.01 par value per share, and 177,388,425PMI’s Series E-1 Preferred Stock at an exercise price of $0.01 par value per share, 68,558,220share. The Series E Warrant is immediately exercisable, in whole or in part, by paying in cash the full purchase price payable in respect of which are designated as "Series A Preferred Stock," 24,760,915the number of which are designated as "Series A-1 Preferred Stock," 35,775,880 of which are designated as "Series B Preferred Stock," 24,404,770 of which are designated as “Series C Preferred Stock” and 23,888,640 of which are designated as “Series D Preferred Stock.” Each share of Common Stockshares purchased. The Series E Warrant was issued and outstanding immediately priorpursuant to the effective date shall be splitWarrant Agreement, dated December 16, 2016, between PMI and converted into five shares of Common Stock; each share of Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock issued and outstanding immediately prior to the effective date, shall be converted into five shares of Series A Preferred Stock, Series A- Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively. No fractional shares shall be issuedColchis Capital Management, L.P., previously described in connectionPMI’s Current Report on Form 8-K as filed with the forward stock split. Commission on December 22, 2016.REPORT20152016 and 2014,2015, and the related consolidated statements of operations, member’s equity, and cash flows for each of the two years in the period ended December 31, 2015.then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.2015,2016, and 2014,2015, and the results of their operations and their cash flows for each of the two years in the periodthen ended, December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.20162017 December 31,
2016 December 31,
2015Assets Cash and Cash Equivalents $ 6,929 $ 15,026 Restricted Cash 147,983 139,937 Short Term Investments 1,280 1,277 Loans Held for Sale at Fair Value 624 32 Borrower Loans Receivable at Fair Value 315,627 297,273 Property and Equipment, Net 10,095 8,419 Servicing Assets 12,461 13,605 Other Assets 186 122 Total Assets $ 495,185 $ 475,691 Liabilities and Member's Equity Accounts Payable and Accrued Liabilities $ 2,223 $ 2,122 Payable to Related Party 1,899 2,989 Payable to Investors 141,625 135,661 Notes at Fair Value 316,236 297,405 Other Liabilities 1,877 1,209 Total Liabilities 463,860 439,386 Member's Equity Member's Equity 30,704 — Retained Earnings 621 36,305 Total Member's Equity 31,325 36,305 Total Liabilities and Member's Equity $ 495,185 $ 475,691 Prosper Year ended December 31, 2016 2015 Revenues Operating Revenues Administration Fee Revenue – Related Party $ 36,630 $ 57,919 Servicing Fees, Net 28,604 16,218 Gain on Sale of Borrower Loans 3,637 14,151 Other Revenues 478 1,500 Total Operating Revenues 69,349 89,788 Interest Income on Borrower Loans 44,649 41,380 Interest Expense on Notes (41,187 ) (38,174 ) Net Interest Income 3,462 3,206 Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net (372 ) 59 Total Net Revenues 72,439 93,053 Expenses Administration Fee – Related Party 62,203 62,786 Servicing 5,395 3,705 General and Administrative 1,321 1,227 Other Expenses, Net 30,704 — Total Expenses 99,623 67,718 Total Net Income (Loss) $ (27,184 ) $ 25,335 Prosper Total Balance as of January 1, 2015 $ 29,619 $ 16,672 $ 46,291 Capital Infusion from Parent (29,370 ) (6,130 ) (35,500 ) Transfer of Servicing Rights to Parent (249 ) — (249 ) Adjustment to Servicing Rights on Transition to Fair Value — 428 428 Net Income — 25,335 25,335 Balance as of December 31, 2015 $ — $ 36,305 $ 36,305 Distributions to Parent — (8,500 ) (8,500 ) Contributions by Parent 30,704 — 30,704 Net Income (Loss) — (27,184 ) (27,184 ) Balance as of December 31, 2016 $ 30,704 $ 621 $ 31,325 Prosper For the Twelve Months Ended
December 31, 2016 2015 Cash flows from operating activities: Net Income (Loss) $ (27,184 ) $ 25,335 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes 372 (59 ) Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes 176 (57 ) Gain on Sale of Borrower Loans (9,634 ) (14,561 ) Change in Fair Value of Servicing Rights 10,620 4,176 Depreciation and Amortization 4,083 3,161 Loss on Contract Termination 30,704 — Other, Net (128 ) — Changes in Operating Assets and Liabilities: Purchase of Loans Held for Sale at Fair Value (1,979,952 ) (3,517,467 ) Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value 1,979,352 3,525,759 Restricted Cash Except for those Related to Investing Activities (5,268 ) (68,776 ) Other Assets (64 ) (118 ) Accounts Payable and Accrued Liabilities 101 1,510 Payable to Investors 5,964 71,852 Net Related Party Receivable/Payable (1,260 ) 2,880 Other Liabilities 954 539 Net Cash Provided by Operating Activities 8,836 34,174 Cash Flows From Investing Activities: Purchase of Borrower Loans Held at Fair Value (217,582 ) (197,436 ) Principal Payment of Borrower Loans Held at Fair Value 173,710 151,893 Purchase of Short Term Investments (1,280 ) (1,277 ) Maturities of Short Term Investments 1,277 1,274 Purchases of Property and Equipment (5,589 ) (9,211 ) Changes in Restricted Cash Related to Investing Activities (2,778 ) 1,942 Net Cash Used in Investing Activities (52,242 ) (52,815 ) Cash Flows from Financing Activities: Proceeds from Issuance of Notes Held at Fair Value 217,767 197,228 Payments of Notes Held at Fair Value (173,958 ) (151,838 ) Cash Distributions to Parent (8,500 ) (35,500 ) Loan Advances to Parent — (10,000 ) Loan Repayments from Parent — 10,000 Net Cash Provided by Financing Activities 35,309 9,890 Net Increase (Decrease) in Cash and Cash Equivalents (8,097 ) (8,751 ) Cash and Cash Equivalents at Beginning of the Year 15,026 23,777 Cash and Cash Equivalents at End of the Year $ 6,929 $ 15,026 Supplemental Disclosure of Cash Flow Information: Cash Paid for Interest $ 40,597 $ 38,168 Non-Cash Operating Activity - Servicing Rights Fair Value Adjustment — 428 Non-Cash Investing Activity- Accrual for Property and Equipment, Net 1,606 1,436 Non-Cash Financing Activity, Distribution to Parent $ — $ 249 Non-Cash Financing Activity, Contribution by Parent $ 30,704 $ — Prosper1.1. Organization and Business “Prosper“Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis.2015.2016. All loans made through the marketplace are funded by WebBank, an FDIC-insured, Utah chartered industrial bank. After funding a loan, WebBank sells the loan to PFL, without recourse to WebBank, in exchange for the principal amount of the loan. WebBank does not have any obligation to purchasers of the Notes.2015,2016, Prosper Funding’s marketplace was open to investors in 30 states and the District of Columbia. Additionally, as of December 31, 20152016 Prosper Funding’s marketplace was open to borrowers in 4645 states and the District of Columbia. Currently, the marketplace does not operate internationally.2.2. Significant Accounting Policies Funding’saccordanceconformity with U.Saccounting principles generally accepted accounting principlesin the United States of America (“U.S. GAAP”).estimates, and those could be material.concentrations of credit risk consist primarily of cash, cash equivalents, borrower loans held and restricted cash. Prosper Funding places cash, cash equivalents and restricted cash with high-quality financial institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds federally insured amounts. Prosper Funding also performs periodic evaluations of the relative credit standing of these financial institutions and has not recognized any losses in earnings from instruments held at these financial institutions.ReclassificationsDuring the period ended December 31, 2015, Prosper Funding changed the presentation of its revenues in the Consolidated Statements of Operations. A new line called “Gain on Sales of Borrower Loans” was created with the amounts included in this line previously classified as “Other Revenue.” Prior period amounts have been reclassified to conform to the current presentation.Prosper Funding also changed the presentation of the servicing assets on its Consolidated Balance Sheets by reclassifying them from “Prepaids and Other Assets” to “Servicing Assets.” Prosper also changed the presentation of liabilities by creating “Other Liabilities” and reclassified servicing liabilities from “Accounts Payable and Accrued Liabilities” to “Other Liabilities”. Prior period amounts have been reclassified to conform to the current presentation. Management believes these changes make the financial statements more useful for the readers of the financial statements and comparable with Prosper Funding’s competitors. and as a result none oftherefore, we do not consolidate these entities are consolidated on Prosper Funding’s consolidated financial statements. Such deposits periodically exceed amounts insured by the FDIC.. of the outstanding balance. The fair value election for Notes and Borrower Loans allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to lenders that are dependent upon borrower payments. As such, the fair value of a group of Notes is approximately equal to the fair value of the corresponding Borrower Loan, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to such Note holders. As a result, the valuation of the Notes uses the same methodology and assumptions as the Borrower Loans, except that the Notes incorporate the 1%1.0% servicing fee and any differences in timing of payments. Any unrealized gains or losses on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations. The effective interest rate associated with a group of Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee. See Note 4 for a roll-forward and further discussion of the significant assumptions used to value Borrower Loans and Notes.fundedoriginated and Notes issued through the Note Channel are carried on Prosper Funding’s consolidated balance sheets as assets and liabilities, respectively. Prosper Funding has adopted the provisions of ASC Topic 825,Financial Instruments (“ASC Topic 825”). ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper Funding estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for the expected payment, loss, recovery and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper Funding maintains the ability to sell the Borrower Loans without the approval of the holders in the corresponding Notes.Borrower primarily comprised of Borrower Loans held for short durations and are recorded at fair value. The fair value is estimated using discounted cash flow methodologies based upon a set of valuation assumptions similar to those of other Borrower Loans. We measure Loans which are set forth below in Note 6 — Fair Value of Assets and Liabilities. Prosper Funding has adopted the provisions of ASC Topic 825. ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other itemsHeld for Sale at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows for the Borrower Loans Held for Sale to be measured at fair value similar to Borrower Loans and Notes. The fair value election, with respect to an item, may not be revoked once an election is made.generallycurrently set at 1%1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. The servicing fee compensates Prosper Funding for the costs incurred in servicing the related loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Prosper Funding records servicing fees paid by Borrower Loan investors as a component of operating revenue when received. The amortization and change in fair value of servicing rights are also included in servicing fees.retainsis retained for the servicing assetsof Borrower Loans by WebBank. Additionally, Prosper Funding recognizes gains or liabilities uponlosses on the sale of Borrower Loans.fundedoriginated through the Note Channel and interest expense on the corresponding Notes using the accrual method based on the stated interest rate to the extent Prosper Funding believes it to be collectable.Administration Fee Expense - Related Party2014-09,2014-9, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model whichnot yet selected a transition methodissued and is evaluatingmay issue in the impactfuture, interpretative guidance, which may cause our evaluation to change. Our preliminary results indicate that administration fees are included in the scope of adopting thisthe new accounting standard updateguidance, while servicing fees and gain or loss on the consolidated financial statementssale of loans remain within the scope of ASC topic 860, Transfers and related disclosures. is currently assessingadopted this guidance on January 1, 2016, and the potentialadoption of this standard did not have a material impact on itsProsper Funding’s financial statements from adopting this new guidance.2015-02,2015-2, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-022015-2 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-022015-2 is effective for periods beginning after December 15, 2015 with early adoption permitted. Prosper Funding has decided to early adopt this guidance effective January 1, 2015, and the adoption of this standard had no impact on Prosper Funding’s consolidated financial statements.2015-052015-5 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which will be effective for the annual reporting period beginning after December 15, 2015.2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a2016-01, 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial LiabilitiesLiabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. We areProsper Funding is currently evaluating the impact that this guidance will have on our consolidated financial statements.3. PropertyEquipment3. Property and Equipment December 31, 2016 2015 Property and equipment: Internal-use software and web site development costs $ 16,749 $ 10,990 Property and equipment 16,749 10,990 Less accumulated depreciation and amortization (6,654 ) (2,571 ) Total property and equipment, net $ 10,095 $ 8,419 and 2014 was $3,161$4,083 thousand and $1,331$3,161 thousand, respectively. Internal-use software and web site development additions of $10.5$5.8 million and $0.8$10.5 million were purchased from PMI in the years ended December 31, 2016 and 2015 and 2014 respectively. 4.4. Borrower Loans, Loans Held For Sale and Notes Held at Fair Value fundedoriginated and Notes issued through the Note Channel is estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used to value such Borrower Loans and Notes include default rates derived from historical performance, market conditions and discount rates applied to each credit grade based on the perceived credit risk. The obligation to pay principal and interest on any series of Notes is equal to the payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the Notes is approximately equal to the fair value of the Borrower Loans fundedoriginated through the Note Channel, adjusted for the servicing fee and the timing of borrower payments subsequently disbursed to the Note holders. The effective interest rate associated with a series of Notes will be less than the interest rate earned on the corresponding Borrower Loan due to the servicing fee.20152016 and 2014,2015, Borrower Loans, Notes and Loans Held for Sale (in thousands) were: Borrower Loans Notes Loans Held for Sale December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 $ 319,143 $ 296,945 $ (323,358 ) $ (294,331 ) $ 641 $ 42 Fair value adjustments (3,516 ) 328 7,122 (3,074 ) (17 ) (10 ) Fair value $ 315,627 $ 297,273 $ (316,236 ) $ (297,405 ) $ 624 $ 32 2015,2016, outstanding Borrower Loans had original maturities between 36 and 60 months, had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2020.2021. At December 31, 2014,2015, Borrower Loans and Loans Held for Sale had original terms between 36 months and 60 months, had monthly payments with fixed interest rates ranging from 5.77%5.32% to 33.04% and had various maturity dates through December 2019.gainloss of approximately $2.8$2.4 million that is attributable to changes in the credit risks associated withrelated to Borrower Loans during the instrument.December 31, 2014 the Borrower Loans that were 90 days or more delinquent, had anaggregate principal amount of $1.5 million and a fair value of $0.14 million. As of December 31, 20152016 and 2014,2015, Borrower Loans in non-accrual status had a fair value of $0.5 million and $0.1 million, and zero, respectively.5.5. Loan Servicing Assets and Liabilities $14.2$3.6 million and $4.0$14.2 million for the years ended December 31, 20152016 and 20142015, respectively. For the year ended December 31, 2014 no impairment was recorded. For the year ended December 31, 2015,2016, servicing assets and liabilities were measured at fair value subsequent to the initial recognitionof eitherbetween 36 orand 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and Maturity dates through December 2020. At December 31, 2014, loans that were sold but for which we retained servicing rights had a total outstanding principal balance of $1.0 billion, original terms between 36 and 60 months and had monthly payments with fixed interest rates ranging from 6.05% to 31.34% and Maturity dates through December 2019.20.438.2 million and $4.8$20.4 million of contractually specified servicing fees, late charges and ancillary fees are included on our Statement of Operations in Servicing Fees, Net for the years ended December 31, 2016 and 2015, and 2014 respectively. Prepayment of the loans has historically been insignificant and therefore does not currently have a material impact on the fair value of servicing assets and liabilities. 6. Fair Value of Assets and Liabilities6. Fair Value of Assets and Liabilities Funding’sFunding’s fair value methodologies, see Note 2 - Summary of Significant Accounting Policies. Prosper Funding did not transfer any assets or liabilities in or out of level 3 during the year ended December 31, 2015.except for servicing assets and liabilities at December 31, 2014, which were measured at amortized cost and presented below at fair value for comparison purposes (in thousands):December 31, 2016 Fair Value $ — $ — $ 315,627 $ 315,627 Servicing Assets — — 12,461 $ 12,461 — — 624 624 — — 328,712 328,712 $ — $ — $ 316,236 $ 316,236 Servicing Liabilities — — 198 198 Loan Trailing Fee Liability — — 665 665 $ — $ — $ 317,099 $ 317,099 December 31, 2015 Fair Value Assets Borrower Loans $ — $ — $ 297,273 $ 297,273 Servicing Assets — — 13,605 13,605 Loans Held for Sale — — 32 32 Total Assets — — 310,910 310,910 Liabilities Notes $ — $ — $ 297,405 $ 297,405 Servicing Liabilities — — 484 484 Total Liabilities $ — $ — $ 297,889 $ 297,889 Funding’sFunding’s Borrower Loans, Loans Held for Sale, Notes, Servicing Assets, Servicing Liabilities and loan servicing rightsLoan Trailing Fee Liability do not trade in an active market with readily observable prices, Prosper Funding uses significantFunding’sFunding’s level 3 fair value measurements at December 31, 2015:RangeRange Unobservable Input December 31, 2015 December 31, 20144.3% - 14.5% 3.2% - 10.6%1.4% - 14.4% 2.6% - 19.7%Rights:Assets and Liabilities:RangeUnobservable InputDecember 31, 2015December 31, 2014Discount rate15% - 25%15% - 25%Default rate1.2% - 14.7%2.6% - 26.3%Prepayment rate14.3% - 25.6%8.0% - 25.8%Market servicing rate0.625%0.625% - 0.70% Range Unobservable Input December 31, 2016 December 31, 2015 Discount rate 15% - 25% 15% - 25% Default rate 1.5% - 15.2% 1.2% - 14.7% Prepayment rate 13.6% - 26.6% 14.3% - 25.6% 0.625 % 0.625 % basis: basis (in thousands): Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Borrower Loans Notes Total Balance at January 1, 2016 $ 297,273 $ (297,405 ) $ 32 $ (100 ) Purchase of Borrower Loans/Issuance of Notes 217,582 (217,767 ) 1,979,952 1,979,767 (171,195 ) 173,958 (447 ) 2,316 (2,515 ) — (1,978,905 ) (1,981,420 ) Other changes 416 (591 ) (1 ) (176 ) (25,934 ) 25,569 (7 ) (372 ) Balance at December 31, 2016 $ 315,627 $ (316,236 ) $ 624 $ 15 Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Borrower Loans Notes Total Balance at January 1, 2015 $ 273,243 $ (273,783 ) $ 8,463 $ 7,923 Purchase of Borrower Loans/Issuance of Notes 197,436 (197,228 ) 3,517,467 3,517,675 Principal repayments (151,038 ) 151,025 (552 ) (565 ) Borrower loans sold to third parties (855 ) 813 (3,525,207 ) (3,525,249 ) Other changes 81 (6 ) (18 ) 57 Change in fair value (21,594 ) 21,774 (121 ) 59 Balance at December 31, 2015 $ 297,273 $ (297,405 ) $ 32 $ (100 ) basis:basis (in thousands):
Amortized Cost at January 1, 2015 $ 3,116 $ 624 399 (29 ) Fair Value at January 1, 2015 $ 3,515 $ 595 14,909 283 (249 ) — (4,570 ) (394 ) Fair Value at January 1, 2016 $ 13,605 $ 484 Additions 9,833 9 Less: Changes in fair value (10,977 ) (295 ) Fair Value at December 31, 2016 $ 12,461 $ 198 Balance at January 1, 2016 $ — Issuances 647 Cash payment of Loan Trailing Fee (21 ) Change in fair value 39 Balance at December 31, 2016 $ 665 20152016 for Borrower Loans, Loans Held for Sale and Notes fundedoriginated through the Note Channel are presented in the following table (in thousands, except percentages):* Represents weighted average assumptions considering all credit grades. Notes Discount rate assumption: 7.30 % * 7.30 % * Resulting fair value from: 100 basis point increase $ 312,424 $ 313,022 200 basis point increase 309,302 309,888 Resulting fair value from: 100 basis point decrease $ 318,913 $ 319,535 200 basis point decrease 322,288 322,921 Default rate assumption: 11.94 % * 11.94 % * Resulting fair value from: 100 basis point increase $ 312,171 $ 312,759 200 basis point increase 308,833 309,401 Resulting fair value from: 100 basis point decrease $ 319,112 $ 319,743 200 basis point decrease 322,640 323,294 Funding’sFunding’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates, prepayment rates and different default rates as of December 31, 20152016 (in thousands, except percentages). Weighted average market servicing rate assumptions 0.625 % 0.625 % Resulting fair value from: Servicing rate increase to 0.65% 11,615 217 Servicing rate decrease to 0.60% 13,307 177 Weighted average prepayment assumptions 20.02 % 20.02 % Resulting fair value from: Applying a 1.1 multiplier to prepayment rate 12,262 194 Applying a 0.9 multiplier to prepayment rate 12,662 201 Weighted average default assumptions 11.59 % 11.59 % Resulting fair value from: Applying a 1.1 multiplier to default rate 12,271 198 Applying a 0.9 multiplier to default rate 12,654 198 7.7. Income Taxes 20152016 and 2014.2015. Prosper Funding is a US disregarded entity and the loss is included in the return of its parent, PMI. Since PMI is in a loss position, not8.8. Commitments and Contingencies Operating Commitmentsamended and restatedbecomes involved in various legal actions. Prosper Funding maintains provisions it considers to be adequate for such actions. Prosper Funding does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper Funding's financial condition, results of operations or cash flows.platformmarketplace are made by WebBank under its bank charter. The arrangement allowsPursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for Borrower Loans to be offered to borrowers at uniform nationwide terms.the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper Funding is required to pay WebBank an amount equal to such deficiency. Accordingly, the greater of a monthly minimum fee or a fee calculated based on a certain percentage of monthly Borrower Loan origination volume. The minimum annual fee for the year ended December 31, 2017 is $1.7 million. The minimum fee is $1.7 million and $1.0 million in each of the years 2018 and 2019, respectively. Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At December 31, 2016 is $1.4 million.$32.7$18.6 million of Borrower Loans that WebBank originated during the during the last two business daydays of fiscal 2015the year ended December 31, 2016 and the first business day of fiscal 2016.the quarter ending March 31, 2017. Prosper Funding will purchase these Borrower Loans within the first twothree business days of fiscal 2016.20152016 is $3.6$3.4 billion. Prosper Funding had accrued $460 thousand$0.6 million and $171 thousand$0.5 million as of December 31, 20152016 and 20142015 respectively in regard to this obligation. 9.9. Related Parties 20152016 and 20142015 are summarized below (in thousands): Aggregate Amount of Interest Earned on Related Party Notes Purchased Notes 2016 2015 2016 2015 Executive officers and management $ 1,065 $ 1,361 $ 225 $ 206 Directors — — — — Total $ 1,065 $ 1,361 $ 225 $ 206 Related Party Notes balance as of December 31, 2016 2015 Executive officers and management $ 1,620 $ 1,912 Directors — — Total $ 1,620 $ 1,912 10.10. Significant Concentrations 2015, 37%2016, 20%, 19%16% and 11%9% were purchased by three different parties. This compares to 37%, 22%19% and 13%11% for the year ended December 31, 2014.2015. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel. 95%90% and 89%95% of Borrower Loans were fundedoriginated through the Whole Loan Channel in the years ending December 31, 2016 and 2015, and 2014, respectively. 11. Colchis Agreement 12. Subsequent Events SIGNATURES17th17th day of March, 2016.2017.PROSPER MARKETPLACE, INC. By:/s/ Aaron VermutBy: Aaron VermutJohn HiestandUsama Ashraf and Sachin Adarkar, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.NameTitleDateName Title Date /s/ Aaron Vermut David Kimball2016Aaron Vermut/s/ John Hiestand Usama AshrafVice President, FinanceChief Financial Officer (Principal Financial and Accounting Officer)2016John Hiestand/s/ Stephan P.Aaron Vermut Executive Chairman; Director2016Stephan P.Aaron Vermut/s/ Christopher M. Bishko 2016/s/ Rajeev V. Date 2016/s/ Patrick W. Grady 2016/s/ David R. Golob 2016/s/ Nigel W. Morris 20162016.2017.PROSPER FUNDING LLC By:/s/ Aaron Vermut By: Aaron VermutChief Executive Officer (Principal Executive Officer); Director John HiestandUsama Ashraf and Sachin Adarkar, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.NameTitleDateName Title Date /s/ Aaron Vermut David KimballDirectorMarch 17, 2016Aaron Vermut/s/ John Hiestand 2016John Hiestand/s/ Stephan P. Vermut Executive Chairman; DirectorMarch 17, 2016Stephan Vermut2016/s/ Bernard J. Angelo 2016/s/ David V. DeAngelis 2016EXHIBITExhibitNumberDescription2.1Description 2.1 Asset Transfer Agreement, dated January 22, 2013, between Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 2.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) 2.22.2 Agreement and Plan of Merger dated as of January 23, 2015 by and among Prosper Marketplace, Inc., American HealthCare Lending, LLC (“AHL”), Prosper Healthcare Lending, LLC and Shaun Sorensen, solely in his capacity as agent for AHL’s members and option holders (incorporated by reference to Exhibit 2.1 of PMI’s Current Report on Form 8-K, filed on January 27, 2015) 2.32.3 Agreement and Plan of Merger, dated as of September 23, 2015, by and among Prosper Marketplace, Inc., BillGuard, Inc., Beach Merger Sub, Inc. and Shareholder Representative Services LLC, solely in its capacity as the Stockholders’ Representative (incorporated by reference to Exhibit 2.1 of PMI’s Current Report on Form 8-K, filed on October 15, 2015) 3.13.1 Fifth Amended and Restated Limited Liability Company Agreement of Prosper Funding LLC, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of Post-Effective Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-179941), filed on October 23, 2013 by PFL and PMI) 3.23.2 Amended and Restated Certificate of Incorporation of Prosper Marketplace, Inc. (2) 3.33.3 Prosper Funding LLC Certificate of Formation (incorporated by reference to Exhibit 3.2 of Pre-Effective Amendment No. 1 to PFL and PMI’s Registration Statement on Form S-1 (File No. 333-179941), filed on April 23, 2012) 3.43.4 Bylaws of PMI, dated March 22, 2005 (incorporated by reference to Exhibit 3.2 of PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed October 30, 2007) 4.14.1 Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5, incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K filed on January 28, 2013) 4.24.2 Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4, incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed on June 26, 2009) 4.34.3 Supplemental Indenture, dated January 22, 2013, between Prosper Marketplace, Inc., Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) 4.44.4 Indenture, dated June 15, 2009, between Prosper Marketplace, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed on June 26, 2009) 4.54.5 Amended and Restated Indenture, dated January 22, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K filed on January 28, 2013) 10.110.1 Form of PFL Borrower Registration Agreement (2) 10.210.2 Form of PFL Investor Registration Agreement (2) 10.310.3 Form of PMI Borrower Registration Agreement (incorporated by reference to Exhibit 10.1 of Pre-Effective Amendment No. 1 to PMI’s Registration Statement on Form S-1 (File No. 333-182599), filed on November 19, 2012) ExhibitNumberDescription10.410.4 Form of PMI Lender Registration Agreement (Note Commitment, Purchase and Sale Agreement) (incorporated by reference to Exhibit 10.2 of Pre-Effective Amendment No. 1 to PMI’s Registration Statement on Form S-1 (File No. 333-182599) filed on November 19, 2012) 10.510.5 Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) 10.610.6 Amendment No. #1 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 10-Q filed on May 14, 2014) 10.7Description 10.7 Amendment No. #2 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of PMI and PFL’s Annual Report on Form 10-K filed on April 6, 2015) 10.810.8 Amendment No. #3 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (2) 10.9 Services and Indemnity Agreement, dated March 1, 2012, between Global Securitization Services, LLC, Kevin Burns, Bernard Angelo, Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.8 of Pre-Effective Amendment No. 3 to PFL and PMI’s Registration Statement on Form S-1 (File Nos. 333-179941 and 333-179941-01), filed on November 21, 2012) 10.910.10 Second Amended and Restated Loan Sale Agreement, dated January 25, 2013, between WebBank, Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.5 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) 10.1010.11 Second Amended and Restated Loan Account Program Agreement, dated January 25, 2013, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.6 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) 10.1110.12 Stand By Loan Purchase Agreement, dated January 25, 2013, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) 10.1210.13 Amended and Restated Loan Sale Agreement, dated September 14, 2010, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.4 of PMI’s Quarterly Report on Form 10-Q, filed on November 12, 2010) (1) 10.1310.14 Amended and Restated Loan Account Program Agreement, dated September 14, 2010, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.3 of PMI’s Quarterly Report on Form 10-Q, filed on November 12, 2010) (1) 10.14Amended and Restated Hosting Services Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)Amended and Restated Services Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)10.16Amended and Restated License Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.4 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)10.17Hosting Services Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.5 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)10.18Prosper-Folio Services Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.6 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)ExhibitNumberDescription10.19Prosper-Folio Software License Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)10.2010.2110.16 Form of Indemnification Agreement for PMI’s directors (other than Patrick Grady), officers and key employees (2) (3)10.2210.17 Form of PMI interim Borrower Registration Agreement (2)(incorporated by reference to Exhibit 10.12 to Post-Effective Amendment No. 1 to PMI's Registration Statement on Form S-1 (File No. 333-182599) filed on January 7, 2013)10.2310.18 Form of PMI interim Lender Registration Agreement (2)(incorporated by reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to PMI's Registration Statement on Form S-1 (File No. 333-182599) filed on January 7, 2013)10.2410.19 Backup Servicing Agreement, dated January 9, 2014, between Prosper Funding LLC and First Associates Loan Servicing, LLC (incorporated by reference to Exhibit 10.25 of PMI and PFL’s the Annual Report on Form 10-K, filed on March 31, 2014)10.2510.20 Amended and Restated Services and Indemnity Agreement, dated May 30, 2013, between Prosper Funding LLC, Prosper Marketplace, Inc., Global Securititization Services, LLC, Bernard J. Angelo and David V. DeAngelis (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K, filed on June 5, 2013) (3) 10.2610.21 Second Amendment to Second Amended and Restated Loan Sale Agreement, dated October 27, 2015, between PMI, PFL and WebBank (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Quarterly Report on Form 10-Q filed on November 9, 2015) 10.2710.22 Amended and Restated Prosper Marketplace, Inc. 2005 Stock Plan (incorporated by reference to Exhibit 4.2 of PMI’s Registration Statement on Form S-8 filed on May 29, 2014) (3) 10.2810.23 Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed on May 12, 2015) (3) 10.2910.24 Amendment No. 1 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed on April 13, 2016) (3) Description 10.25 10.26 Form of Stock Option Agreement under the Prosper Marketplace, Inc. 2015 Equity Incentive Plan (2)(incorporated by reference to Exhibit 10.29 of PMI and PFL’s Annual Report on Form 10-K, filed on March 18, 2016) (3)10.3010.27 Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the Prosper Marketplace, Inc. 2015 Equity Incentive Plan (2)(incorporated by reference to Exhibit 10.30 of PMI and PFL’s Annual Report on Form 10-K, filed on March 18, 2016) (3)21.110.28 Asset Sale Agreement, dated July 1, 2016, between WebBank and Prosper Funding LLC (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1) 10.29 Marketing Agreement, dated July 1, 2016, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1) 10.30 Stand By Purchase Agreement, dated July 1, 2016, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Current Report on Form 8-K, filed on July 8, 2017) (1) 21.1 Subsidiaries of Prosper Marketplace, Inc. (2) 21.221.2 Subsidiaries of Prosper Funding LLC (incorporated by reference to Exhibit 21.2 of PMI and PFL’s Annual Report on Form 10-K, filed March 31, 2013) 23.123.1 Consent of Independent Registered Accounting Firm (2) 31.131.1 Certification of Chief Executive Officer of PMI Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) 31.231.2 Certification of Principal Financial Officer of PMI pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) 31.331.3 Certification of Chief Executive Officer of PFL Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) 31.4Certification of Principal Financial Officer of PFL pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)ExhibitNumberDescription32.232.2 Certification of Principal Executive Officer and Principal Financial Officer of PFL pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) 99.1Unaudited Pro Forma Condensed Combined Financial Information (2)(1)(1) Certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act. (2)(2) Filed herewith. (3)(3) Management contract or compensatory plan or arrangement.