12. Convertible Preferred Stock, Warrant Liability and Stockholders’ Deficit
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of SeptemberJune 30, 20172020 are disclosed in the table below (amounts in thousands except share and per sharepar value amounts):
Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effectivethen-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.
preferred stock has converted any of the Series A convertible preferred stock, then all of such holder’s shares of Series A-1 convertible preferred stock also will be converted upon a liquidation event. In lieu of any fractional shares of common stock to which a holder would otherwise be entitled, PMI shall pay such holder cash in an amount equal to the fair market value of such fractional shares, as determined by its Board of Directors. At present, each of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, and the Series F convertible preferred stock converts into PMI common stock at a 1:1 ratio while theratio. The Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio and the Series G convertible preferred stock converts into common stock at a 1:1.36 ratio. The Series G convertible preferred stock conversion ratio reflects the Series G true-up that occurred at end of the vesting period for the Series E-2 and Series F Preferred Stock warrants.
PMI’s convertible preferred stock has been classified as temporary equity on the Consolidated Balance Sheets.condensed consolidated balance sheets. The preferred stock is not redeemable; however, in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of Series E-1, Series E-2, and Series F convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A, Series B, Series C, Series D, Series G and Series A-1 convertible preferred stock or common stock, an amount per share for (i) each share of Series E-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, (ii) each share of Series E-2 convertible preferred stock equal to the sum of two-thirds the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (iii) each share of Series F convertible preferred stock equal to the sum of two-thirds of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series E-1, Series E-2, and Series F convertible preferred stock, each holder of Series A, Series B, Series C and Series D, Series E-2, Series F, and Series G convertible preferred stock is entitled to receive, on a pari passu basis, prior to and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 convertible preferred stock or common stock, (i) an amount per share for each share of Series E-2 and Series F convertible preferred stock equal to the sum of one-third of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (ii) an amount per share for each share of Series A, Series B, Series C, Series D and Series G convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock, an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, Series G, and Series A-1 convertible preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of Series A convertible preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the Series A convertible preferred stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum aggregate amount per share of Series A convertible preferred stock which the holders of Series A convertible preferred stock shall be entitled to receive is three3 times the original issue price for the Series A convertible preferred stock.
At present, the liquidation preferences are equal to $0.29 per share for the Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the Series B convertible preferred stock, $2.87 per share for the Series C convertible preferred stock, $6.91 per share for the Series D convertible preferred stock, $0.84 per share for the Series E-1 convertible preferred stock, $0.84 per share for the Series E-2 convertible preferred stock, $0.84 per share for the Series F convertible preferred stock and $1.34 per share for the Series G convertible preferred stock.
Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the Bylaws of PMI.
The combined activity of the Convertible Preferred Stock Warrant Liability for the ninesix months ended SeptemberJune 30, 2017 is2020 and 2019 are as follows (in thousands):
13. Share Based Incentive Plan and Compensation
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1, Amendment No. 2 and Amendment No. 2,3, which were approved by PMI's stockholders oneffective as of February 15, 2016, and May 31, 2016, and
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2016 Reprice”Repricing”), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock. The repricing was effected on May 16, 2016 for eligible directors and employees located in the United States and on May 19, 2016 for eligible employees located in Israel.
On March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2017 Reprice”Repricing” and together with the 2016 Reprice,Repricing, the "Repricings"“Repricings”), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock. The repricing2017 Repricing was effected on March 17, 2017 for eligible directors and employees.
Prosper believes that the Repricings will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of the Repricings.
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Unvested - December 31, 2016 | 1,995,159 |
| | $ | 2.16 |
|
| Granted | 12,000 |
| | 0.22 |
|
| Vested | — |
| | — |
|
| Forfeited | (608,479 | ) | | 2.17 |
|
| Unvested - September 30, 2017 | 1,398,680 |
| | $ | 2.13 |
|
The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations duringfor the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Origination and servicing | $ | 34 | | | $ | 108 | | | $ | 72 | | | $ | 304 | |
| Sales and marketing | 15 | | | 63 | | | 26 | | | 145 | |
| General and administrative | 343 | | | 1,064 | | | 799 | | | 2,401 | |
| Total stock-based compensation | $ | 392 | | | $ | 1,235 | | | $ | 897 | | | $ | 2,850 | |
Prosper capitalized stock-based compensation as internal-use software and website development costs of $0.1 million for both the three months ended SeptemberJune 30, 20172020 and 2016 (in thousands):
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| Origination and servicing | $ | 225 |
| | $ | 518 |
| $ | 770 |
| | $ | 1,536 |
|
| Sales and marketing | 135 |
| | 639 |
| 446 |
| | 2,271 |
|
| General and administrative | 2,479 |
| | 4,513 |
| 8,435 |
| | 13,329 |
|
| Restructuring | — |
| | — |
| — |
| | 45 |
|
| Total stock based compensation | $ | 2,839 |
| | $ | 5,670 |
| $ | 9,651 |
| | $ | 17,181 |
|
During2019, and $0.1 million and $0.2 million for the threesix months ended SeptemberJune 30, 20172020 and 2016, Prosper capitalized $49 thousand and $156 thousand, respectively, of stock-based compensation as internal use software and website development costs.2019, respectively. As of SeptemberJune 30, 2017,2020, the unamortized stock-basedstock-based compensation expense adjusted for forfeiture estimates related to Prosper’sour employees’ unvested stock-based awards was approximately $14.6$2.6 million, which will be recognized over the remaining weighted-average vesting period of approximately 1.82.0 years.
14. Restructuring
Summary of Restructuring Plan
On May 3, 2016, Prosper adopted a strategic restructuring of its business. This restructuring was intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location. As a result of this restructuring, Prosper terminated 167 employees across all locations. In December 2016, Prosper shut down its Tel Aviv location, resulting in the termination of 31 employees.
In addition to the employment costs associated with the restructuring, Prosper is also marketing for sublease, space in our existing office space that is no longer needed due to the reduction in headcount. Other than accretion and changes in sublease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.
The following table summarizes the activities related to Prosper's restructuring plan (in thousands):
|
| | | | | | | | | | | |
| | Severance Related | | Facilities Related | | Total |
| Balance January 1, 2017 | $ | 597 |
| | $ | 6,052 |
| | $ | 6,649 |
|
| Adjustments to expense | (13 | ) | | 409 |
| | 396 |
|
| Sublease cash receipts | — |
| | 131 |
| | 131 |
|
| Less: Cash paid | (584 | ) | | (3,886 | ) | | (4,470 | ) |
| Balance September 30, 2017 | $ | — |
| | $ | 2,706 |
| | $ | 2,706 |
|
15. Income Taxes
For the three months ended SeptemberJune 30, 20172020 and 2016,2019, Prosper recognized $85recognized $34 thousand and $74$29 thousand of income tax expense, respectively. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, Prosper recognized $346recognized $68 thousand and $344$58 thousand of income tax expense, respectively. The income tax expense relates to state income tax expense and the amortization of tax deductible goodwill which gives rise to an indefinite-lived deferred tax liability. No other income tax expense or benefit was recorded for the three or nineand six month periods ended SeptemberJune 30, 20172020 and 2016June 30, 2019 due to a full valuation allowance recorded against ourthe Company’s deferred tax assets.assets.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, it is not more likely than not that our deferred tax assets will be realized and therefore a full valuation allowance has been recorded.
16.15. Consortium Purchase Agreement
On February 27, 2017, Prosper entered into a series of agreements (the "Consortium“Consortium Purchase Agreement"Agreement”) with a consortium of investors (the "Consortium"“Consortium”), pursuant to which the Consortium has agreed to purchase borrower loansBorrower Loans in an aggregate principal amount of up to $5.0 billion (including certain loans purchased by one of the investors prior to the date of the Consortium Purchase Agreement). PFL will bewas obligated to offer for purchase minimum monthly volumes of eligible loans to the Consortium, for the Consortium to elect to purchase. The obligation to offer for purchase minimum monthly volumes of eligible loans and the related vesting ended upon the expiration of the Consortium Purchase Agreement in May 2019.
In connection with the Consortium Purchase Agreement, PMI issued to the Consortium three3 warrants (together, the “Series F Warrant”) to purchase up to an aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
The Consortium’sConsortium's right to exercise thethese Series F Warrant isWarrants was subject to monthly vesting during the term of the Consortium Purchase Agreement based upon the volume of loans the Consortium elects to purchase (if any)and was fully vested in each month, subject to certain cure rights such as offering additional loans for sale in subsequent periods. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI, insolvency of PMI or PFL, certain breaches of contract by PMI or PFL that are not cured within a defined cure period and upon the occurrence of certain other events set forth in the Warrant Agreement.May 2019.
On vesting of the Series F warrants,Warrants, Prosper recordsrecorded a liability as "ConvertibleConvertible Preferred Stock Warrant Liability"Liability on the Condensed Consolidated Balance Sheetcondensed consolidated balance sheets at fair value and a corresponding amount as "FairFair Value of Warrants Vested on Sale of Borrower Loans"Loans on the Condensed Consolidated Statementcondensed consolidated statement of Operations.operations. Subsequent changes in the fair value of the vested warrants are recorded in "Other Expenses"Change in Fair Value of Convertible Preferred Stock Warrants on the Condensed Consolidated Statementcondensed consolidated statement of Operations.operations. Additionally, in connection with the execution of the Consortium Purchase Agreement, certain previously issued rebates were settled by an issuance of vested Series F Convertible Preferred Stock Warrants. The difference in fair value of these warrants over the cash settlement price is recorded in "Other Expense"Change in Fair Value of Convertible Preferred Stock Warrants on the Condensed Consolidated Statementcondensed consolidated statement of Operations.operations.
Through its expiration in May 2019, $3.3 billion in loans were acquired and 177.7 million warrants vested under the Consortium Purchase Agreement. In addition to the $3.3 billion of loans acquired above, warrants vested on signing of the Consortium Purchase Agreement were issued to settle certain rebates on $0.3 billion of whole loan purchases by members of the Consortium prior to the signing of the Consortium Purchase Agreement. This $0.3 billion also reduced the up to $5.0 billion aggregate amount under the Consortium Purchase Agreement. 17. Commitments and ContingenciesFuture Minimum Lease Payments
16. Leases
Prosper has entered into various non-cancelable operating leases for certaincorporate offices with contractualand datacenters. Our leases have remaining lease periods expiring between 2022 and 2027.
Future minimum rental payments under these leases asterms of September 30, 2017 are as follows (in thousands):
|
| | | |
| Remaining three months of 2017 | 1,335 |
|
| 2018 | 5,690 |
|
| 2019 | 6,026 |
|
| 2020 | 6,193 |
|
| 2021 | 6,170 |
|
| 2022 | 6,076 |
|
| Thereafter | 8,480 |
|
| Total future operating lease obligations | $ | 39,970 |
|
The payments in the above table include amounts that have been accrued for as partone year to seven years. Some of the restructuring liability in Note 14. Restructuring accrual balances relatedlease agreements include options to operating facility leases were $2.7 million at September 30, 2017.
extend the lease term for up to an additional five years. Rental expense under operating lease arrangements was $1.1 $1.5 million and $1.6$1.4 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Rental expense under operating lease arrangements was $3.6$3.0 million and $5.3$2.7 million for the six months ended June 30, 2020 and 2019, respectively. Additionally, Prosper subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income from operating lease arrangements was $0.2 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively. Sublease income from operating lease arrangements was $0.3 million and $0.5 million for the six months ended June 30, 2020 and 2019, respectively.
Operating Lease Right-of-Use (“ROU”) Assets
As of June 30, 2020, PMI’s operating lease right-of-use assets consist only of leases for office buildings. The following table summarizes the operating lease right-of-use assets as of June 30, 2020, which are included in “Property and Equipment, Net” on the condensed consolidated balance sheets.
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| ROU Assets - Office buildings | $ | 15,694 | | | $ | 4,955 | | | $ | 10,739 | |
| | | | | |
| | | | | |
The Company identified certain impairment triggers related to its ROU assets in the second quarter of 2020, primarily due to the non-renewal of certain sublease agreements and the time expected to find new subtenants. As a result of impairment testing performed on these ROU assets, the Company recorded an impairment charge of $0.2 million for the ninethree months ended SeptemberJune 30, 20172020.
Lease Liabilities
Future maturities of operating lease liabilities as of June 30, 2020 were as follows (in thousands). The present value of the future minimum lease payments represent our lease liabilities as of June 30, 2020 and 2016, respectively. are included in "Other Liabilities" on the condensed consolidated balance sheets.
| | | | | |
| Minimum Lease Payments |
| Remainder of 2020 | $ | 2,593 | |
| 2021 | 5,130 | |
| 2022 | 5,014 | |
| 2023 | 1,562 | |
| 2024 | 871 | |
| Thereafter | 1,820 | |
| Total future minimum lease payments | $ | 16,990 | |
| Less imputed interest | (1,679) | |
| Present value of future minimum lease payments | $ | 15,311 | |
Because the rate implicit in each lease is not readily determinable, we use our incremental borrowing rate to determine the present value of the lease payments. Other information related to leases was as follows ($ in thousands):
| | | | | |
| June 30, 2020 |
| Cash paid for operating leases year-to-date | $ | 2,704 | |
| Right of use assets obtained in exchange for new operating lease obligations | $ | — | |
| Weighted average remaining lease term (in years) | 3.77 |
| Weighted average discount rate | 5.54 | % |
17. Commitments and Contingencies
In the normal course of its operations, Prosper becomes involved in various legal actions. Prosper maintains provisions it considers to be adequate for such actions. Prosper does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper's financial condition, results of operations or cash flows.
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant 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 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, thethe minimum fee for the remaining threesix months ended December 31, 2017of 2020 is $0.4$0.9 million. The minimum fee isfees are $1.7 million and $0.9$0.1 million in each offor the years 20182021 and 2019,2022, respectively.
Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15$15.0 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenantcovenant can result in termination of the contract with WebBank. At SeptemberAs of June 30, 2017,2020, Prosper was in compliance with the covenant.
Loan Purchase Commitments
Prosper has entered into an agreement with WebBank to purchase $32.0 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended September 30, 2017 and the first business day of the quarter ending December 31, 2017. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending December 31, 2017.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at September 30, 2017 is $3,702 million. Prosper has accrued $1.0 million and $0.6 million as of September 30, 2017 and December 31, 2016, respectively, in regard to this obligation.
Securities Law Compliance
From inception through October 16, 2008, Prosper sold approximately $178.0 million of Borrower Loans to investors through its old platform structure, whereby Prosper assigned promissory notes directly to investors. Prosper did not register the offer and sale of the promissory notes corresponding to these Borrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws. Prosper believes that the question of whether or not the operation of the
platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, Prosper would have failed to comply with the registration and qualification requirements of federal and state laws.
In 2008, plaintiffs filed a class action lawsuit against Prosper and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation agreed to enter into a settlement to resolve all claims related thereto (the “Settlement”). In connection with the Settlement, Prosper agreed to pay an aggregate amount of $10 million into a settlement fund, split into four annual installments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order and judgment entered by the Superior Court on April 16, 2014. Pursuant to the final order and judgment, the claims in the class action were dismissed, and the defendants were released by the plaintiffs from all claims that were or could have been asserted concerning the issues alleged in the class action lawsuit. All annual installments have been made as of September 30, 2017.
18. Related Parties
Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers, and certain affiliates participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the nine months ended September 30, 2017 and 2016, as well as the Notes and Borrower Loans outstanding as of September 30, 2017 and December 31, 2016 are summarized below (in thousands):
|
| | | | | | | | | | | | |
| | Aggregate Amount of Notes and Borrower Loans Purchased Nine Months Ended September 30, | Interest Earned on Notes and Borrower Loans Nine Months Ended September 30, |
| Related Party | 2017 | 2016 | 2017 | 2016 |
| Executive officers and management | $ | 15 |
| $ | 1,039 |
| $ | 90 |
| $ | 170 |
|
| Directors (excluding executive officers and management) | 270 |
| 427 |
| 30 |
| 25 |
|
| Total | $ | 285 |
| $ | 1,466 |
| $ | 120 |
| $ | 195 |
|
|
| | | | | | | | | | | | | | | | |
| | | Aggregate Amount of Notes and Borrower Loans Purchased Three Months Ended September 30, | | Interest Earned on Notes and Borrower Loans Three Months Ended September 30, |
| Related Party | | 2017 | | 2016 | | 2017 | | 2016 |
| Executive officers and management | | $ | 5 |
| | $ | 245 |
| | $ | 10 |
| | $ | 62 |
|
| Directors (excluding executive officers and management) | | 97 |
| | 77 |
| | 10 |
| | 10 |
|
| Total | | $ | 102 |
| | $ | 322 |
| | $ | 20 |
| | $ | 72 |
|
|
| | | | | | | | |
| | | Notes and Borrower Loans Balance as of |
| Related Party | | September 30, 2017 | | December 31, 2016 |
| Executive officers and management | | $ | 27 |
| | $ | 1,620 |
|
| Directors (excluding executive officers and management) | | 540 |
| | 537 |
|
| | | $ | 567 |
| | $ | 2,157 |
|
19. Significant Concentrations
Prosper is dependent on third party funding sources such as banks and investment funds to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the nine months ended September 30, 2017, 61%, 9% and 6% were purchased by three different parties. This compares to 21%, 20% and 10% for the nine months ended September 30, 2016. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which 93% and 90% of Borrower Loans were originated through the Whole Loan Channel in the nine months ended September 30, 2017 and 2016, respectively.
Prosper receives all of its transaction fee revenue from WebBank. Prosper earns a transaction fee from WebBank for our services in facilitating originations of Borrower Loans issued by WebBank. The rate of the transaction fee for each individual Borrower Loan is based on the term and credit grade of the Borrower Loan. No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented.
Prosper Funding LLC
Condensed Consolidated Balance Sheets (Unaudited)
(amounts in thousands)
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Assets | | | |
| Cash and Cash Equivalents | $ | 11,716 |
| | $ | 6,929 |
|
| Restricted Cash | 158,126 |
| | 147,983 |
|
| Short Term Investments | — |
| | 1,280 |
|
| Loans Held for Sale at Fair Value | 84 |
| | 624 |
|
| Borrower Loans Receivable at Fair Value | 303,053 |
| | 315,627 |
|
| Property and Equipment, Net | 8,866 |
| | 10,095 |
|
| Servicing Assets | 14,324 |
| | 12,461 |
|
| Other Assets | 249 |
| | 186 |
|
| Total Assets | $ | 496,418 |
| | $ | 495,185 |
|
| Liabilities and Member’s Equity | | | |
| Accounts Payable and Accrued Liabilities | $ | 591 |
| | $ | 2,223 |
|
| Payable to Related Party | 3,582 |
| | 1,899 |
|
| Payable to Investors | 151,172 |
| | 141,625 |
|
| Notes at Fair Value | 302,799 |
| | 316,236 |
|
| Other Liabilities | 3,658 |
| | 1,877 |
|
| Total Liabilities | 461,802 |
| | 463,860 |
|
| Member's Equity | | | |
| Member's Equity | 30,704 |
| | 30,704 |
|
| Retained Earnings | 3,912 |
| | 621 |
|
| Total Member's Equity | $ | 34,616 |
| | $ | 31,325 |
|
| Total Liabilities and Member's Equity | $ | 496,418 |
| | $ | 495,185 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Funding LLC
Condensed Consolidated Statements of Operations (Unaudited)
(amounts in thousands)
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| Revenues | |
| | |
| | | |
| Operating Revenues | |
| | |
| | | |
| Administration Fee Revenue - Related Party | $ | 32,198 |
| | $ | 5,530 |
| $ | 74,661 |
| | $ | 27,878 |
|
| Servicing Fees, Net | 6,626 |
| | 7,026 |
| 19,027 |
| | 21,650 |
|
| Gain (Loss) on Sale of Borrower Loans | (17,399 | ) | | 761 |
| (34,108 | ) | | 3,865 |
|
| Other Revenues | 45 |
| | 30 |
| 109 |
| | 448 |
|
| Total Operating Revenues | 21,470 |
| | 13,347 |
| 59,689 |
| | 53,841 |
|
| Interest Income on Borrower Loans | 12,066 |
| | 11,566 |
| 35,572 |
| | 33,062 |
|
| Interest Expense on Notes | (11,247 | ) | | (10,636 | ) | (33,102 | ) | | (30,456 | ) |
| Net Interest Income | 819 |
| | 930 |
| 2,470 |
| | 2,606 |
|
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | (173 | ) | | (47 | ) | (198 | ) | | (126 | ) |
| Total Net Revenues | 22,116 |
| | 14,230 |
| 61,961 |
| | 56,321 |
|
| Expenses | |
| | |
| |
| | |
|
| Administration Fee - Related Party | 19,078 |
| | 12,243 |
| 53,359 |
| | 48,500 |
|
| Servicing | 1,553 |
| | 1,374 |
| 4,808 |
| | 4,139 |
|
| General and Administrative | 186 |
| | 342 |
| 503 |
| | 1,082 |
|
| Total Expenses | 20,817 |
| | 13,959 |
| 58,670 |
| | 53,721 |
|
| Total Net Income | $ | 1,299 |
| | $ | 271 |
| $ | 3,291 |
| | $ | 2,600 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Funding LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
|
| | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| Cash flows from operating activities: | |
| | |
|
| Net Income | $ | 3,291 |
| | $ | 2,600 |
|
| 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 | 198 |
| | 126 |
|
| Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes | (159 | ) | | — |
|
| Gain on Sale of Borrower Loans | (10,661 | ) | | (7,030 | ) |
| Change in Fair Value of Servicing Rights | 8,681 |
| | 8,182 |
|
| Depreciation and Amortization | 4,312 |
| | 2,940 |
|
| Changes in Operating Assets and Liabilities: | |
| | |
|
| Purchase of Loans Held for Sale at Fair Value | (2,025,569 | ) | | (1,619,866 | ) |
| Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | 2,026,111 |
| | 1,619,757 |
|
| Restricted Cash Except for those Related to Investing Activities | (9,081 | ) | | 37,545 |
|
| Other Assets | (63 | ) | | (17 | ) |
| Accounts Payable and Accrued Liabilities | (1,632 | ) | | (1,103 | ) |
| Payable to Investors | 9,547 |
| | (35,669 | ) |
| Net Related Party Receivable/Payable | 2,154 |
| | (2 | ) |
| Other Liabilities | 1,898 |
| | 382 |
|
| Net Cash Provided by Operating Activities | 9,027 |
| | 7,845 |
|
| Cash Flows From Investing Activities: | |
| | |
|
| Purchase of Borrower Loans Held at Fair Value | (152,461 | ) | | (164,436 | ) |
| Principal Payment of Borrower Loans Held at Fair Value | 147,051 |
| | 127,308 |
|
| Maturities of Short Term Investments | 1,280 |
| | 1,277 |
|
| Purchases of Short Term Investments | — |
| | (1,279 | ) |
| Purchases of Property and Equipment | (3,554 | ) | | (5,437 | ) |
| Changes in Restricted Cash Related to Investing Activities | (1,062 | ) | | (2,152 | ) |
| Net Cash Used in Investing Activities | (8,746 | ) | | (44,719 | ) |
| Cash Flows from Financing Activities: | |
| | |
|
| Proceeds from Issuance of Notes Held at Fair Value | 151,894 |
| | 165,727 |
|
| Payments of Notes Held at Fair Value | (147,388 | ) | | (129,603 | ) |
| Net Cash Provided by Financing Activities | 4,506 |
| | 36,124 |
|
| Net Increase (Decrease) in Cash and Cash Equivalents | 4,787 |
| | (750 | ) |
| Cash and Cash Equivalents at Beginning of the Year | 6,929 |
| | 15,026 |
|
| Cash and Cash Equivalents at End of the Period | $ | 11,716 |
| | $ | 14,276 |
|
| Supplemental Disclosure of Cash Flow Information: | |
| | |
|
| Cash Paid for Interest | $ | 33,207 |
| | $ | 30,228 |
|
| Non-Cash Investing Activity - Accrual for Property and Equipment, Net | $ | 1,135 |
| | 152 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Funding LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Prosper Funding LLC (“PFL”) was formed in the state of Delaware on February 17, 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”, "Parent"). Except as the context otherwise requires, as used in these Notes to the condensed consolidated financial statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiaries, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, and Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016. The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
Prosper Funding did not have any items of other comprehensive income (loss) during any of the periods presented in the condensed consolidated financial statements as of and for the nine months ended September 30, 2017 and September 30, 2016.
The preparation of Prosper Funding's condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.
2. Significant Accounting Policies
Prosper Funding's significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no changes to these accounting policies during the first nine months of 2017.
Fair Value Measurements
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Short Term Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
Borrower Loans, Loans Held for Sale and Notes
Through the Note Channel, Prosper Funding purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes funded through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes funded through the Note Channel are carried on Prosper Funding’s consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper Funding estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper Funding maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.
Recent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with 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 Funding in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Prosper Funding expects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018. Our evaluation of this ASU is ongoing and not complete. The FASB has issued and may issue in the future, interpretative guidance, which may cause our evaluation to change. Our preliminary results indicate that administration fees are included in the scope of the new guidance, while servicing fees and gain or loss on the sale of loans remain within the scope of ASC topic 860, Transfers and Servicing. Prosper Funding does not currently believe that this ASU will have a material effect on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. Prosper Funding is currently evaluating the impact that this guidance will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper Funding in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper Funding is currently evaluating the impacts the adoption of this accounting standard will have on the Prosper Funding's cash flows.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU2016-18)", which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for us in the first quarter of 2018 and early adoption is permitted. Prosper Funding is currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Property and equipment: | |
| | |
|
| Internal-use software and web site development costs | $ | 19,413 |
| | $ | 16,749 |
|
| Less accumulated depreciation and amortization | (10,547 | ) | | (6,654 | ) |
| Total property and equipment, net | $ | 8,866 |
| | $ | 10,095 |
|
Depreciation expense for the three months ended September 30, 2017 and 2016 was $1.7 million and $1.1 million, respectively. Depreciation expense for the nine months ended September 30, 2017 and 2016 was $4.3 million and $2.9 million, respectively.
4. Borrower Loans, Loans Held For Sale, and Notes Held at Fair Value
The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale and Notes as of September 30, 2017 and December 31, 2016, are presented in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Borrower Loans | | Notes | | Loans Held for Sale |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
| Aggregate principal balance outstanding | $ | 306,847 |
| | $ | 319,143 |
| | $ | (310,063 | ) | | $ | (323,358 | ) | | $ | 95 |
| | $ | 641 |
|
| Fair value adjustments | (3,794 | ) | | (3,516 | ) | | 7,264 |
| | 7,122 |
| | (11 | ) | | (17 | ) |
| Fair value | $ | 303,053 |
| | $ | 315,627 |
| | $ | (302,799 | ) | | $ | (316,236 | ) | | $ | 84 |
| | $ | 624 |
|
At September 30, 2017, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through September 2022. At December 31, 2016, outstanding Borrower Loans had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2021.
Approximately $1.5 million represents the loss that is attributable to changes in the instrument specific credit risks related to Borrower Loans that was recorded in the change in fair value during the nine months ended September 30, 2017.
As of September 30, 2017, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.4 million and a fair value of $1.1 million. As of December 31, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.2 million and a fair value of $1.0 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of September 30, 2017 and December 31, 2016, Borrower Loans in non-accrual status had a fair value of $0.3 million and $0.5 million, respectively.
5. Loan Servicing Assets and Liabilities
Prosper Funding accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper Funding sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The total gains recognized on the sale of such Borrower Loans were a loss of $17.4 million and a gain of $0.8 million for the three months ended September 30, 2017 and September 30, 2016, respectively. The total gains recognized on the sale of such Borrower Loans were a loss of $34.1 million and gain of $3.9 million for the nine months ended September 30, 2017 and September 30, 2016, respectively.
At September 30, 2017, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through September 2022. At December 31, 2016, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.4 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through December 2021.
$10.1 million and $9.6 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended September 30, 2017 and 2016, respectively. $27.9 million and $29.3 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the nine months ended September 30, 2017 and 2016, respectively.
Fair value
Valuation method – Prosper Funding uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper Funding considers significant to the estimated fair values of the Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.
Market servicing rate – Prosper Funding estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper Funding estimated these market servicing rates
based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper Funding sells and services and information from a backup service provider.
Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper Funding’s servicing assets.
Default Rate – The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6. Income Taxes
Prosper Funding incurred no income tax provision for the nine months ended September 30, 2017 and 2016. Prosper Funding is a US disregarded entity and its income and loss is included in the return of its parent, PMI. Since PMI is in a loss position, is not currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.
7. Fair Value of Assets and Liabilities
Prosper Funding measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower
Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | |
| | |
| | |
| | |
|
| Borrower Loans | $ | — |
| | $ | — |
| | $ | 303,053 |
| | $ | 303,053 |
|
| Servicing Assets | — |
| | — |
| | 14,324 |
| | 14,324 |
|
| Loans Held for Sale | — |
| | — |
| | 84 |
| | 84 |
|
| Total Assets | — |
| | — |
| | 317,461 |
| | 317,461 |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Notes | $ | — |
| | $ | — |
| | $ | 302,799 |
| | $ | 302,799 |
|
| Servicing Liabilities | — |
| | — |
| | 81 |
| | 81 |
|
| Loan Trailing Fee Liability | | | | | 2,162 |
| | 2,162 |
|
| Total Liabilities | $ | — |
| | $ | — |
| | $ | 305,042 |
| | $ | 305,042 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | |
| | |
| | |
| | |
|
| Borrower Loans | $ | — |
| | $ | — |
| | $ | 315,627 |
| | $ | 315,627 |
|
| Servicing Assets | — |
| | — |
| | 12,461 |
| | 12,461 |
|
| Loans Held for Sale | — |
| | — |
| | 624 |
| | 624 |
|
| Total Assets | — |
| | — |
| | 328,712 |
| | 328,712 |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Notes | $ | — |
| | $ | — |
| | $ | 316,236 |
| | $ | 316,236 |
|
| Servicing Liabilities | — |
| | — |
| | 198 |
| | 198 |
|
| Loan Trailing Fee Liability | — |
| | — |
| | 665 |
| | 665 |
|
| Total Liabilities | $ | — |
| | $ | — |
| | $ | 317,099 |
| | $ | 317,099 |
|
As Prosper Funding’s Borrower Loans, Loans Held for Sale, Notes and loan servicing rights do not trade in an active market with readily observable prices, Prosper Funding uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper Funding’s level 3 fair value measurements at September 30, 2017 and December 31, 2016:
Borrower Loans, Loans Held for Sale and Notes:
|
| | | | |
| | Range |
Unobservable Input | | September 30, 2017 | | December 31, 2016 |
Discount rate | | 4.1% - 14.9% | | 4.0% - 15.9% |
Default rate | | 2.0% - 15.4% | | 1.7% - 14.9% |
Servicing Rights
|
| | | | | | |
| | | Range |
| Unobservable Input | | September 30, 2017 | | December 31, 2016 |
| Discount rate | | 15% - 25% |
| | 15% - 25% |
|
| Default rate | | 1.5% - 15.9% |
| | 1.5% - 15.2% |
|
| Prepayment rate | | 14.7% - 27.3% |
| | 13.6% - 26.6% |
|
| Market servicing rate | | 0.625 | % | | 0.625 | % |
The changes in the Borrower Loans, Loans Held for Sale and Notes, which are Level 3 assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Borrower Loans | | Notes | | Loans Held for Sale | | Total |
| Balance at January 1, 2017 | $ | 315,627 |
| | $ | (316,236 | ) | | $ | 624 |
| | $ | 15 |
|
| Originations | 152,461 |
| | (151,894 | ) | | 2,025,569 |
| | 2,026,136 |
|
| Principal repayments | (144,325 | ) | | 147,388 |
| | (52 | ) | | 3,011 |
|
| Borrower Loans sold to third parties | (2,726 | ) | | — |
| | (2,026,059 | ) | | (2,028,785 | ) |
| Other changes | 57 |
| | 106 |
| | (4 | ) | | 159 |
|
| Change in fair value | (18,041 | ) | | 17,837 |
| | 6 |
| | (198 | ) |
| Balance at September 30, 2017 | $ | 303,053 |
| | $ | (302,799 | ) | | $ | 84 |
| | $ | 338 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Borrower Loans | | Notes | | Loans Held for Sale | | Total |
| Balance at January 1, 2016 | $ | 297,273 |
| | $ | (297,405 | ) | | $ | 32 |
| | $ | (100 | ) |
| Originations | 164,436 |
| | (165,727 | ) | | 1,619,866 |
| | 1,618,575 |
|
| Principal repayments | (125,419 | ) | | 129,603 |
| | (269 | ) | | 3,915 |
|
| Borrower Loans sold to third parties | (1,889 | ) | | — |
| | (1,619,488 | ) | | (1,621,377 | ) |
| Other changes | 232 |
| | (229 | ) | | (3 | ) | | — |
|
| Change in fair value | (19,962 | ) | | 19,838 |
| | (2 | ) | | (126 | ) |
| Balance at September 30, 2016 | $ | 314,671 |
| | $ | (313,920 | ) | | $ | 136 |
| | $ | 887 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Borrower Loans | | Notes | | Loans Held for Sale | | Total |
| Balance at July 1, 2017 | $ | 312,272 |
| | $ | (311,410 | ) | | $ | 95 |
| | $ | 957 |
|
| Originations | 45,521 |
| | (45,388 | ) | | 779,743 |
| | 779,876 |
|
| Principal repayments | (46,833 | ) | | 47,114 |
| | (10 | ) | | 271 |
|
| Borrower Loans sold to third parties | (736 | ) | | — |
| | (779,743 | ) | | (780,479 | ) |
| Other changes | 48 |
| | (160 | ) | | (1 | ) | | (113 | ) |
| Change in fair value | (7,219 | ) | | 7,045 |
| | — |
| | (174 | ) |
| Balance at September 30, 2017 | $ | 303,053 |
| | $ | (302,799 | ) | | $ | 84 |
| | $ | 338 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Borrower Loans | | Notes | | Loans Held for Sale | | Total |
| Balance at July 1, 2016 | $ | 310,034 |
| | $ | (309,530 | ) | | $ | 4,706 |
| | $ | 5,210 |
|
| Originations | 55,221 |
| | (56,580 | ) | | 261,855 |
| | 260,496 |
|
| Principal repayments | (43,043 | ) | | 45,403 |
| | (133 | ) | | 2,227 |
|
| Borrower Loans sold to third parties | (751 | ) | | — |
| | (266,286 | ) | | (267,037 | ) |
| Other changes | 238 |
| | (196 | ) | | (4 | ) | | 38 |
|
| Change in fair value | (7,028 | ) | | 6,983 |
| | (2 | ) | | (47 | ) |
| Balance at September 30, 2016 | $ | 314,671 |
| | $ | (313,920 | ) | | $ | 136 |
| | $ | 887 |
|
The following table presents additional information about Level 3 servicing assets and liabilities recorded at fair value for the three months ended September 30, 2017 (in thousands).
|
| | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair Value at January 1, 2017 | 12,461 |
| | 198 |
|
| Additions | 10,660 |
| | — |
|
| Less: Changes in fair value | (8,797 | ) | | (117 | ) |
| Fair Value at September 30, 2017 | 14,324 |
| | 81 |
|
|
| | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair Value at January 1, 2016 | 13,605 |
| | 484 |
|
| Additions | 7,092 |
| | 9 |
|
| Less: Changes in fair value | (8,423 | ) | | (239 | ) |
| Fair Value at September 30, 2016 | 12,274 |
| | 254 |
|
|
| | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair Value at July 1, 2017 | 13,297 |
| | 111 |
|
| Additions | 4,128 |
| | — |
|
| Less: Changes in fair value | (3,101 | ) | | (30 | ) |
| Fair Value at September 30, 2017 | 14,324 |
| | 81 |
|
|
| | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Fair Value at July 1, 2016 | 13,798 |
| | 324 |
|
| Additions | 1,342 |
| | — |
|
| Less: Changes in fair value | (2,866 | ) | | (70 | ) |
| Fair Value at September 30, 2016 | 12,274 |
| | 254 |
|
Loan Trailing Fee
The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and defaults rates using a discounted cash flow model.
The following table presents additional information about level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
|
| | | |
Balance at January 1, 2017 | | 665 |
|
Issuances | | 1,985 |
|
Cash payment of Loan Trailing Fee | | (677 | ) |
Change in fair value | | 189 |
|
Balance at September 30, 2017 | | 2,162 |
|
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at September 30, 2017 for Borrower Loans, Loans Held for Sale and Notes funded are presented in the following table (in thousands, except percentages):
|
| | | | | | | | |
| | Borrower Loans and Loans Held for Sale | | Notes | |
| Discount rate assumption: | 7.38 | % | * | 7.38 | % | * |
| Resulting fair value from: | |
| | |
| |
| 100 basis point increase | $ | 300,057 |
| | $ | 299,802 |
| |
| 200 basis point increase | 297,055 |
| | 296,798 |
| |
| Resulting fair value from: | |
| | |
| |
| 100 basis point decrease | $ | 306,300 |
| | $ | 306,049 |
| |
| 200 basis point decrease | 309,547 |
| | 309,298 |
| |
| Default rate assumption: | 13.39 | % | * | 13.39 | % | * |
| Resulting fair value from: | |
| | |
| |
| 100 basis point increase | $ | 299,357 |
| | $ | 299,005 |
| |
| 200 basis point increase | 295,710 |
| | 295,346 |
| |
| Resulting fair value from: | |
| | |
| |
| 100 basis point decrease | $ | 306,960 |
| | $ | 306,637 |
| |
| 200 basis point decrease | 310,821 |
| | 310,598 |
| |
* Represents weighted average assumptions considering all credit grades.
Servicing Asset and Liability Fair Value Input Sensitivity:
The following table presents the estimated impact on Prosper Funding’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of September 30, 2017 (in thousands, except percentages).
|
| | | | | |
| | Servicing Assets | | Servicing Liabilities |
| Market servicing rate assumptions | 0.625 | % | | 0.625 | % |
| Resulting fair value from: | |
| | |
|
| Market servicing rate increase to 0.65% | 13,408 |
| | 89 |
|
| Market servicing rate decrease to 0.60% | 15,241 |
| | 72 |
|
| Weighted average prepayment assumptions | 19.93 | % | | 19.93 | % |
| Resulting fair value from: | |
| | |
|
| Applying a 1.1 multiplier to prepayment rate | 14,136 |
| | 79 |
|
| Applying a 0.9 multiplier to prepayment rate | 14,515 |
| | 82 |
|
| Weighted average default assumptions | 12.74 | % | | 12.74 | % |
| Resulting fair value from: | |
| | |
|
| Applying a 1.1 multiplier to default rate | 14,131 |
| | 80 |
|
| Applying a 0.9 multiplier to default rate | 14,522 |
| | 81 |
|
These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
8. Commitments and Contingencies
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant 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 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 minimum fee for the remaining three months of 2017 is $0.4 million. The minimum fee is $1.7 million and $0.9 million for years 2018 and 2019, respectively.
Loan Purchase Commitments
Prosper entered into an agreement with WebBank to purchase $8.6 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended June 30, 2020. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending September 30, 2020.
Repurchase Obligation
Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols or a violation of the applicable federal, state or local lending laws. Prosper recognizes a liability at fair value for the repurchase obligation when the Borrower Loans are sold. The fair value of the repurchase obligation is estimated based on historical experience. Repurchased Borrower Loans associated with violations of federal, state or local lending laws or verifiable identity theft are written off at the time of repurchase. The maximum potential amount of future payments associated with this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at June 30, 2020 is $2.6 billion. Prosper has accrued $0.3 million and $0.4 million as of June 30, 2020 and December 31, 2019, respectively, in regard to this obligation.
Regulatory Contingencies
Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, an amount is recorded which management considers to be the best estimate within the range of potential losses that are both probable and estimable; however, if management cannot quantify the amount of the estimated loss, then the low end of the range of the potential losses is recorded.
SEC Inquiry
In April 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to Note investors. Prosper was advised by the SEC that it was investigating whether violations of federal securities laws had occurred in connection with the error. On April 19, 2019, the SEC accepted an offer of settlement from PFL to resolve the matter. Under the settlement, the SEC alleged a violation of Section 17(a)(2) of the Securities Act and ordered PFL to cease and desist from any future violations of that provision. PFL neither admitted nor denied any wrongdoing, and agreed to pay a civil monetary penalty of $3.0 million. The penalty of $3.0 million was paid in full in April 2019.
West Virginia Matter
In January 2018, the Attorney General of the State of West Virginia (the “Attorney General”) initiated discussions regarding certain acts and practices of PMI and PFL that the Attorney General asserts may have violated the West Virginia Consumer Credit and Protection Act (the “Consumer Act”), to which Prosper responded with such information as was requested by the Attorney General. Following a period of more than a year with limited to no communication, in February 2020, Prosper received a proposed Assurance of Discontinuance (an “AOD”) from the Attorney General requesting that, without in any way admitting that any of its prior practices were in violation of the Consumer Act, Prosper agree to certain terms and conditions regarding its past and potential future conduct of its business with respect to customers in West Virginia, including a release by the Attorney General of any claims it may have related to the matters identified in the AOD. Prosper is evaluating and intends to discuss the proposed terms in the AOD with the Attorney General.
We cannot predict the outcome of the matter and any potential fines or penalties, if any, that may arise from the matter. Further, we are unable to estimate a range of outcomes and as a result no accrual has been made.
No loans have been originated through the Prosper platform to West Virginians since June 2016.
18. Related Parties
Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers, and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers, and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers, and certain affiliates participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the three and six months ended June 30, 2020 and 2019, as well as the Notes and Borrower Loans outstanding as of June 30, 2020 and December 31, 2019 are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aggregate Amount of
Notes and Borrower Loans Purchased
Three Months Ended June 30, | | | | Interest Earned on
Notes and Borrower Loans
Three Months Ended June 30, | | |
| Related Party | | 2020 | | 2019 | | 2020 | | 2019 |
| Executive officers and management | | $ | 6 | | | $ | 11 | | | $ | 1 | | | $ | 2 | |
| Directors (excluding executive officers and management) | | 110 | | | 208 | | | 14 | | | 24 | |
| Total | | $ | 116 | | | $ | 219 | | | $ | 15 | | | $ | 26 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aggregate Amount of
Notes and Borrower Loans Purchased
Six Months Ended June 30, | | | | Interest Earned on
Notes and Borrower Loans
Six Months Ended June 30, | | |
| Related Party | | 2020 | | 2019 | | 2020 | | 2019 |
| Executive officers and management | | $ | 12 | | | $ | 5 | | | $ | 3 | | | $ | 1 | |
| Directors (excluding executive officers and management) | | 231 | | | 99 | | | 29 | | | 12 | |
| Total | | $ | 243 | | | $ | 104 | | | $ | 32 | | | $ | 13 | |
| | | | | | | | | | | | | | |
| | Notes Balance as of | | |
| Related Party | | June 30, 2020 | | December 31, 2019 |
| Executive officers and management | | $ | 36 | | | $ | 35 | |
| Directors (excluding executive officers and management) | | 684 | | | 682 | |
| | $ | 720 | | | $ | 717 | |
19. Significant Concentrations
Prosper is dependent on third party funding sources such as banks, asset managers, investment funds and Warehouse Lines to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the three months ended June 30, 2020, three individual parties purchased 12.8%, 17.9% and 19.0% of such loans, and the Company’s Warehouse VIEs purchased 38.8% of such loans. Of all Borrower Loans originated in the six months ended June 30, 2020, those same three parties purchased 10.6%, 17.1% and 13.5%, respectively, of such loans, and the Company’s Warehouse VIEs purchased 20.1% of such loans. For the three months ended June 30, 2019, two parties purchased 17.5% and 19.4% of such loans, and for the six months ended June 30, 2019, those same two parties purchased 10.0% and 17.4%, respectively, of such loans. These purchases reflect that a significant portion of our business is dependent on funding through the Whole Loan Channel, through which 91% and 93% of Borrower Loans were originated in the six months ended June 30, 2020 and 2019, respectively.
Prosper receives all of its transaction fee revenue from WebBank. Prosper earns a transaction fee from WebBank for its services in facilitating originations of Borrower Loans issued by WebBank. The rate of the transaction fee for each individual Borrower Loan is based on the term and credit grade of the Borrower Loan. No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented.
20. Subsequent Events
Share Transfer
In July 2020, the Company established a trust, and through that trust entered into a Stock Transfer Agreement with an investor to purchase 34,670,420 of Series A convertible preferred stock and 16,577,495 shares of Series B convertible preferred stock for nominal consideration. The Company does not plan to retire the shares and instead the shares will be held by the trust for the future benefit of PMI’s employees.
Stock Option Reprice
On August 11, 2020, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2020 Repricing”), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock.
Prosper Funding LLC
Condensed Consolidated Balance Sheets (Unaudited)
(amounts in thousands)
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| Assets | | | |
| Cash and Cash Equivalents | $ | 7,813 | | | $ | 7,462 | |
| Restricted Cash | 113,647 | | | 110,399 | |
| Borrower Loans, at Fair Value | 211,775 | | | 245,137 | |
| | | |
| Property and Equipment, Net | 7,852 | | | 7,549 | |
| Servicing Assets | 12,063 | | | 14,888 | |
| Other Assets | 647 | | | 749 | |
| Total Assets | $ | 353,797 | | | $ | 386,184 | |
| Liabilities and Member’s Equity | | | |
| Accounts Payable and Accrued Liabilities | $ | 2,520 | | | $ | 2,133 | |
| Payable to Related Party | 7,183 | | | 2,679 | |
| Payable to Investors | 105,591 | | | 105,287 | |
| Notes at Fair Value | 209,986 | | | 244,171 | |
| Other Liabilities | 2,907 | | | 3,727 | |
| Total Liabilities | 328,187 | | | 357,997 | |
| Member's Equity | | | |
| Member's Equity | 11,404 | | | 15,904 | |
| Retained Earnings | 14,206 | | | 12,283 | |
| Total Member's Equity | $ | 25,610 | | | $ | 28,187 | |
| Total Liabilities and Member's Equity | $ | 353,797 | | | $ | 386,184 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Funding LLC
Condensed Consolidated Statements of Operations (Unaudited)
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | | | | | | | |
| Operating Revenues | | | | | | | |
| Administration Fee Revenue - Related Party | $ | 3,740 | | | $ | 16,640 | | | $ | 9,575 | | | $ | 33,615 | |
| Servicing Fees, Net | 5,257 | | | 6,231 | | | 11,716 | | | 12,876 | |
| Gain (Loss) on Sale of Borrower Loans | 1,182 | | | (4,053) | | | 3,182 | | | (10,879) | |
| Other Revenue | 165 | | | (14) | | | 345 | | | 43 | |
| Total Operating Revenues | 10,344 | | | 18,804 | | | 24,818 | | | 35,655 | |
| Interest Income on Borrower Loans | 9,309 | | | 10,403 | | | 19,147 | | | 20,734 | |
| Interest Expense on Notes | (8,728) | | | (9,735) | | | (17,944) | | | (19,384) | |
| Net Interest Income | 581 | | | 668 | | | 1,203 | | | 1,350 | |
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net | 194 | | | (131) | | | 257 | | | (218) | |
| Total Net Revenues | 11,119 | | | 19,341 | | | 26,278 | | | 36,787 | |
| Expenses | | | | | | | |
| Administration Fee - Related Party | 9,494 | | | 16,773 | | | 21,858 | | | 31,765 | |
| Servicing | 1,137 | | | 1,304 | | | 2,330 | | | 2,372 | |
| General and Administrative | 113 | | | 34 | | | 167 | | | 129 | |
| Total Expenses | 10,744 | | | 18,111 | | | 24,355 | | | 34,266 | |
| Total Net Income | $ | 375 | | | $ | 1,230 | | | $ | 1,923 | | | $ | 2,521 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Funding LLC
Condensed Consolidated Statements of Member’s Equity (Unaudited)
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Member’s Equity | | Retained Earnings (Accumulated Deficit) | | Total |
| Balance as of January 1, 2020 | | $ | 15,904 | | | $ | 12,283 | | | $ | 28,187 | |
| Net Income | | — | | | 1,548 | | | 1,548 | |
| Balance as of March 31, 2020 | | $ | 15,904 | | | $ | 13,831 | | | $ | 29,735 | |
| Distribution to Parent | | (4,500) | | | — | | | (4,500) | |
| Net Income | | — | | | 375 | | | 375 | |
| Balance as of June 30, 2020 | | $ | 11,404 | | | $ | 14,206 | | | $ | 25,610 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | Member’s Equity | | Retained Earnings (Accumulated Deficit) | | Total |
| Balance as of January 1, 2019 | | $ | 24,904 | | | $ | 6,341 | | | $ | 31,245 | |
| Net Income | | — | | | 1,291 | | | 1,291 | |
| Balance as of March 31, 2019 | | $ | 24,904 | | | $ | 7,632 | | | $ | 32,536 | |
| Net Income | | — | | | 1,230 | | | 1,230 | |
| Balance as of June 30, 2019 | | $ | 24,904 | | | $ | 8,862 | | | $ | 33,766 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Prosper Funding LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| Cash Flows from Operating Activities: | | | |
| Net Income | $ | 1,923 | | | $ | 2,521 | |
| Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities: | | | |
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes | (258) | | | 217 | |
| Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes | 4 | | | (403) | |
| Gain on Sale of Borrower Loans | (3,402) | | | (6,796) | |
| Change in Fair Value of Servicing Rights | 6,227 | | | 6,877 | |
| Depreciation and Amortization | 2,051 | | | 2,203 | |
| Changes in Operating Assets and Liabilities: | | | |
| Purchase of Loans Held for Sale at Fair Value | (622,122) | | | (1,161,237) | |
| Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | 622,122 | | | 1,161,237 | |
| Other Assets | 102 | | | 179 | |
| Accounts Payable and Accrued Liabilities | 387 | | | (2,466) | |
| Payable to Investors | 304 | | | (9,553) | |
| Net Related Party Receivable/Payable | 3,419 | | | (1,131) | |
| Other Liabilities | (820) | | | 97 | |
| Net Cash Provided by (Used in) Operating Activities | 9,937 | | | (8,255) | |
| Cash Flows from Investing Activities: | | | |
| Purchase of Borrower Loans Held at Fair Value | (65,664) | | | (86,062) | |
| Principal Payment of Borrower Loans Held at Fair Value | 77,160 | | | 84,137 | |
| Purchases of Property and Equipment | (1,269) | | | (2,337) | |
| Net Cash Provided by (Used in) Investing Activities | 10,227 | | | (4,262) | |
| Cash Flows from Financing Activities: | | | |
| Proceeds from Issuance of Notes Held at Fair Value | 65,043 | | | 86,713 | |
| Payments of Notes Held at Fair Value | (77,108) | | | (85,728) | |
| Cash Distributions to Parent | (4,500) | | | — | |
| Net Cash (Used in) Provided by Financing Activities | (16,565) | | | 985 | |
| Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | 3,599 | | | (11,532) | |
| Cash, Cash Equivalents and Restricted Cash at Beginning of the Period | 117,861 | | | 147,181 | |
| Cash, Cash Equivalents and Restricted Cash at End of the Period | $ | 121,460 | | | $ | 135,649 | |
| | | |
| Supplemental Disclosure of Cash Flow Information: | | | |
| Cash Paid for Interest | $ | 17,700 | | | $ | 19,986 | |
| Non-Cash Investing Activity - Accrual for Property and Equipment, Net | 1,331 | | | 35 | |
| | | |
| Reconciliation to Amounts on Consolidated Balance Sheets | | | |
| Cash and Cash Equivalents | $ | 7,813 | | | $ | 12,269 | |
| Restricted Cash | 113,647 | | | 123,380 | |
| Total Cash, Cash Equivalents and Restricted Cash | $ | 121,460 | | | $ | 135,649 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Funding LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Prosper Funding LLC (“PFL”) was formed in the state of Delaware in February 2012 as a limited liability company with the Prosper Marketplace, Inc. (“PMI”) as its sole equity member. Except as the context otherwise requires, as used in these Notes to the condensed consolidated financial statements of PFL, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiary, Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019. The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
Prosper Funding did not have any items of other comprehensive income or loss for any of the periods presented in the condensed consolidated financial statements as of and for the six months ended June 30, 2020 and June 30, 2019.
The preparation of Prosper Funding's condensed consolidated financial statements and related disclosures in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.
2. Significant Accounting Policies
Prosper Funding's significant accounting policies are included in Note 2, Summary of Significant Accounting Policies, in Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no changes to these accounting policies during the first six months of 2020.
Fair Value Measurements
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
Refer to Note 7 for additional fair value disclosures.
Restricted Cash
Restricted Cash consists primarily of cash deposits, money market funds and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors have on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.
Borrower Loans, Loans Held for Sale and Notes
With respect to the Note Channel, Prosper Funding purchases Borrower Loans from WebBank, then issues Notes and holds the Borrower Loans until maturity. The obligation to repay a series of Notes funded through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes funded through the Note Channel are carried on Prosper Funding’s condensed consolidated balance sheets as assets and liabilities, respectively.
Prosper Funding places Borrower Loans and Loans Held for Sale on non-accrual status when they are 120 days past due. When a loan is placed on non-accrual status, Prosper stops accruing interest and reverses all accrued but unpaid interest as of such date. Additionally, Prosper charges-off Borrower Loans and Loans Held for Sale when they are 120 days past due. The fair value of loans 120 days past due generally consists of the expected recovery from debt sales in subsequent periods.
Management has elected the fair value option for Borrower Loans, Loans Held for Sale, and Notes. Changes in fair value of Borrower Loans are largely offset by the changes in fair value of Notes due to the borrower payment-dependent design of the Notes. Changes in fair value of Borrower Loans, Loans Held for Sale and Notes are included in “Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net” on the Consolidated Statements of Operations.
Prosper Funding primarily uses a discounted cash flow model to estimate the fair value of Borrower Loans, Loans Held for Sale and Notes. The key assumptions used in the valuation include default rates and prepayment rates derived primarily from historical performance and discount rates based on estimates of the rates of return that investors would require when investing in financial instruments with similar characteristics.
Recent Accounting Pronouncements
Accounting Standards Adopted In The Current Period
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820); Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The guidance only affects disclosures in the notes to the consolidated financial statements and has no effect on Prosper Funding’s balance sheet or statements of operations.
Accounting Standards Issued, To Be Adopted By Prosper Funding In Future Periods
No issued and pending accounting standards were identified that are expected to have an impact on Prosper Funding.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| Internal-use software and web site development costs | $ | 26,885 | | | $ | 24,930 | |
| Less accumulated depreciation and amortization | (19,033) | | | (17,381) | |
| Total property and equipment, net | $ | 7,852 | | | $ | 7,549 | |
Depreciation expense for the three months ended June 30, 2020 and 2019 was $1.0 million and $1.1 million, respectively. Depreciation expense for the six months ended June 30, 2020 and 2019 was $2.1 million and $2.2 million, respectively.
4. Borrower Loans and Notes Held at Fair Value
The aggregate principal balances outstanding and fair values of Borrower Loans and Notes as of June 30, 2020 and December 31, 2019, are presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Borrower Loans | | | | Notes | | |
| June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 |
| Aggregate principal balance outstanding | $ | 226,599 | | | $ | 248,702 | | | $ | (227,674) | | | $ | (250,281) | |
| Fair value adjustments | (14,824) | | | (3,565) | | | 17,688 | | | 6,110 | |
| Fair value | $ | 211,775 | | | $ | 245,137 | | | $ | (209,986) | | | $ | (244,171) | |
At June 30, 2020, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.92% and had various maturity dates through June 2025. At December 31, 2019, outstanding Borrower Loans had original maturities of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and had various maturity dates through December 2024.
As of June 30, 2020, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $1.4 million and a fair value of $0.1 million. As of December 31, 2019, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.6 million and a fair value of $0.8 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of June 30, 2020 and December 31, 2019, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.3 million, respectively.
5. Loan Servicing Assets
Prosper Funding accounts for Servicing Assets at their estimated fair values with changes in fair values recorded in Servicing Fees, Net on the condensed consolidated statements of operations. The initial asset or liability is recognized when Prosper Funding sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The total recognized gains and losses on the sale of such Borrower Loans was a $1.2 million gain and a $4.1 million loss for the three months ended June 30, 2020 and 2019, respectively. The total recognized gains and losses on the sale of such Borrower Loans was a $3.2 million gain and a $10.9 million loss for the six months ended June 30, 2020 and 2019, respectively.
As of June 30, 2020, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.1 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and various maturity dates through June 2025. At December 31, 2019, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and various maturity dates through December 2024.
Contractually-specified servicing fees and ancillary fees totaled $10.5 million and $10.2 million for the three months ended June 30, 2020 and 2019, respectively, and $23.0 million and $20.2 million for the six months ended June 30, 2020 and 2019, respectively, and are included on the condensed consolidated statements of operations in Servicing Fees, Net.
Fair Value Valuation Method
Prosper Funding uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 are those that Prosper Funding considers significant to the estimated fair values of the Level 3 Servicing Assets. The following is a description of the significant unobservable inputs provided in the table.
Market Servicing Rate
Prosper Funding estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper Funding estimates these market servicing rates based on observable
market rates for other loan types in the industry and bids from sub-servicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper Funding sells and services and information from backup service providers.
Discount Rate
The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. Management used a range of discount rates for the Servicing Assets based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper Funding’s Servicing Assets.
Default Rate
The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate
The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which Prosper Funding expects to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6. Income Taxes
Prosper Funding incurred 0 income tax provision for the six months ended June 30, 2020 and June 30, 2019. Prosper Funding is a U.S. disregarded entity and its income and loss are included in the income tax reporting of its parent, PMI. Since PMI is in a cumulative loss position, is not currently subject to income taxes, and has fully reserved against its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.
7. Fair Value of Assets and Liabilities
Prosper Funding has elected to record certain financial instruments at fair value on the balance sheet. Prosper Funding classifies Borrower Loans, Loans Held for Sale and Notes as financial instruments and assesses their fair value each on a quarterly basis for financial statement presentation purposes. Gains and losses on these financial instruments are shown separately on the condensed consolidated statements of operations.
At June 30, 2020 and December 31, 2019, the discounted cash flow methodology used to estimate the Notes fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the table below, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability. Prosper Funding did not transfer any assets or liabilities in or out of Level 3 for the six months ended June 30, 2020 or 2019.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans and Notes include default and prepayment rates derived primarily from historical performance and discount rates that reflect estimates of the rates of return that investors would require when investing in financial instruments with similar characteristics.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | | | | | | | |
| Borrower Loans | $ | — | | | $ | — | | | $ | 211,775 | | | $ | 211,775 | |
| Servicing Assets | — | | | — | | | 12,063 | | | 12,063 | |
| Total Assets | $ | — | | | $ | — | | | $ | 223,838 | | | $ | 223,838 | |
| Liabilities: | | | | | | | |
| Notes | $ | — | | | $ | — | | | $ | 209,986 | | | $ | 209,986 | |
| | | | | | | |
| Loan Trailing Fee Liability | — | | | — | | | 2,403 | | | 2,403 | |
| Total Liabilities | $ | — | | | $ | — | | | $ | 212,389 | | | $ | 212,389 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | | | | | | | |
| Borrower Loans | $ | — | | | $ | — | | | $ | 245,137 | | | $ | 245,137 | |
| Servicing Assets | — | | | — | | | 14,888 | | | 14,888 | |
| Total Assets | $ | — | | | $ | — | | | $ | 260,025 | | | $ | 260,025 | |
| Liabilities: | | | | | | | |
| Notes | $ | — | | | $ | — | | | $ | 244,171 | | | $ | 244,171 | |
| | | | | | | |
| Loan Trailing Fee Liability | — | | | — | | | 2,997 | | | 2,997 | |
| Total Liabilities | $ | — | | | $ | — | | | $ | 247,168 | | | $ | 247,168 | |
As Prosper Funding’s Borrower Loans, Notes, Servicing Assets and loan trailing fee liability do not trade in an active market with readily observable prices, Prosper Funding uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper Funding’s Level 3 fair value measurements at the dates presented:
| | | | | | | | | | | | | | |
| | Range | | |
| Borrower Loans and Notes | | June 30, 2020 | | December 31, 2019 |
| Discount rate | | 8.2% - 15.9% | | 4.4% - 12.1% |
| Default rate | | 2.7% - 17.7% | | 2.4% - 17.7% |
| | | | | | | | | | | | | | |
| | Range | | |
| Servicing Assets | | June 30, 2020 | | December 31, 2019 |
| Discount rate | | 15.0% - 25.0% | | 15.0% - 25.0% |
| Default rate | | 1.9% - 19.4% | | 1.7% - 18.8% |
| Prepayment rate | | 15.3% - 28.5% | | 16.5% - 28.1% |
Market servicing rate (1) (2) | | 0.625% - 0.818% | | 0.625 | % |
(1) Servicing assets associated with loans enrolled in a relief program offered by the Company in response to the COVID-19 pandemic as of June 30, 2020 were measured using a market servicing rate assumption of 81.8 basis points. This rate was estimated using a multiplier consistent with observable market rates for other loan types, applied to the base market servicing rate assumption of 62.5 basis points.
(2)Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of June 30, 2020 and December 31, 2019, the market rate for collection fees and non-sufficient fund fees was assumed to be 4 basis points and 6 basis points, respectively, for a total market servicing rate range of 66.5 - 85.8 basis points and a total market servicing rate of 68.5 basis points, respectively.
| | | | | | | | | | | | | | |
| | Range | | |
| Loan Trailing Fee Liability | | June 30, 2020 | | December 31, 2019 |
| Discount rate | | 15.0% - 25.0% | | 15.0% - 25.0% |
| Default rate | | 1.9% - 19.4% | | 1.7% - 18.8% |
| Prepayment rate | | 15.3% - 28.5% | | 16.5% - 28.1% |
Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis
The following tables present additional information about Level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis for three months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | |
| Assets | | | | Liabilities | | |
| Borrower Loans | | Loans Held for Sale | | Notes | | Total |
| Balance at January 1, 2020 | $ | 245,137 | | | $ | — | | | $ | (244,171) | | | $ | 966 | |
| Originations | 65,664 | | | 622,122 | | | (65,043) | | | 622,743 | |
| Principal repayments | (75,596) | | | — | | | 77,108 | | | 1,512 | |
| Borrower Loans sold to third parties | (1,564) | | | (622,122) | | | — | | | (623,686) | |
| Other changes | 253 | | | — | | | (257) | | | (4) | |
| Change in fair value | (22,119) | | | — | | | 22,377 | | | 258 | |
| Balance at June 30, 2020 | $ | 211,775 | | | $ | — | | | $ | (209,986) | | | $ | 1,789 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | |
| Assets | | | | Liabilities | | |
| Borrower Loans | | Loans Held for Sale | | Notes | | Total |
| Balance at January 1, 2019 | $ | 263,522 | | | $ | — | | | $ | (264,003) | | | $ | (481) | |
| Originations | 86,062 | | | 1,161,237 | | | (86,713) | | | 1,160,586 | |
| Principal repayments | (82,414) | | | — | | | 85,728 | | | 3,314 | |
| Borrower Loans sold to third parties | (1,723) | | | (1,161,237) | | | — | | | (1,162,960) | |
| Other changes | (200) | | | — | | | 603 | | | 403 | |
| Change in fair value | (11,177) | | | — | | | 10,960 | | | (217) | |
| Balance at June 30, 2019 | $ | 254,070 | | | $ | — | | | $ | (253,425) | | | $ | 645 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | |
| Assets | | | | Liabilities | | |
| Borrower Loans | | Loans Held for Sale | | Notes | | Total |
| Balance at April 1, 2020 | $ | 227,659 | | | $ | — | | | $ | (225,491) | | | $ | 2,168 | |
| Originations | 24,363 | | | 222,572 | | | (24,468) | | | 222,467 | |
| Principal repayments | (36,256) | | | — | | | 36,520 | | | 264 | |
| Borrower Loans sold to third parties | (682) | | | (222,572) | | | — | | | (223,254) | |
| Other changes | 344 | | | — | | | (395) | | | (51) | |
| Change in fair value | (3,653) | | | — | | | 3,848 | | | 195 | |
| Balance at June 30, 2020 | $ | 211,775 | | | $ | — | | | $ | (209,986) | | | $ | 1,789 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | |
| Assets | | | | Liabilities | | |
| Borrower Loans | | Loans Held for Sale | | Notes | | Total |
| Balance at April 1, 2019 | $ | 259,899 | | | $ | — | | | $ | (258,722) | | | $ | 1,177 | |
| Originations | 41,839 | | | 670,382 | | | (41,774) | | | 670,447 | |
| Principal repayments | (41,215) | | | — | | | 41,611 | | | 396 | |
| Borrower Loans sold to third parties | (749) | | | (670,382) | | | — | | | (671,131) | |
| Other changes | (115) | | | — | | | 2 | | | (113) | |
| Change in fair value | (5,589) | | | — | | | 5,458 | | | (131) | |
| Balance at June 30, 2019 | $ | 254,070 | | | $ | — | | | $ | (253,425) | | | $ | 645 | |
The following tables present additional information about Level 3 Servicing Assets recorded at fair value (in thousands):
| | | | | |
| Servicing Assets |
| Fair Value at January 1, 2020 | $ | 14,888 | |
| Additions | 3,402 | |
| Less: Changes in fair value | (6,227) | |
| Fair Value at June 30, 2020 | $ | 12,063 | |
| | | | | |
| Servicing Assets |
| Fair Value at January 1, 2019 | $ | 15,550 | |
| Additions | 6,796 | |
| Less: Changes in fair value | (6,885) | |
| Fair Value at June 30, 2019 | $ | 15,461 | |
| | | | | |
| Servicing Assets |
| Fair Value at April 1, 2020 | $ | 13,690 | |
| Additions | 1,206 | |
| Less: Changes in fair value | (2,833) | |
| Fair Value at June 30, 2020 | $ | 12,063 | |
| | | | | |
| Servicing Assets |
| Fair Value at April 1, 2019 | $ | 15,174 | |
| Additions | 3,830 | |
| Less: Changes in fair value | (3,543) | |
| Fair Value at June 30, 2019 | $ | 15,461 | |
Loan Trailing Fee Liability
The fair value of the Loan Trailing Fee Liability represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and default rates using a discounted cash flow model. The assumptions used are the same as those used for the valuation of Servicing Assets, as described below.
The following tables present additional information about Level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
| | | | | | | | |
| | Loan Trailing Fee Liability |
| Fair Value at January 1, 2020 | | $ | 2,997 | |
| Issuances | | 625 | |
| Cash payment of Loan Trailing Fee | | (1,271) | |
| Change in fair value | | 52 | |
| Fair Value at June 30, 2020 | | $ | 2,403 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
| Fair Value at January 1, 2019 | | $ | 3,118 | |
| Issuances | | 1,297 | |
| Cash payment of Loan Trailing Fee | | (1,298) | |
| Change in fair value | | 132 | |
| Fair Value at June 30, 2019 | | $ | 3,249 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
| Fair Value at April 1, 2020 | | $ | 2,646 | |
| Issuances | | 240 | |
| Cash payment of Loan Trailing Fee | | (596) | |
| Change in fair value | | 113 | |
| Fair Value at June 30, 2020 | | $ | 2,403 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
| Fair Value at April 1, 2019 | | $ | 3,084 | |
| Issuances | | 731 | |
| Cash payment of Loan Trailing Fee | | (640) | |
| Change in fair value | | 74 | |
| Fair Value at June 30, 2019 | | $ | 3,249 | |
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Key economic assumptions are used to compute the fair value of Borrower Loans. The sensitivity of the fair value to immediate changes in assumptions at June 30, 2020 and December 31, 2019 for Borrower Loans are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | |
| Borrower Loans | June 30, 2020 | | December 31, 2019 |
| Fair value, using the following assumptions: | $ | 211,775 | | | $ | 245,137 | |
| Weighted-average discount rate | 11.23 | % | | 6.43 | % |
| Weighted-average default rate | 13.60 | % | | 13.68 | % |
| | | |
| Fair value resulting from: | | | |
| 100 basis point increase in discount rate | $ | 209,970 | | | $ | 242,888 | |
| 200 basis point increase in discount rate | 208,205 | | | 240,691 | |
| Fair value resulting from: | | | |
| 100 basis point decrease in discount rate | $ | 213,623 | | | $ | 247,442 | |
| 200 basis point decrease in discount rate | 215,514 | | | 249,805 | |
| | | |
| Fair value resulting from: | | | |
| 10 percent increase in default rate | $ | 209,420 | | | $ | 241,930 | |
| 20 percent increase in default rate | 207,073 | | | 238,807 | |
| Fair value resulting from: | | | |
| 10 percent decrease in default rate | $ | 214,140 | | | $ | 248,453 | |
| 20 percent decrease in default rate | 216,517 | | | 251,777 | |
Key economic assumptions are used to compute the fair value of Notes. The sensitivity of the fair value to immediate changes in assumptions at June 30, 2020 and December 31, 2019 for Notes funded through the Note Channel are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | |
| Notes | June 30, 2020 | | December 31, 2019 |
| Fair value, using the following assumptions: | $ | 209,986 | | | $ | 244,171 | |
| Weighted-average discount rate | 11.23 | % | | 6.43 | % |
| Weighted-average default rate | 13.60 | % | | 13.68 | % |
| | | |
| Fair value resulting from: | | | |
| 100 basis point increase in discount rate | $ | 208,194 | | | $ | 241,927 | |
| 200 basis point increase in discount rate | 206,441 | | | 239,737 | |
| Fair value resulting from: | | | |
| 100 basis point decrease in discount rate | $ | 211,821 | | | $ | 246,471 | |
| 200 basis point decrease in discount rate | 213,698 | | | 248,828 | |
| | | |
| Fair value resulting from: | | | |
| 10 percent increase in default rate | $ | 207,637 | | | $ | 240,958 | |
| 20 percent increase in default rate | 205,297 | | | 237,831 | |
| Fair value resulting from: | | | |
| 10 percent decrease in default rate | $ | 212,345 | | | $ | 247,489 | |
| 20 percent decrease in default rate | 214,715 | | | 250,817 | |
Key economic assumptions are used to compute the fair value of Servicing Assets. The sensitivity of the current fair value to immediate changes in assumptions at June 30, 2020 and December 31, 2019 for Servicing Assets are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | |
| Servicing Assets | June 30, 2020 | | December 31, 2019 |
| Fair value, using the following assumptions: | $ | 12,063 | | | $ | 14,888 | |
| Weighted-average market servicing rate | 0.632 | % | | 0.625 | % |
| Weighted-average prepayment rate | 20.67 | % | | 20.99 | % |
| Weighted-average default rate | 13.47 | % | | 12.67 | % |
| | | |
| Fair value resulting from: | | | |
| Market servicing rate increase of 0.025% | $ | 11,336 | | | $ | 13,966 | |
| Market servicing rate decrease of 0.025% | 12,789 | | | 15,811 | |
| | | |
| Fair value resulting from: | | | |
| Applying a 1.1 multiplier to prepayment rate | $ | 11,822 | | | $ | 14,583 | |
| Applying a 0.9 multiplier to prepayment rate | 12,306 | | | 15,197 | |
| | | |
| Fair value resulting from: | | | |
| Applying a 1.1 multiplier to default rate | $ | 11,885 | | | $ | 14,618 | |
| Applying a 0.9 multiplier to default rate | 12,241 | | | 15,165 | |
These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
8. Commitments and Contingencies
Operating Commitments
Prosper entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining six months of 2020 is $0.9 million. The minimum fees are $1.7 million and $0.1 million for the years 2021 and 2022, respectively.
Additionally, under the agreement with WebBank, Prosper is required to maintain minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. As of June 30, 2020, we were in compliance with the covenant.
Loan Purchase Commitments
Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase $32.0$8.6 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended SeptemberJune 30, 2017 and first business day of the quarter ending December 31, 2017.2020. Prosper Funding will purchase these Borrower Loans within the first three business days of the quarter ending December 31, 2017.September 30, 2020.
Repurchase and Indemnification ContingencyObligation
Under the terms of the loan purchase agreements between Prosper Funding and investors that participate in the Whole Loan Channel, Prosper Funding may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience. Prosper Funding recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at
Septemberas of June 30, 2017 2020 is $3,665 million. Prosper$3.1 billion. Prosper Funding had accrued $1.0has accrued $0.3 million and $0.6$0.4 million as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively, in regard to this obligation.
Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, we record the amount we consider to be the best estimate within the range of potential losses that are both probable and estimable; however, if we cannot quantify the amount of the estimated loss, then we record the low end of the range of those potential losses.
SEC Inquiry
In April 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to Note investors. Prosper was advised by the SEC that it was investigating whether violations of federal securities laws had occurred in connection with the error. On April 19, 2019, the SEC accepted an offer of settlement from PFL to resolve the matter. Under the settlement, the SEC alleged a violation of Section 17(a)(2) of the Securities Act and ordered PFL to cease and desist from any future violations of that provision. PFL neither admitted nor denied any wrongdoing, and agreed to pay a civil monetary penalty of $3.0 million. The penalty of $3.0 million was paid in full in April 2019.
West Virginia Matter
In January 2018, the Attorney General of the State of West Virginia (the “Attorney General”) initiated discussions regarding certain acts and practices of PMI and PFL that the Attorney General asserts may have violated the West Virginia Consumer Credit and Protection Act (the “Consumer Act”), to which Prosper responded with such information as was requested by the Attorney General. Following a period of more than a year with limited to no communication, in February 2020, Prosper received a proposed Assurance of Discontinuance (an “AOD”) from the Attorney General requesting that, without in any way admitting that any of its prior practices were in violation of the Consumer Act, Prosper agree to certain terms and conditions regarding its past and potential future conduct of its business with respect to customers in West Virginia, including a release by the Attorney General of any claims it may have related to the matters identified in the AOD. Prosper is evaluating and intends to discuss the proposed terms in the AOD with the Attorney General.
We cannot predict the outcome of the matter and any potential fines or penalties, if any, that may arise from the matter. Further, we are unable to estimate a range of outcomes and as a result no accrual has been made.
No loans have been originated through the Prosper platform to West Virginians since June 2016.
9. Related Parties
Since inception, Prosper Funding has engaged in various transactions with its directors, executive officers, and sole member, and immediate family members and other affiliates of its directors, executive officers, and sole member. Prosper Funding believes that all of the transactions described below were made on terms no less favorable to Prosper Funding than could have been obtained from unaffiliated third parties.
Prosper Funding’s executive officers and directors who are not executive officers participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be related parties of Prosper Funding as of Septemberfor the three and six months ended June 30, 20172020 and December 31, 20162019 are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aggregate Purchases | | | | Interest Earned | | |
| | Three Months Ended June 30, | | | | Three Months Ended June 30, | | |
| Related Party | | 2020 | | 2019 | | 2020 | | 2019 |
| Executive officers and management | | $ | 6 | | | $ | 5 | | | $ | 1 | | | $ | 1 | |
| Directors (excluding executive officers and management) | | — | | | — | | | — | | | — | |
| Total | | $ | 6 | | | $ | 5 | | | $ | 1 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aggregate Purchases | | | | Interest Earned | | |
| | Six Months Ended June 30, | | | | Six Months Ended June 30, | | |
| Related Party | | 2020 | | 2019 | | 2020 | | 2019 |
| Executive officers and management | | $ | 12 | | | $ | 11 | | | $ | 3 | | | $ | 2 | |
| Directors (excluding executive officers and management) | | — | | | — | | | — | | | — | |
| Total | | $ | 12 | | | $ | 11 | | | $ | 3 | | | $ | 2 | |
The balance of Notes held by officers and directors who are not executive officers are as follows (in thousands):
| | | | | | | | | | | | | | |
| Related Party | | June 30, 2020 | | December 31, 2019 |
| Executive officers and management | | $ | 36 | | | $ | 35 | |
| Directors (excluding executive officers and management) | | — | | | — | |
| | $ | 36 | | | $ | 35 | |
|
| | | | | | | | | | | | |
| | Aggregate Amount of Notes and Borrower Loans Purchased Nine Months Ended September 30, | Interest Earned on Notes and Borrower Loans Nine Months Ended September 30, |
| Related Party | 2017 | 2016 | 2017 | 2016 |
| Executive officers and management | $ | 15 |
| $ | 1,039 |
| $ | 90 |
| $ | 170 |
|
| Directors (excluding executive officers and management) | — |
| — |
| — |
| — |
|
| Total | $ | 15 |
| $ | 1,039 |
| $ | 90 |
| $ | 170 |
|
|
| | | | | | | | | | | | |
| | Aggregate Amount of Notes and Borrower Loans Purchased | Interest Earned on Notes and Borrower Loans |
| | Three Months Ended September 30, | Three Months Ended September 30, |
| Related Party | 2017 | 2016 | 2017 | 2016 |
| Executive officers and management | $ | 5 |
| $ | 245 |
| $ | 10 |
| $ | 62 |
|
| Directors (excluding executive officers and management) | — |
| — |
| — |
| — |
|
| Total | $ | 5 |
| $ | 245 |
| $ | 10 |
| $ | 62 |
|
|
| | | | | | | |
| | Note and Borrower Loan Balance as of |
| Related Party | September 30, 2017 | | December 31, 2016 |
| Executive officers and management | $ | 27 |
| | $ | 1,620 |
|
| Directors (excluding executive officers and management) | — |
| | — |
|
| | $ | 27 |
| | $ | 1,620 |
|
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONOPERATIONS
PROSPER MARKETPLACE, INC.
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks, and assumptions associated with these statements. This discussion should be read in conjunction with Prosper’s historical condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Overview
Prosper is a pioneer of online marketplace lending that connects borrowers and investors. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return.
We believe our online marketplace model has key advantages relative to traditional bank lending, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology driventechnology-driven automation that increases efficiency and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure; instead, we use data and technology to drive automation and efficiency in our operation.operations. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including portions of the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.
During the year ended December 31, 2016,2019, our marketplace facilitated $2.2$2.7 billion in Borrower Loan originations, of which $2.0$2.5 billion were funded through our Whole Loan Channel, representing 90% of the total Borrower Loans originated through our marketplace during this period. From inception through September 30, 2017, our marketplace facilitated $10.5 billion in Borrower Loan originations, of which $9.1 billion were funded through our Whole Loan Channel, representing 87% of the total Borrower Loans originated through our marketplace during this period. In the three months ended September 30, 2017, our marketplace facilitated $821.8 million in Borrower Loan originations, up 6% from the previous quarter and up 164% from the same period in 2016. In the three months ended September 30, 2017, $776.5 million of the borrower loan originations originated through our marketplace were funded through our Whole Loan Channel, representing 94% of the total Borrower Loans originated through our marketplace during this period. In the nine months ended SeptemberFrom inception through June 30, 2017,2020, our marketplace facilitated $2.2$17.4 billion in Borrower LoansLoan originations, of which $2.03$15.6 billion were funded through our Whole Loan Channel, representing 93%representing 90% of the total Borrower Loans originated through our marketplace during this period.
During the course of 2016 and 2017, management has taken actions to increase originations while effectively managing costs and, as a result, inIn the three months ended SeptemberJune 30, 2017, Prosper2020, our marketplace facilitated $251 million in Borrower Loan originations, a decrease of 67% from the same period in 2019. The percentage of loans funded through the Whole Loan Channel for the three months ended June 30, 2020 was able to generate positive cash flows from operations in the amount of $9.9 million.90%.
As a credit marketplace, we believe our customers are more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate inon our marketplace as borrowers or investors and, consequently, could negatively affect our business and results of operations.
Recent Developments
A novel strain of coronavirus, known as SARS-CoV-2, which causes COVID-19, first surfaced in December 2019. COVID-19 continues to spread globally and the World Health Organization has declared the COVID-19 outbreak to be a global pandemic. The COVID-19 outbreak has led to federal, state and local governments enacting various restrictions in an attempt to limit the spread of the virus, including declaration of a federal National State of Emergency, multiple cities and states declaring states of emergency, school and business closings, limitations on social or public gatherings and other social distancing measures, such as working remotely, travel restrictions, quarantines and shelter in place orders. While state and local governments across the U.S. have been in various stages of easing shelter-in-place orders and other restrictions, officials continue to monitor rates of infection and hospitalization, and summertime surges in COVID-19 cases threaten many states’ plans to reopen. The financial markets, which have been recovering from the steep declines seen in February and March 2020, are experiencing continued trading volatility as a result of the pandemic and related economic disruption. In addition,
unemployment rates remain high, and U.S. gross domestic product contracted at a record annualized 32.9% rate during the second quarter of 2020.
ResultsIn response to the economic and financial effects of OperationsCOVID-19, the Federal Reserve has sharply reduced interest rates and instituted quantitative easing measures as well as domestic and global capital market support programs, and the Trump Administration and Congress enacted fiscal measures to address the economic and social consequences of the pandemic, including the CARES Act, which was signed into law on March 27, 2020. The CARES Act includes, among other matters, expanded eligibility for Small Business Administration loans under a new Paycheck Protection Program (“PPP loans”), provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits, and technical corrections to tax depreciation methods for qualified improvement property. As disclosed above in Note 10, Debt, to Prosper’s Notes to Consolidated Financial Statements, Prosper has obtained a PPP loan in the amount of $8.4 million, which we have applied towards payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. The Company is also deferring applicable payroll taxes as permitted under the CARES Act.
Prosper is also actively tracking the impact of COVID-19 on our communities, and offering assistance to qualified borrowers who are facing financial hardship as a result of the COVID-19 pandemic. These relief options include, among other things, the ability to delay up to four monthly loan payments, the ability to reduce minimum monthly payments for up to six months and extend the term of the loan by up to 11 months, and waived late and non-sufficient funds fees. Since COVID-19 relief was first offered in March 2020, approximately 13% of our outstanding loan balances on a cumulative basis have enrolled in at least one of these COVID-19 relief programs. Approximately four percent of our outstanding loan balances are actively enrolled in at least one relief program as of August 3, 2020. Currently, approximately 90% of borrowers graduating from payment delay relief have either made a loan payment or enrolled in our payment reduction program. Overall requests for COVID-19 relief are declining; however, enrollment may continue as long as the pandemic continues to trigger increased work stoppages and unemployment. Prosper is also complying with new state mandates that may temporarily impact collections activity with respect to delinquent loans.
Over the last few years, Prosper has been tightening credit and focusing on borrowers’ ability and intent to pay in order to generate sustainable and attractive risk-adjusted returns for our investors. In light of changes in the economic environment caused by COVID-19, we have taken additional actions to help actively manage investor returns and adapt to this rapidly changing environment, including further tightening our credit criteria, engaging with borrowers earlier and more frequently in the payment cycle and implementing stricter income and employment verification throughout the second quarter of 2020. As a result, we have seen a significant reduction in approved loan listings with higher risk C, D, E or HR Prosper Ratings.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. While marketplace activity has declined as a result of COVID-19, it is uncertain as to the full magnitude that the pandemic will have on our workforce, financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of COVID-19. Although Prosper cannot predict the length or gravity of the impacts of these events at this time, if the pandemic continues for an extended period of time, it may have a material adverse effect on our results of future operations, financial position, and liquidity.
Key Operating and Financial Metrics (in thousands)
| | | | Three Months Ended
September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| Loan Originations | $ | 821,841 |
| | $ | 311,776 |
| | $ | 2,182,035 |
| | $ | 1,735,219 |
| Loan Originations | $ | 250,638 | | | $ | 759,858 | | | $ | 700,017 | | | $ | 1,358,055 | |
| Transaction Fees, Net | 37,250 |
| | 14,086 |
| | 99,541 |
| | 75,186 |
| Transaction Fees, Net | 11,401 | | | 33,876 | | | 31,814 | | | 60,171 | |
Whole Loans Outstanding (1)
| 3,702,319 |
| | 3,737,263 |
| | 3,702,319 |
| | 3,737,263 |
| Whole Loans Outstanding (1) | 3,110,157 | | | 3,728,247 | | | 3,110,157 | | | 3,728,247 | |
| Servicing Fees, Net | 6,976 |
| | 7,079 |
| | 19,922 |
| | 21,898 |
| Servicing Fees, Net | 4,660 | | | 5,172 | | | 10,717 | | | 11,375 | |
| Net Loss | (26,940 | ) | | (17,417 | ) | | (92,366 | ) | | (70,509 | ) | |
| Total Net Revenue | | Total Net Revenue | 26,257 | | | 42,930 | | | 29,502 | | | 73,008 | |
Core Revenue (2) | | Core Revenue (2) | 26,257 | | | 50,735 | | | 29,502 | | | 90,561 | |
| Net Income (Loss) | | Net Income (Loss) | 17,641 | | | (569) | | | 38,771 | | | (23,283) | |
Adjusted EBITDA (2) | 7,271 |
| | (8,804 | ) | | 4,787 |
| | (29,425 | ) | Adjusted EBITDA (2) | 770 | | | 5,331 | | | (31,172) | | | 5,688 | |
| Net Cash Provided by (Used in) Operating Activities | 9,881 |
| | (4,237 | ) | | (1,715 | ) | | (47,522 | ) | |
(1) Balance as of SeptemberJune 30.
(2) Core Revenue and Adjusted EBITDA is aare non-GAAP Financial measure.measures. For more information regarding this measurethese measures and a reconciliation of this measurethese measures to the most comparable US GAAP measure, see “Non-GAAP Financial Measures”
Overview
The following tables summarize Prosper’s net loss for the three and nine months ended September 30, 2017 and 2016 (in thousands, except percentages):Measures.”
|
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Total Net Revenue | $ | 28,862 |
| | $ | 23,951 |
| | 4,911 |
| | 21 | % |
| Total Expenses | 55,717 |
| | 41,294 |
| | 14,423 |
| | 35 | % |
| Net Loss Before Taxes | (26,855 | ) | | (17,343 | ) | | (9,512 | ) | | 55 | % |
| Income Tax Expense | 85 |
| | 74 |
| | 11 |
| | 15 | % |
| Net Loss | $ | (26,940 | ) | | $ | (17,417 | ) | | (9,523 | ) | | 55 | % |
61
|
| | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Total Net Revenue | $ | 91,152 |
| | $ | 108,639 |
| | (17,487 | ) | | (16 | )% |
| Total Expenses | 183,172 |
| | 178,804 |
| | 4,368 |
| | 2 | % |
| Net Loss Before Taxes | (92,020 | ) | | (70,165 | ) | | (21,855 | ) | | 31 | % |
| Income Tax Expense | 346 |
| | 344 |
| | 2 |
| | 1 | % |
| Net Loss | $ | (92,366 | ) | | $ | (70,509 | ) | | (21,857 | ) | | 31 | % |
Total net revenue for the three months ended September 30, 2017 increased $4.9 million, a 21% increase from the three months ended September 30, 2016, primarily due to increased Borrower Loan originations, which increased 164% on a dollar basis, but was partially offset by $21.8 million of rebates that were provided to members of the Consortium via the issuance of Convertible Preferred Stock Warrants that vested during the three months ended September 30, 2017. See below for an explanation of the increase in origination volume. Total expenses for the three months ended September 30, 2017 increased $14.4 million, a 35% increase from the three months ended September 30, 2016, primarily due to an increase in the fair value of the preferred stock warrant liability of $6.3 million in the three months ended September 30, 2017 and an $12.6 million increase in sales and marketing expenses for the three months ended September 30, 2017, as Prosper increased its marketing efforts to attract borrowers
to the platform. Net loss for the three months ended September 30, 2017 increased $9.5 million, primarily due to the warrant related charges explained above.
Total net revenue for the nine months ended September 30, 2017 decreased $17.5 million, a 16% decrease from the nine months ended September 30, 2016, primarily due to the $42.0 million of rebates that were provided to members of the Consortium via the issuance of Convertible Preferred Stock Warrants that vested during the nine months ended September 30, 2017, partially offset by a 26% increase in dollar amount of loan originations during the period. Total expenses for the nine months ended September 30, 2017 increased $4.4 million, a 2% increase from the nine months ended September 30, 2016. This was primarily due to a $29.1 million increase in the fair value of the preferred stock warrant liability in the nine months ended September 30, 2017, a $7.3 million increase in marketing expenses during the period and $6.4 million of impairment charges on assets held for sale during the period. These increased expenses were partially offset by a reduction in general and administration costs of $25.9 million and restructuring charges of $13.6 million.
Net loss for the nine months ended September 30, 2017 increased $21.9 million, primarily due to the decrease in revenues explained above.
Origination VolumeLoan Originations
From inception through SeptemberJune 30, 2017,2020, a total of 832,9851,343,227 Borrower Loans totaling $10.5$17.4 billion were originated through Prosper’s marketplace.
During the third quarterthree months ended SeptemberJune 30, 2017, 63,5822020, 19,092 Borrower Loans totaling $821.8$250.6 million were originated through Prosper’s marketplace, compared to 22,963 Borrower55,260 Borrower Loans totaling $311.8$759.9 million during the third quarterthree months ended SeptemberJune 30, 2016.2019. This represented an increaserepresents a decrease of 177%65% in terms of the number of loans and a 164% increase67% decrease in the dollar amount of loans. During the nine months ended September 30, 2017, 171,290 Borrower Loans totaling $2.18 billion were originated through Prosper's marketplace, compared to 128,289 Borrower Loans totaling $1.74 billion during the nine months ended September 30, 2016. This represented an increase of 34% in terms of number of loans and a 26% increase in the dollar amount of loans.
The origination increase experienced duringoriginations decrease for the quarter ended SeptemberJune 30, 20172020 versus the quarter ended SeptemberJune 30, 2016 is2019 was due to reduced investor demand, tighter underwriting and higher borrower rates starting in March 2020 to address the fact that, beginning innegative economic impact of the second quarter of 2016, a number of our largest investors paused or significantly reduced their purchases of Borrower Loans. As a result of such reductions,COVID-19 outbreak.
Loan origination volume by Prosper undertook a restructuring in May of 2016.
Prosper has taken a number of actions aimed at increasing the amount of capital committed to make purchases through its marketplace. On February 27, 2017, Prosper signed an agreement with a consortium of investorsRating was as follows for the purchaseperiods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | | Six Months Ended June 30, | | | | | | |
| | 2020 | | | | 2019 | | | | 2020 | | | | 2019 | | |
| | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| AA | | $ | 52.7 | | | 21 | % | | $ | 98.5 | | | 13 | % | | $ | 111.2 | | | 16 | % | | $ | 182.2 | | | 14 | % |
| A | | 94.2 | | | 38 | % | | 186.2 | | | 25 | % | | 198.8 | | | 28 | % | | 328.2 | | | 24 | % |
| B | | 65.6 | | | 26 | % | | 191.6 | | | 25 | % | | 175.4 | | | 25 | % | | 345.1 | | | 25 | % |
| C | | 21.6 | | | 9 | % | | 169.5 | | | 22 | % | | 129.1 | | | 18 | % | | 304.0 | | | 22 | % |
| D | | 5.0 | | | 2 | % | | 66.8 | | | 9 | % | | 40.0 | | | 6 | % | | 119.4 | | | 9 | % |
| E | | 1.0 | | | — | % | | 16.4 | | | 2 | % | | 11.7 | | | 2 | % | | 30.1 | | | 2 | % |
| HR | | 0.2 | | | — | % | | 5.1 | | | 1 | % | | 1.8 | | | — | % | | 9.8 | | | 1 | % |
Other (1) | | 10.3 | | | 4 | % | | 25.8 | | | 3 | % | | 32.1 | | | 5 | % | | 39.2 | | | 3 | % |
| Total | | $ | 250.6 | | | | | $ | 759.9 | | | | | $ | 700.1 | | | | | $ | 1,358.0 | | | |
(1) Represents loans originated through the Prosper platform via the Whole Loan Channel but not assigned Prosper Ratings.
For the three and six months ended June 30, 2020, the mix of uporiginations on the Prosper platform was generally reflective of tighter underwriting as compared to $5.0 billionthe corresponding periods in 2019, as the Company sought to reduce borrower defaults across its platform in response to COVID-19.
Results of loans over two years (for more details please see note 16 to our condensed consolidated financial statements). As a result,Operations
The following tables summarize Prosper’s net income (loss) for the dollar amount of loans originated through Prosper's marketplace increased inthree and six months ended June 30, 2020 and 2019 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Total Net Revenues | $ | 26,257 | | | $ | 42,930 | | | $ | (16,673) | | | (39) | % |
| Total Expenses | 8,582 | | | 43,470 | | | (34,888) | | | (80) | % |
| Net Income (Loss) Before Taxes | 17,675 | | | (540) | | | 18,215 | | | n/m |
| Income Tax Expense | 34 | | | 29 | | | 5 | | | 17 | % |
| Net Income (Loss) | $ | 17,641 | | | $ | (569) | | | $ | 18,210 | | | n/m |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Total Net Revenue | $ | 29,502 | | | $ | 73,008 | | | $ | (43,506) | | | (60) | % |
| Total Expenses | (9,337) | | | 96,233 | | | (105,570) | | | (110) | % |
| Net Income (Loss) Before Taxes | 38,839 | | | (23,225) | | | 62,064 | | | n/m |
| Income Tax Expense | 68 | | | 58 | | | 10 | | | 17 | % |
| Net Income (Loss) | $ | 38,771 | | | $ | (23,283) | | | $ | 62,054 | | | n/m |
n/m: not meaningful
Total net revenues for the third quarter of 2017 by $236.3three months ended June 30, 2020 decreased $16.7 million, or 40%39%, when compared to the firstthree months ended June 30, 2019. The decrease was primarily attributable to a $22.5 million decrease in Transaction Fees, Net, and a $2.9 million decrease in Gain on Sale of Borrower Loans, due to the decrease in originations during this time, which was in turn driven by reduced investor demand, tighter underwriting and higher borrower rates in response to the economic impact of COVID-19. These decreases were partially offset by the Fair Value of Warrants Vested on Sale of Borrower Loans, which previously had a $7.8 million negative revenue impact during the three months ended June 30, 2019, but no impact for the three months ended June 30, 2020 as the Consortium Purchase Agreement ended in May 2019, after which no additional warrants were issued. There was also a $3.5 million increase in Net Interest Income due primarily to the additional interest income generated from having three securitizations and two warehouse lines in place for all of the three months ended June 30, 2020. Not all of these transactions closed prior to June 30, 2019 or were in place for the entire second quarter of 2017.2019.
Total expenses for the three months ended June 30, 2020 decreased $34.9 million from the same period in 2019, primarily due to a $16.4 million decrease in Sales and Marketing expenses, due to a decline in originations and improved marketing efficiencies, and a $19.5 million gain from Change in Fair Value of Convertible Preferred Stock Warrants, due to a decrease in the fair value of the underlying Convertible Preferred Stock during the period. For the three months ended June 30, 2019, the gain from Change in Fair Value of Convertible Preferred Stock Warrants was $4.7 million. Accordingly, net income for the three months ended June 30, 2020 increased $18.2 million when compared to the net loss incurred for the three months ended June 30, 2019.
Total net revenues for the six months ended June 30, 2020 decreased $43.5 million, or 60%, as compared to the same period in 2019. The decrease was primarily attributable to a $39.3 million loss from the Change in Fair Value of Financial Instruments, Net, for the six months ended June 30, 2020 which compared to a $3.7 million loss for the corresponding period in the prior year, as the economic impact brought on by the COVID-19 outbreak negatively impacted the fair value of our financial instruments carried at fair value. These economic conditions also resulted in reduced originations starting in March 2020, contributing to a $28.4 million decrease in Transaction Fees, Net. These decreases were partially offset by the Fair Value of Warrants Vested on Sale of Borrower Loans, which previously had a $17.6 million negative revenue impact for the six months ended June 30, 2019, but no impact for the six months ended June 30, 2020 as the Consortium Purchase Agreement ended in May 2019, after which no additional warrants were issued. There was also a $9.1 million increase in Net Interest Income due primarily to the additional interest income generated from having three securitizations and two warehouse lines in place for all of the six months ended June 30, 2020. Not all of these transactions closed prior to June 30, 2019 or were in place for the entire first half of 2019.
Total expenses for the six months ended June 30, 2020 decreased $105.6 million from the same period in 2019, primarily due to a $75.0 million gain from the Change in Fair Value of Convertible Preferred Stock Warrants, as compared to a $5.3 million loss for the six months ended June 30, 2019. Additionally, there was a $21.5 million decrease in Sales and Marketing expenses due to a decline in originations improved marketing efficiencies. Accordingly, net income for the six months ended June 30, 2020 increased $62.1 million when compared to the net loss incurred for the six months ended June 30, 2019.
RevenueRevenues
The following tables summarizes Prosper’s revenuesummarize our revenues for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands, except percentages):
|
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Operating Revenues | |
| | |
| | |
| | |
|
| Transaction Fees, Net | $ | 37,250 |
| | $ | 14,086 |
| | 23,164 |
| | 164 | % |
| Servicing Fees, Net | 6,976 |
| | 7,079 |
| | (103 | ) | | (1 | )% |
| Gain (Loss) on Sale of Borrower Loans | 4,373 |
| | 761 |
| | 3,612 |
| | 475 | % |
| Fair Value of Warrants Vested on the Sale of Borrower Loans | (21,772 | ) | | — |
| | (21,772 | ) | | 100 | % |
| Other Revenues | 1,390 |
| | 973 |
| | 417 |
| | 43 | % |
| Total Operating Revenues | 28,217 |
| | 22,899 |
| | 5,318 |
| | 23 | % |
| Interest Income | |
| | |
| | |
| | |
|
| Interest Income on Borrower Loans | 12,065 |
| | 11,735 |
| | 330 |
| | 3 | % |
| Interest Expense on Notes | (11,247 | ) | | (10,636 | ) | | (611 | ) | | 6 | % |
| Net Interest Income | 818 |
| | 1,099 |
| | (281 | ) | | (26 | )% |
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | (173 | ) | | (47 | ) | | (126 | ) | | 268 | % |
| Total Revenues | 28,862 |
| | 23,951 |
| | 4,911 |
| | 21 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Operating Revenues: | | | | | | | |
| Transaction Fees, Net | $ | 11,401 | | | $ | 33,876 | | | $ | (22,475) | | | (66) | % |
| Servicing Fees, Net | 4,660 | | | 5,172 | | | (512) | | | (10) | % |
| Gain on Sale of Borrower Loans | 617 | | | 3,559 | | | (2,942) | | | (83) | % |
| Fair Value of Warrants Vested on the Sale of Borrower Loans | — | | | (7,805) | | | 7,805 | | | (100) | % |
| Other Revenues | 566 | | | 2,188 | | | (1,622) | | | (74) | % |
| Total Operating Revenues | 17,244 | | | 36,990 | | | (19,746) | | | (53) | % |
| | | | | | | |
| Interest Income: | | | | | | | |
| Interest Income on Borrower Loans and Loans Held for Sale | 26,645 | | | 23,543 | | | 3,102 | | | 13 | % |
| Interest Expense on Financial Instruments | (15,270) | | | (15,645) | | | 375 | | | (2) | % |
| Net Interest Income | 11,375 | | | 7,898 | | | 3,477 | | | 44 | % |
| Change in Fair Value of Financial Instruments, Net | (2,362) | | | (1,958) | | | (404) | | | 21 | % |
| Total Net Revenues | $ | 26,257 | | | $ | 42,930 | | | $ | (16,673) | | | (39) | % |
| | | | | | | | | | | | Six Months Ended June 30, | | |
| | Nine Months Ended September 30, | | | | | | 2020 | | 2019 | | $ Change | | % Change |
| | 2017 | | 2016 | | $ Change | | % Change | |
| Operating Revenues | |
| | | | |
| | |
| |
| Operating Revenues: | | Operating Revenues: | | | | | | | |
| Transaction Fees, Net | $ | 99,541 |
| | $ | 75,186 |
| | 24,355 |
| | 32 | % | Transaction Fees, Net | $ | 31,814 | | | $ | 60,171 | | | $ | (28,357) | | | (47) | % |
| Servicing Fees, Net | 19,922 |
| | 21,898 |
| | (1,976 | ) | | (9 | )% | Servicing Fees, Net | 10,717 | | | 11,375 | | | (658) | | | (6) | % |
| Gain on Sale of Borrower Loans | 7,858 |
| | 3,865 |
| | 3,993 |
| | 103 | % | Gain on Sale of Borrower Loans | 2,361 | | | 6,256 | | | (3,895) | | | (62) | % |
| Fair Value of Warrants Vested on the Sale of Borrower Loans | (41,966 | ) | | — |
| | (41,966 | ) | | 100 | % | Fair Value of Warrants Vested on the Sale of Borrower Loans | — | | | (17,553) | | | 17,553 | | | (100) | % |
| Other Revenues | 3,525 |
| | 4,562 |
| | (1,037 | ) | | (23 | )% | Other Revenues | 1,578 | | | 3,223 | | | (1,645) | | | (51) | % |
| Total Operating Revenues | 88,880 |
| | 105,511 |
| | (16,631 | ) | | (16 | )% | Total Operating Revenues | 46,470 | | | 63,472 | | | (17,002) | | | (27) | % |
| Interest Income | |
| | |
| | |
| | |
| |
| Interest Income on Borrower Loans | 35,572 |
| | 33,710 |
| | 1,862 |
| | 6 | % | |
| Interest Expense on Notes | (33,102 | ) | | (30,456 | ) | | (2,646 | ) | | 9 | % | |
| | Interest Income: | | Interest Income: | |
| Interest Income on Borrower Loans and Loans Held for Sale | | Interest Income on Borrower Loans and Loans Held for Sale | 54,289 | | | 41,972 | | | 12,317 | | | 29 | % |
| Interest Expense on Financial Instruments | | Interest Expense on Financial Instruments | (31,953) | | | (28,765) | | | (3,188) | | | 11 | % |
| Net Interest Income | 2,470 |
| | 3,254 |
| | (784 | ) | | (24 | )% | Net Interest Income | 22,336 | | | 13,207 | | | 9,129 | | | 69 | % |
| Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net | (198 | ) | | (126 | ) | | (72 | ) | | 57 | % | |
| Total Revenues | 91,152 |
| | 108,639 |
| | (17,487 | ) | | (16 | )% | |
| Change in Fair Value of Financial Instruments, Net | | Change in Fair Value of Financial Instruments, Net | (39,304) | | | (3,671) | | | (35,633) | | | n/m |
| Total Net Revenues | | Total Net Revenues | $ | 29,502 | | | $ | 73,008 | | | $ | (43,506) | | | (60) | % |
n/m: not meaningful
Transaction Fees, Net
Prosper earnsWe earn a transaction fee upon the successful origination of all Borrower Loans facilitated through Prosper’sour marketplace. Prosper receives payments from WebBank as compensation for the activities Prosper performswe perform on behalf of WebBank. Prosper’sOur fee is determined by the term and credit grade of the Borrower Loans that Prosper facilitates on its marketplace and WebBank originates. We record the transaction fee revenue net of any fees paid by us to WebBank.
Transaction fees increased primarily due to higher origination volume through Prosper’s marketplace duringfor the three months ended SeptemberJune 30, 2017. The average transaction fee was 4.53% and 4.52% of2020 decreased $22.5 million, or 66%, as compared to the principal amount of originated loans facilitated through Prosper’s marketplacecorresponding period in 2019. Transaction fees for the threesix months ended SeptemberJune 30, 2017 and 2016, respectively.
2020 decreased $28.4 million, or 47%, as
Transaction fees increased primarily duecompared to a higherthe corresponding period in 2019. These decreases were consistent with the lower origination volume through Prosper's marketplace and higher average transaction fee during the nine months ended September 30, 2017. The average transaction fee was 4.56% and 4.33% of the principal amount of originated loans facilitated through Prosper’s marketplace for the nine months ended September 30, 2017 and 2016, respectively. This increase was due to marketing fee increases implemented in the second quarter of 2016 for certain Prosper scores. The marketing fee increases were partially offset by the fair value of the loan trailing fee on loans originated on the platform during the period.volumes discussed above.
Servicing Fees, Net
Prosper earns a fee from investorsInvestors who purchase Borrower Loans from Prosper through the Whole Loan Channel for servicing such loans on their behalf. Thetypically pay Prosper a servicing fee compensates us for the costs we incur in servicing the Borrower Loan, including managing payments from borrowers and payments to investors and maintaining investors’ account portfolios. Historically, the servicing fee has been generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has beenwhich is currently set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The decreaseservicing fee compensates Prosper for the costs incurred in servicing fees duringthe Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. We record Servicing Fees from investors as a component of operating revenue when received. The decreases in Servicing Fees for the three and six months ended SeptemberJune 30, 2017 was due to the decrease in Borrower Loans being serviced2020, as compared to the three months ended September 30, 2016.
The decreasecorresponding periods in servicing fees during the nine months ended September 30, 2017 was also2019 were primarily due to the decrease in Borrower Loans being serviced as compared to the nine months ended September 30, 2016.a lower principal balance of whole loans serviced.
Gain (Loss) on Sale of Borrower Loans
Gain (Loss) on Sale of Borrower Loans consists of net gains and losses on Borrower Loans sold through the Whole Loan Channel. The increasedecreases for each of the three and six months ended June 30, 2020 was primarily due to an increasea decrease in the volume of such sales during the three months ending September 30, 2017whole loans sold due to an increase in loans being originated through the platformlower origination volume, as described above and $0.5 million less of rebates that were issued in the three months ended September 30, 2017 when compared to the three months ended September 30, 2016.
The increase during the nine months ended September 30, 2017 was due to an increase in loans being originated through the platform as described above, 0.075% higher servicing fee on borrower loans sold, increasing the gain on each loan sold and $0.7 million more in rebates that were issued in the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016. The incremental 0.075% fee was introduced starting in August 2016.discussed above.
Fair Value of Warrants Vested on the Sale of Borrower Loans
Fair Value of Warrants Vested on the Sale of Borrower Loans relates to warrants to purchase Series F Convertible Preferred Stock issued to the Consortium that vestvested when the Consortium purchasespurchased whole loans under the Consortium Purchase Agreement, which ended in May 2019. Since that was signed in February 2017. The charges of $21.8 million and $42.0 million recognized related to the fair value ofdate, no further warrants that vested during the three and nine months ended September 30, 2017, respectively. have been issued.
Other RevenueRevenues
Other revenuesRevenues consist primarily of securitization fees and credit referral fees. Credit referral fees are where partner companies pay us an agreed upon amount for referrals of customers from our website.platform. Securitization fees represent fees Prosper earns to facilitate securitizations for purchasers of borrower loans.Borrower Loans. The increase$1.6 million decrease in other revenueOther Revenues for both the three and six months ended SeptemberJune 30, 2017 was primarily the result of an increase in securitization fees2020, as Prosper facilitated one securitization during the three months ended September 30, 2017 compared to no securitizations during the three months ended September 30, 2016.
The decrease in other revenue for the nine months ended September 30, 2017 was primarily due to the fact thatcorresponding periods in the nine months ended September 30, 2016, Prosper earned non-recurring revenues of $1.2 millionprior year, was due primarily to reduced application volume referred to our credit referral partners for these periods, as well as certain one-time services that were earnedongoing in the period2019 but were not repeated in relation to work performed for a BillGuard partner.2020.
Interest Income on Borrower Loans and Loans Held for Sale and Interest Expense on NotesFinancial Instruments
Prosper recognizes interest incomeWe recognize Interest Income on Borrower Loans funded through the Note Channeland Loans Held for Sale using the accrual method based on the stated interest rate to the extent we believe it to be collectible. We record interest expense on the corresponding Notes, Notes Issued by Securitization Trust, Certificates Issued by Securitization Trust, and Warehouse Lines based on the contractual interest rates. The interest rate charged on the Borrower LoansNotes is generally 1% higherlower than the corresponding interest rate on the Notecorresponding Borrower Loans to compensate us for servicing the underlying Borrower Loans.
The increases of $3.5 million and $9.1 million in Net Interest Income for the three and six months ended June 30, 2020, respectively, compared to the corresponding periods in 2019 were primarily due to net interest income earned from having all three securitizations and two warehouse lines in place for all of 2020. In 2019, one securitization and one warehouse line were established during the three months ended June 30, 2019, and one additional securitization was completed after that date.
Change in Fair Value of Financial Instruments, Net
Prosper records Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust at fair value. Changes in fair value of Borrower Loans funded through Note Channel are largely offset by the changes in fair value of the Notes due to their borrower payment-dependent structure. Prosper's obligation to pay principal and interest on Notes is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of the servicing fee, which is generally 1.0% of the outstanding balance.
In 2018, Prosper began using Warehouse Lines to finance the purchase of Loans Held for Sale for the purpose of earning Net Interest Income and contributing to securitization transactions. Loans Held for Sale consist primarily of loans held in warehouse trusts. Changes in the fair value of Loans Held for Sale are not offset by changes in fair value of Warehouse Lines because Warehouse Lines are carried at amortized cost. See Note 10 of the accompanying notes to PMI’s condensed consolidated financial statements for more details on Warehouse Lines. During 2019, Prosper co-sponsored and consolidated three securitization transactions, one of which was consolidated after June 30, 2019. Refer to Note 6 of the accompanying notes
to PMI’s condensed consolidated financial statements for additional information on these securitization transactions. Changes in the fair value of Borrower Loans held in consolidated securitization trusts are partially offset by changes in fair value of the Certificates Issued by the Securitization Trusts. Changes in the fair value of loans held in warehouse and securitization trusts are negative due to actual charge-offs but could be negative or positive due to changes in fair value adjustments that are attributable to changes in expected credit performance and implied market discount rates. We earn interest income on loans held in warehouse and securitization trusts during the period we own the loans, which partially offsets changes in the fair value of those loans. The following table illustrates the composition of the loans held in warehouse and securitization trusts by Prosper Rating, which is an indicator of the credit quality:
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Loans Held for Sale(1): | | | |
| AA | 13 | % | | 11 | % |
| A | 33 | % | | 38 | % |
| B | 38 | % | | 37 | % |
| C | 12 | % | | 9 | % |
| D | 3 | % | | 4 | % |
| E | 1 | % | | 1 | % |
| HR | — | % | | — | % |
| Total | 100 | % | | 100 | % |
| | | |
Borrower Loans - Securitizations(2): | | | |
| AA | 7 | % | | 8 | % |
| A | 19 | % | | 13 | % |
| B | 24 | % | | 25 | % |
| C | 33 | % | | 32 | % |
| D | 13 | % | | 16 | % |
| E | 3 | % | | 5 | % |
| HR | 1 | % | | 1 | % |
| Total | 100 | % | | 100 | % |
(1) The percentages are calculated using the weighted average of month-end principal balances of Loans Held for Sale by Prosper Rating. | | | |
(2)The percentages are calculated using the weighted-average of month-end principal balances of Borrower Loans by Prosper Rating. | | | |
Fair values of Borrower Loans, Loans Held for Sale, Notes and Notes, net
The fair value of Borrower Loans, Loans Held for Sale and NotesCertificates Issued by Securitization Trust are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The mainkey assumptions used to value such Borrower Loans, Loans Held for Sale and
Notes include default rates and prepayment rates derived primarily from historical performance, and discount rates. Loans heldrates based on estimates of the rates of return that investors would require when investing in other financial instruments with similar characteristics. The loss in the Change in Fair Value of Financial Instruments, Net was $2.4 million for sale arethe three months ended June 30, 2020, as compared to a loss of $2.0 million for the corresponding period in 2019. The loss for the six months ended June 30, 2020 was $39.3 million, as compared to a loss of $3.7 million for the corresponding period in 2019. In response to the negative economic impact due to COVID-19, we adjusted certain fair value assumptions in the first quarter of 2020 to reflect available market information and market feedback, which resulted in the large increase in the loss for the six months ended June 30, 2020 as compared to the prior year. For the three months ended June 30, 2020, due primarily comprisedto improved market conditions and the gradual economic recovery since the start of Borrower Loans heldthe COVID-19 pandemic along with principal repayments on loans, the loss in the Change in Fair Value of Financial Instruments, Net decreased and was more consistent with the corresponding period in 2019. Refer to Note 7 of the accompanying condensed consolidated financial statements for short durations and are valued using the same approach as the Borrower Loans held atadditional information on fair value.value assumptions.
The following table summarizesdetails the changes in our fair value adjustmentsof our financial instruments for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively (in thousands):
| | | | | | | | | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | Three Months Ended September 30, | Nine Months Ended September 30, | | 2020 | | 2019 | | 2020 | | 2019 |
| Assets: | | Assets: | | | | | | | |
| Borrower Loans | | Borrower Loans | $ | (5,036) | | | $ | (10,376) | | | $ | (58,232) | | | $ | (17,299) | |
| Loans Held for Sale | | Loans Held for Sale | 426 | | | (1,233) | | | (13,826) | | | (2,542) | |
| | 2017 | | 2016 | 2017 | | 2016 | |
| Borrower Loans | $ | (7,219 | ) | | $ | (7,028 | ) | $ | (18,041 | ) | | $ | (19,962 | ) | |
| Loans held for sale | — |
| | (2 | ) | 6 |
| | (2 | ) | |
| Liabilities: | | Liabilities: | |
| Notes | 7,045 |
| | 6,983 |
| 17,837 |
| | 19,838 |
| Notes | 3,848 | | | 5,458 | | | 22,377 | | | 10,960 | |
| Total | $ | (174 | ) | | $ | (47 | ) | $ | (198 | ) | | $ | (126 | ) | |
| Certificates Issued by Securitization Trust | | Certificates Issued by Securitization Trust | (1,600) | | | 3,320 | | | 10,381 | | | 3,836 | |
| | | $ | (2,362) | | | $ | (2,831) | | | $ | (39,300) | | | $ | (5,045) | |
Expenses
The following tables summarize Prosper’s expenses for the three and six months ended SeptemberJune 30, 20172020 and 20162019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Expenses | | | | | | | |
| Origination and Servicing | $ | 7,365 | | | $ | 9,427 | | | $ | (2,062) | | | (22) | % |
| Sales and Marketing | 5,022 | | | 21,450 | | | (16,428) | | | (77) | % |
| General and Administrative - Research and Development | 3,652 | | | 4,450 | | | (798) | | | (18) | % |
| General and Administrative - Other | 12,068 | | | 13,458 | | | (1,390) | | | (10) | % |
| Change in Fair Value of Convertible Preferred Stock Warrants | (19,549) | | | (4,729) | | | (14,820) | | | n/m |
| Impairment Expense | 228 | | | — | | | 228 | | | 100 | % |
| Restructuring Charges | — | | | 5 | | | (5) | | | (100) | % |
| Other Income, Net | (204) | | | (591) | | | 387 | | | (65) | % |
| Total Expenses | $ | 8,582 | | | $ | 43,470 | | | $ | (34,888) | | | (80) | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | |
| | |
|
| | 2017 | | 2016 | | $ Change | | % Change |
| Expenses | |
| | |
| | |
| | |
|
| Origination and Servicing | $ | 9,263 |
| | $ | 7,633 |
| | 1,630 |
| | 21 | % |
| Sales and Marketing | 21,947 |
| | 9,391 |
| | 12,556 |
| | 134 | % |
| General and Administrative -Research and Development | 3,981 |
| | 6,353 |
| | (2,372 | ) | | (37 | )% |
| General and Administrative - Other | 14,142 |
| | 18,387 |
| | (4,245 | ) | | (23 | )% |
| Change in Fair Value of Convertible Preferred Stock Warrants | 6,323 |
| | — |
| | 6,323 |
| | 100 | % |
Restructuring Charges
| 86 |
| | (470 | ) | | 556 |
| | (118 | )% |
| Other Expenses | (25 | ) | | — |
| | (25 | ) | | 100 | % |
| Total Expenses | $ | 55,717 |
| | $ | 41,294 |
| | $ | 14,423 |
| | 35 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Expenses | | | | | | | |
| Origination and Servicing | $ | 15,811 | | | $ | 17,589 | | | $ | (1,778) | | | (10) | % |
| Sales and Marketing | 16,264 | | | 37,791 | | | (21,527) | | | (57) | % |
| General and Administrative - Research and Development | 8,175 | | | 8,906 | | | (731) | | | (8) | % |
| General and Administrative - Other | 25,707 | | | 27,771 | | | (2,064) | | | (7) | % |
| Change in Fair Value of Convertible Preferred Stock Warrants | (74,998) | | | 5,327 | | | (80,325) | | | n/m |
| Impairment Expense | 228 | | | — | | | 228 | | | 100 | % |
| Restructuring Charges, Net | — | | | 86 | | | (86) | | | (100) | % |
| Other Income, Net | (524) | | | (1,237) | | | 713 | | | (58) | % |
| Total Expenses | $ | (9,337) | | | $ | 96,233 | | | $ | (105,570) | | | (110) | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | |
|
| | 2017 | | 2016 | | $ Change | | % Change |
| Expenses | |
| | |
| | |
| | |
|
| Origination and Servicing | $ | 26,694 |
| | $ | 26,850 |
| | (156 | ) | | (1 | )% |
| Sales and Marketing | 61,634 |
| | 54,303 |
| | 7,331 |
| | 14 | % |
| General and Administrative -Research and Development | 12,063 |
| | 21,517 |
| | (9,454 | ) | | (44 | )% |
| General and Administrative - Other | 45,534 |
| | 61,981 |
| | (16,447 | ) | | (27 | )% |
| Change in Fair Value of Convertible Preferred Stock Warrants | 29,140 |
| | — |
| | 29,140 |
| | 100 | % |
Restructuring Charges
| 504 |
| | 14,153 |
| | (13,649 | ) | | (96 | )% |
| Other Expenses | 7,603 |
| | — |
| | 7,603 |
| | 100 | % |
| Total Expenses | $ | 183,172 |
| | $ | 178,804 |
| | $ | 4,368 |
| | 2 | % |
As of SeptemberJune 30, 2017,2020, Prosper had 359386 full-time employees compared to 392403 full-time employees as of SeptemberJune 30, 2016.2019. The following table reflects full-time employees as of SeptemberJune 30, 20172020 and 20162019 by department: functional area:
|
| | | | | |
| | September 30, 2017 | | September 30, 2016 |
| Origination and Servicing | 154 |
| | 147 |
|
| Sales and Marketing | 12 |
| | 36 |
|
| General and Administrative - Research and Development | 78 |
| | 103 |
|
| General and Administrative - Other | 115 |
| | 106 |
|
| Total Headcount | 359 |
| | 392 |
|
67
| | | | | | | | | | | |
| June 30, 2020 | | June 30, 2019 |
| Origination and Servicing | 145 | | 156 |
| Sales and Marketing | 16 | | 16 |
| General and Administrative - Research and Development | 95 | | 94 |
| General and Administrative - Other | 130 | | 137 |
| Total Headcount | 386 | | 403 |
Origination and Servicing
Origination and Servicing
Origination and servicing costs consist primarily of salaries, benefits and stock-based compensation expense related to Prosper’s credit,our capital markets, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans. The increase indecrease for the three months ending Septemberended June 30, 20172020 of $2.1 million was primarily the result of an increased usage ofdue to a $1.4 million decrease in outsourced services, of $1.2a $0.3 million decrease in professional services and increased amortization costs for internal use software of $0.6 million. The increase was offset by a $0.4 million decrease in compensation costs, driven by lower headcount and the salary reduction we instituted in the second quarter of $0.5 million.2020.
The decrease in Origination and Servicing costs for the ninesix months ended SeptemberJune 30, 20172020 of $1.8 million was the result ofdue primarily to a $1.0 million decrease in outsourced services and a $0.6 million decrease in compensation costs, of $2.9 million due todriven by lower headcount. This was offset by an increase in amortization costs of internal use software of $1.4 million and an increased usage of outsourced services of $1.3 million.
Sales and Marketing
Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations and direct mail marketing, as well as the compensation expenses such as wages, benefits and stock based compensation for the employees who support these activities. For the three months ended SeptemberJune 30, 2017,2020, the increasedecrease of $16.4 million was largely due primarily to increased variablean overall decrease in marketing and advertising, including partnership costs as Prosper increased its marketing efforts to increase demand from Borrowers given the greater availability of funding from investors. These increases included a $9.1$6.6 million, or 150% increase in direct mailing costs as Prosper increased the volume of its direct mail campaigns, a $3.1costs of $7.4 million or 384% increase in partnershipand digital advertising costs as Prosper significantly increased partnership activities and a $1.8of $1.4 million. There were also decreases of $0.4 million or 457% increase in online marketing costs. These increases were offset by a $1.2 million or 63% decrease in compensation costs, driven primarily by the salary reduction we instituted in the second quarter of 2020, as Prosper significantly reduced its saleswell as $0.2 million in outsourced services and marketing headcount.$0.1 million in professional services.
For the ninesix months ended SeptemberJune 30, 2017,2020, the increase isdecrease of $21.5 million was due primarily to an increaseoverall decrease in variable marketing and advertising, including partnership costs as Prosper increased its marketing efforts to increase demand from Borrowers given the greater availability from investors. These increases included a $12.5of $8.6 million, or 41% increase in direct mailing costs as Prosper increased the volume of its direct mail campaigns,costs of $9.8 million, digital advertising costs of $2.2 million and a $2.6direct to site advertising costs of $0.1 million. There were also decreases of $0.3 million or 83% increase in online marketing costs and an $2.7 million or 37% increase in partnership costs. These were offset by decreases in certain variable marketing channels such as trade shows which decreased $0.6 million or 94% and radio advertising which decreased $1.0 million or 100% as Prosper reallocated its market channel mix to gain greater efficiencies. These cost increases were partially offset by a $7.0 million or 75% decrease in compensation costs, driven primarily by the salary reduction we instituted in the second quarter of 2020, as Prosper significantly reduced its saleswell as $0.2 million in outsourced services and $0.2 million in professional services. These decreases for the three and six months ended June 30, 2020 reflect our efforts to optimize our marketing headcountprograms to improve efficiencies, combined with its restructuring that occurreddeclines in May 2016.originations during the period, as discussed above. We plan to continue to optimize and manage spend for the foreseeable future, especially in light of the current environment.
General and Administrative - Research and Development
General and Administrative – Research and developmentDevelopment costs consist primarily of salaries, benefits and stock-based compensation expense related to our engineering and product development employees and related vendor costs. The decrease in General and Administrative – Research and Development for the three months ended SeptemberJune 30, 20172020 of $0.8 million was due primarily due to a $0.5 million decrease in compensation costs, driven by the salary reduction we instituted in the second quarter of $2.1 million. Compensation costs decreased as2020, and a result of the$0.3 million decrease in headcount. The total expenses incurred for the three months ended September 30, 2017 do not reflect 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 expense. Prosperoutsourced services. We capitalized internal-use software and website development costs in the amount of $0.9$2.1 million and $1.1$2.3 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
The decrease in General and Administrative – Research and Development for the six months ended June 30, 2020 of $0.7 million was due primarily to a $0.5 million decrease in compensation costs, driven by the salary reduction we instituted in the second quarter of 2020, and a $0.3 million decrease in outsourced services. We capitalized internal-use software and website development costs in the amount of $4.8 million and $4.3 million for the six months ended June 30, 2020 and 2019, respectively.
General and Administrative - Other
General and Administrative – Other expenses consist primarily of salaries, benefits and stock-based compensation expense related to engineering and product development employees and related vendor costs. The decrease for the nine months ended September 30, 2017 was primarily due to a decrease in compensation costs of $7.7 million and a decrease of $1.5 million due to lower contractor and consultant usage. Compensation costs decreased as a result of the decrease in headcount. The total expenses incurred for the nine months ended September 30, 2017 do not reflect 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 expense. P
rosper capitalized internal-use software and website development costs in the amount of $3.0 million and $5.2 million for the nine months ended September 30, 2017 and 2016, respectively.
General and Administrative
General and administrative expenses consists primarily of salaries, benefits and stock-based compensation expense related toour accounting and finance, risk, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expense.expenses. The decrease in General and Administrative - Other for the three months ended SeptemberJune 30, 20172020 of $1.4 million was due primarily the result ofto a decrease in compensation expense of $1.0$0.8 million a decrease in professional services, as we completed a
securitization in the second quarter of $1.4 million2019 but none in 2020, and a $0.6 million decrease in rentcompensation costs, driven by lower headcount and occupancy expensesthe salary reduction we instituted in the second quarter of $0.5 million. 2020.
The decrease in compensation expenses is the result of the reduction in headcount. RentGeneral and occupancy related expenses have decreased as Prosper has ceased the use of or terminated a number of leases for office space.
The decreaseAdministrative - Other for the ninesix months ended SeptemberJune 30, 20172020 of $2.1 million was due primarily the result ofto (a) a $0.9 million decrease in compensation expensecosts, driven by lower headcount and the salary reduction we instituted in the second quarter of $12.42020; (b) a $0.7 million a decrease in professional services, as we completed two securitizations in the first half of $3.02019 but none in 2020; and (c) a $0.5 million and a decrease in rentsoftware licenses and occupancy expenses of $2.2 million. The decreasesupport costs.
Change in compensation expenses is the result of the reduction in headcount since June 30, 2016. Rent and occupancy related expenses have decreased as Prosper has ceased the use of or terminated a number of leases for office space.
Changes in the Fair Value of Convertible Preferred Stock Warrants
ChangesChange in the Fair Value of Convertible Preferred Stock warrants increased $6.3Warrants was a gain of $19.5 million and $29.1$75.0 million infor the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, over the comparable prior period. There were no such warrants outstandingdue to a decrease in the three and nine months ended September 30, 2016.
Restructuring Charges
Restructuring costs consist of personnel and facilities related costs related to the strategic restructuring of the business that Prosper announced on May 3, 2016. For the three months and nine months ended September 30, 2017, the expenses relate to adjustments to fair value of the existing liabilities and accretion expense on the remaining liability. For the three and nine months ended September 30, 2016 the expense relates to the restructuring that Prosper announcedunderlying Convertible Preferred Stock during these periods. Change in May 2016.
Other Expenses
Other expenses includes primarily impairment charges on assets held for sale and interest income. During the nine months ended September 30, 2017, Prosper management marketed the assets related to the Prosper Daily application and, as a result, the related assets were marked down to fair value less costs to sell, resulting in an additional impairment charge of $6.4 million. Additionally, during the nine months ended September 30, 2017, Prosper settled certain rebates related to the purchase of whole loans by members of the Consortium prior to the closing of the Consortium transaction via the issuanceFair Value of Convertible Preferred Stock Warrants atwas a gain of $4.7 million for the three months ended June 30, 2019, due to a decrease in the fair value of the underlying Convertible Preferred Stock for the period. For the six months ended June 30, 2019, Change in Fair Value of Convertible Preferred Stock Warrants was a loss of $1.5$5.3 million, overdue to an increase in the fair value of the underlying Convertible Preferred Stock for that period.
Impairment Expense
We recorded a $0.2 million impairment charge for the three months ended June 30, 2020 related to our operating lease right-of-use assets. This impairment was triggered by the non-renewal of certain sublease agreements for a portion of our office space.
Other Income, Net
Other Income, Net for the three and six months ended June 30, 2020 primarily consists of interest income on cash settlement amount.and cash equivalents, as well as sublease income. The decrease in Other Income, Net for the three and six months ended June 30, 2020, as compared to the corresponding period in 2019, was primarily due to declines in interest income, as interest rates declined in 2020 and our outstanding cash, cash equivalents and available for sale investments (which matured in 2019) all decreased from the prior year. For the three and six months ended June 30, 2020 interest income decreased $0.3 million and $0.5 million as compared to the corresponding periods in 2019.
Non-GAAP Financial Measures
Core Revenue
Core Revenue is a non-GAAP financial measure that we define as our Total Net Revenue adjusted to exclude the Fair Value of Warrants Vested on Sale of Borrower Loans. We believe it is useful to exclude the Fair Value of Warrants Vested on Sale of Borrower Loans from Total Net Revenue to derive a better measurement of our business performance. We believe that this adjustment also affords greater comparability to other marketplace lenders.
The underlying Fair Value of Warrants Vested on the Sale of Borrower Loans relates to the Consortium Purchase Agreement. This agreement expired in May 2019 and we currently do not expect to sign a similar agreement to replace it. As a result, we believe that providing the Core Revenue metric that excludes the impact of Fair Value of Warrants Vested on Sale of Borrower Loans is useful to investors.
Core Revenue has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for Total Net Revenue which has been prepared in accordance with U.S. GAAP. These limitations include the following:
•Core Revenue is net of Fair Value of Warrants Vested on Sale of Borrower Loans, which was historically our largest contra revenue item (no amount has been recorded since May 2019, when the Consortium Purchase Agreement ended); and
•Other companies, including companies in our industry, may calculate Core Revenue differently or not at all, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Core Revenue alongside other financial performance measures, including Total Net Revenue and our financial results presented in accordance with U.S. GAAP. The following table presents a reconciliation of Total Net Revenue to Core Revenue for each of the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Total Net Revenues | $ | 26,257 | | | $ | 42,930 | | | $ | 29,502 | | | $ | 73,008 | |
| Less: Fair Value of Warrants Vested on Sale of Borrower Loans | — | | | (7,805) | | | — | | | (17,553) | |
| Core Revenue | $ | 26,257 | | | $ | 50,735 | | | $ | 29,502 | | | $ | 90,561 | |
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as Net LossIncome (Loss) adjusted for interest income on availableAvailable for sale securitiesSale Investments and cashCash and cash equivalents, income tax expense,Cash Equivalents, SEC Settlement Costs, Income Tax Expense, depreciation and amortization, impairment of intangiblelong-lived assets stock basedand Goodwill, stock-based compensation expense, fair valueFair Value of warrants vestedWarrants Vested on the saleSale of borrower loans, restructuring charges,Borrower Loans, Restructuring Charges, and fair value adjustments for warrant liabilities.Change in Fair Value of Convertible Preferred Stock Warrants. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.
We consider Adjusted EBITDA to be a helpful indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Management uses Adjusted EBITDA to, among other things, understand and compare operating results across accounting periods, evaluate our operations and financial performance and for internal planning and forecasting purposes. Inclusion of Adjusted EBITDA is intended to provide investors insight into the manner in which management views the performance of the Company, enhance investors’ evaluation of our operating results, and to facilitate meaningful comparisons of our results between periods. These non-GAAP financial measures should not be considered an alternative to, or more meaningful than, the GAAP financial information provided herein.
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under USU.S. GAAP. Some of these limitations are:
although•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not consider the potentially dilutive impact of equity-based charges;
•Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
other•Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
The major non-GAAP adjustments, and our basis for excluding them, are outlined below:
•Fair value of warrants vested on the sale of borrower loansBorrower Loans and change in the fair value of convertible preferred stock warrants liability. We exclude these charges primarily because they are non-cash charges and the fair value varies based on the fair value of the underlying preferred stock, varying valuation methodologies and subjective assumptions. ThisTheir inclusion makes the comparison of our current financial results to previous and future periods difficult to evaluate.
Stock-based•Stock-based compensation expense. This consists of expenses for equity awards under our equity incentive plans. Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to evaluate;evaluate; therefore, we believe it is useful to exclude stock-based compensation. We also excluded these expenses because they are non-cash.
•Amortization or impairment of acquired intangible assets and impairment of goodwill. We incur amortization or impairment of acquired intangible assetsIntangible Assets and goodwillGoodwill in connection with acquisitions and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.
Restructuring charges - We have incurred restructuring charges that are included in our GAAP financial statements, related to workforce reductions and estimated costs of exiting facility lease commitments due to our May 2016 restructuring. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or historical operations of our business.70
The following table presents a reconciliation of Net LossIncome (Loss) to Adjusted EBITDA for each of the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net Income (Loss) | $ | 17,641 | | | $ | (569) | | | $ | 38,771 | | | $ | (23,283) | |
| Fair Value of Warrants Vested on Sale of Borrower Loans | — | | | 7,805 | | | — | | | 17,553 | |
| Depreciation expense: | | | | | | | |
| Servicing and Origination | 1,413 | | | 1,276 | | | 2,782 | | | 2,422 | |
| General and Administration - Other | 567 | | | 527 | | | 1,149 | | | 1,181 | |
| Amortization of Intangibles | 55 | | | 70 | | | 110 | | | 140 | |
| Impairment of Operating Lease Right-of-Use Assets | 228 | | | — | | | 228 | | | — | |
| Stock-Based Compensation | 392 | | | 1,235 | | | 897 | | | 2,850 | |
| Restructuring Charges | — | | | 4 | | | — | | | 86 | |
| Change in the Fair Value of Warrants | (19,549) | | | (4,729) | | | (74,998) | | | 5,327 | |
| Interest Income on Available for Sale Securities, Cash and Cash Equivalents | (11) | | | (317) | | | (179) | | | (646) | |
| Income Tax Expense | 34 | | | 29 | | | 68 | | | 58 | |
| Adjusted EBITDA | $ | 770 | | | $ | 5,331 | | | $ | (31,172) | | | $ | 5,688 | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net Loss | $ | (26,940 | ) | | $ | (17,417 | ) | | $ | (92,366 | ) | | $ | (70,509 | ) |
Fair Value of Warrants Vested on Sale of Borrower Loans
| 21,772 |
| | — |
| | 41,966 |
| | — |
|
| Depreciation expense: |
|
| |
|
| |
|
| |
|
|
| Servicing and Origination | 1,676 |
| | 1,076 |
| | 4,313 |
| | 2,940 |
|
| General & Administration - Other | 1,279 |
| | 1,380 |
| | 3,883 |
| | 3,971 |
|
| Amortization of Intangibles | 177 |
| | 1,007 |
| | 1,207 |
| | 2,982 |
|
| Impairment of Intangibles | 67 |
| | — |
| | 6,374 |
| | — |
|
| Stock-based Compensation | 2,839 |
| | 5,670 |
| | 9,651 |
| | 17,136 |
|
| Restructuring Charges | 86 |
| | (470 | ) | | 504 |
| | 14,153 |
|
| Change in the Fair Value of Warrants | 6,323 |
| | — |
| | 29,140 |
| | — |
|
| Interest Income on Available for Sale Securities, Cash and Cash Equivalents | (93 | ) | | (124 | ) | | (231 | ) | | (442 | ) |
| Income Tax Expense | 85 |
| | 74 |
| | 346 |
| | 344 |
|
| Adjusted EBITDA | $ | 7,271 |
| | $ | (8,804 | ) | | $ | 4,787 |
| | $ | (29,425 | ) |
Expenses on the Condensed Consolidated Statementcondensed consolidated statements of Operationsoperations include the following amountamounts of stock basedstock-based compensation for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Origination and Servicing | $ | 34 | | | $ | 108 | | | $ | 72 | | | $ | 304 | |
| Sales and Marketing | 15 | | | 63 | | | 26 | | | 145 | |
| General and Administrative | 343 | | | 1,064 | | | 799 | | | 2,401 | |
| Total Stock-Based Compensation | $ | 392 | | | $ | 1,235 | | | $ | 897 | | | $ | 2,850 | |
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| Origination and servicing | $ | 225 |
| | $ | 518 |
| $ | 770 |
| | $ | 1,536 |
|
| Sales and marketing | 135 |
| | 639 |
| 446 |
| | 2,271 |
|
| General and administrative | 2,479 |
| | 4,513 |
| 8,435 |
| | 13,329 |
|
| Total stock based compensation | $ | 2,839 |
| | $ | 5,670 |
| $ | 9,651 |
| | $ | 17,136 |
|
Liquidity and Capital Resources
The following table summarizes Prosper’s cash flow activities for the nine months ended September 30, 2017We anticipate that our available funds, Warehouse Lines, and 2016 (in thousands):
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| Net Loss | $ | (92,366 | ) | | $ | (70,509 | ) |
| Net cash used in operating activities | (1,715 | ) | | (47,522 | ) |
| Net cash provided by (used in) investing activities | 89 |
| | (23,280 | ) |
| Net cash provided by financing activities | 52,315 |
| | 36,360 |
|
| Net increase (decrease) in cash and cash equivalents | 50,689 |
| | (34,442 | ) |
| Cash and cash equivalents at the beginning of the period | 22,337 |
| | 66,295 |
|
| Cash and cash equivalents at the end of the period | $ | 73,026 |
| | $ | 31,853 |
|
Net cash increased for the nine months ended September 30, 2017 primarily due to the net $47.9 million proceeds raised from the sale of Series G Convertible Preferred Stock, $4.8 million of net income, net of non-cash items, and net maturity and sales of $8.2 million in available for sale securities, partially offset by $3.3 million reduction in Accounts Payable and Accrued Liabilities, $2.4 million increase in prepaid expenses and a $3.0 million scheduled payment to reduce our settlement liability. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties, which is included in cash flow from operations will be sufficient to meet our operational cash needs for at least the next 12 months. However, there remains significant uncertainty regarding the future impact of the COVID-19 outbreak on our financial condition and liquidity. As more fully described in Note 10, Debt, to the accompanying condensed consolidated financial statements and the Recent Developments section above, we have taken actions to optimize our liquidity, which include obtaining an $8.4 million loan under the PPP, deferring certain payroll taxes, implementing salary reductions for all employees with annualized base salaries greater than certain minimum thresholds effective May 1, 2020, suspending certain benefits such as 401(k) match for all employees effective July 1, 2020, reducing third-party operating activities alongcosts and limiting discretionary expenses where possible. We have applied the PPP loan proceeds towards payroll costs, rent and utilities in accordance with the corresponding proceeds from salerelevant terms and conditions of Borrower Loans), offset by repayment of Borrower Loans and the net $8.2 million of available for sale securities that have been converted into cash. Net cash provided by financing activities primarily represents proceeds from the sale of Series G convertible preferred stock and the issuance of Notes, partially offset by payments on Notes.
CARES Act.
The following table summarizes Prosper’s cash flow activities for the three months ended SeptemberJune 30, 20172020 and 20162019 (in thousands):
|
| | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| Net Loss | $ | (26,940 | ) | | $ | (17,417 | ) |
| Net cash provided by (used in) operating activities | 9,881 |
| | (4,237 | ) |
| Net cash used in investing activities | (17,653 | ) | | (3,898 | ) |
| Net cash provided by financing activities | 46,131 |
| | 11,164 |
|
| Net increase (decrease) in cash and cash equivalents | 38,359 |
| | 3,029 |
|
| Cash and cash equivalents at the beginning of the period | 34,667 |
| | 28,824 |
|
| Cash and cash equivalents at the end of the period | $ | 73,026 |
| | $ | 31,853 |
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 |
| Net Income (Loss) | $ | 17,641 | | | $ | (569) | |
| | | |
| Net cash used in operating activities | (31,936) | | | (17,712) | |
| Net cash provided by investing activities | 43,047 | | | 20,517 | |
| Net cash (used in) provided by financing activities | (15,551) | | | 13,323 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (4,440) | | | 16,128 | |
| Cash, cash equivalents and restricted cash at the beginning of the period | 194,333 | | | 212,986 | |
| Cash, cash equivalents and restricted cash at the end of the period | $ | 189,893 | | | $ | 229,114 | |
Net cash increased
Cash, Cash Equivalents and Restricted Cash decreased by $4.4 million for the three months ended SeptemberJune 30, 20172020, based on the following components:
Operating Activities: $31.9 million in cash was used in operating activities, driven by (a) $46.4 million in net Purchases of Loans Held for Sale, offset by (b) $9.7 million in cash from working capital, primarily due to the $6.5timing of payments to investors, and (c) $4.8 million ofin net income, net of non-cash items and the net $47.9items.
Investing Activities: $43.0 million raised through the sale of Series G Convertible Preferred Stock. The increasein cash was provided by investing activities due to (a) $69.3 million in principal payments on Borrower Loans, offset by the net purchase of $16.6(b) $24.4 million of available for sale securities. Net cash used in investing primarily represents purchases of available for sale securitiesBorrower Loans and (c) $1.9 million in purchases of property and equipment. Netequipment, primarily consisting of internal-use software.
Financing Activities: $15.6 million in cash was used in financing activities, due to (a) $12.1 million in net payments on Notes Held at Fair Value and (b) $56.5 million in payments on Notes and Certificates Issued by Securitization Trusts, offset by (c) $44.6 million in net proceeds from Warehouse Lines and (d) $8.4 million in proceeds from the PPP loan.
Cash, Cash Equivalents and Restricted Cash increased $16.1 million for the three months ended June 30, 2019 based on the following components:
Operating Activities: $17.7 million in cash was used in operating activities, driven by (a) $26.2 million in net Purchases of Loans Held for Sale, and (b) $2.0 in cash used for working capital, primarily due to the timing of payments to investors, offset by (c) $8.9 million in net income, net of non-cash items.
Investing Activities: $20.5 million in cash was provided by investing activities, due to (a) $61.8 million in principal payments on Borrower Loans and (b) $4.3 million in maturities on Available for Sale Securities, offset by (c) $41.8 million in purchases of Borrower Loans, (d) $1.4 million in purchases of Available for Sale Securities and (e) $2.2 million in purchases of property and equipment, primarily consisting of internal-use software.
Financing Activities: $13.3 million in cash was provided by financing activities, primarily representsdriven by $37.7 million in proceeds from Warehouse Lines and $4.3 million in proceeds from a securitization issuance, partially offset by $26.6 million in principal payments on Notes and Certificates Issued by Securitization Trusts and $2.2 million in debt issuance costs.
The following table summarizes Prosper’s cash flow activities for the six months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| Net Income (Loss) | $ | 38,771 | | | $ | (23,283) | |
| | | |
| Net cash used in operating activities | (50,212) | | | (49,334) | |
| Net cash provided by investing activities | 79,312 | | | 36,627 | |
| Net cash (used in) provided by financing activities | (59,615) | | | 34,762 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (30,515) | | | 22,055 | |
| Cash, cash equivalents and restricted cash at the beginning of the period | 220,408 | | | 207,059 | |
| Cash, cash equivalents and restricted cash at the end of the period | $ | 189,893 | | | $ | 229,114 | |
Cash, Cash Equivalents and Restricted Cash decreased by $30.5 million for the six months ended June 30, 2020, based on the following components:
Operating Activities: $50.2 million in cash was used in operating activities, driven by (a) $53.7 million in net Purchases of Loans Held for Sale and (b) $9.3 million in cash used for working capital, primarily due to the timing of payments for Accounts Payable and Accrued Liabilities, offset by (c) $12.8 million in net income, net of non-cash items.
Investing Activities: $79.3 million in cash was provided by investing activities due to (a) $150.3 million in principal payments on Borrower Loans, offset by (b) $65.7 million in purchases of Borrower Loans and (c) $5.3 million in purchases of property and equipment, primarily consisting of internal-use software.
Financing Activities: $59.6 million in cash was used in financing activities, due to (a) $12.1 million in net payments on Notes Held at Fair Value and (b) $123.3 million in payments on Notes and Certificates Issued by Securitization Trusts, offset by (c) $67.3 million in net proceeds from Warehouse Lines and (d) $8.4 million in proceeds from the salePPP loan.
Cash, Cash Equivalents and Restricted Cash increased $22.1 million for the six months ended June 30, 2019 based on the following components:
Operating Activities: $49.3 million in cash was used in operating activities, driven by (a) $52.4 million in net Purchases of Series G convertible preferred stock. Loans Held for Sale, and (b) $11.3 million in cash used for working capital, primarily due to the timing of payments to investors, offset by (c) $14.4 million in net income, net of non-cash items.
Prosper also has availableInvesting Activities: $36.6 million in cash was provided by investing activities, due to (a) $106.9 million in principal payments on Borrower Loans and (b) $22.3 million in maturities on Available for sale securities that are availableSale Securities, offset by (c) $86.1 million in purchases of Borrower Loans, (d) $1.5 million in purchases of Available for its liquidity needs. The fair valueSale Securities and (e) $5.0 million in purchases of securities available for sale asproperty and equipment, primarily consisting of September 30, 2017internal-use software.
Financing Activities: $34.8 million in cash was $24.6 million. As a resultprovided by financing activities, primarily driven by $69.4 million in proceeds from Warehouse Lines and $5.5 million in proceeds from securitization issuances, partially offset by $34.5 million in principal payments on Notes and Certificates Issued by Securitization Trusts and $6.6 million in debt issuance costs.
Due to volatility in the total cash, cash equivalents and available for sale investments availablefinancial markets brought on by the COVID-19 outbreak, we may not be able to Prosper at September 30, 2017 for itsaccess the securitization market in the near future. Despite this, we believe our liquidity needs was $97.6 million. At September 30, 2017, the available for sale securities included US treasury securities, corporate debt securities, corporate bonds and agency bonds. All securities were rated or carried implied ratings equal to investment grade (defined as a rating equivalent to a Moody’s rating of “Baa3” or higher, or a Standard & Poor’s rating of “BBB-” or higher) and there were no significant unrealized losses. These securities provided $0.1 million ofare met through transaction fees, servicing fees, net interest income, forproceeds from sales of loans and interests in existing securitization transactions, draws on Warehouse Lines, proceeds from the three months ending September 30, 2017. These securities continuePPP loan and Cash and Cash Equivalents. Management is continuing to monitor the impact of the COVID-19 pandemic on our financial results and operations. If the financial results anticipated are not achieved, whether due to COVID-19 or otherwise, our sources of liquidity may not be sufficient to meet our operating and liquidity requirements without obtaining additional liquidity which may not be available to meet liquidity needs.on favorable terms or at all.
Income Taxes
Prosper recognizes benefits from uncertainWe use the liability method of accounting for income taxes. Under this method, deferred tax positions only if it believes that it is more likely than not thatassets and liabilities are recognized by applying the statutory tax position will be sustained on examination byrates in effect in the taxing authorities based onyears in which the technical meritsdifferences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the position.
Given Prosper’s history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of theneed for a valuation allowance against our deferred tax benefits of future deductions for its net operating loss carry-forwards.assets. Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, Prosper has recordedwe have provided a full valuation allowance against itsour net deferred tax assets.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The application of income tax expense relateslaw is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are required to statemake subjective assumptions and judgments regarding our income tax expenseexposures. 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 amortizationconsolidated balance sheets and statements of goodwill from the acquisition of PHL for tax purposes which gives rise to an indefinite-lived deferred tax liability.operations.
Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, Prosper is a variablewe are an interest holder in certain special purposespurpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as Prosper iswe are not the primary beneficiary. Other than these special purpose entities, as of June 30, 2020, we did not have any relationships with
unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Critical Accounting Policies
Certain of Prosper's accounting policies that involve a higher degree of judgment and complexity are discussed in Part II, - Item 7, - Management's“Management's Discussion and Analysis of Financial Condition and Results of Operation - Operations—Critical Accounting EstimatesEstimates” in Prosper’s Annual Report on Form 10-K.10-K for the year ended December 31, 2019. There have been no significant changes to these critical accounting estimates during the first ninesix months of 2017.
2020.
PROSPER FUNDING LLC
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper Funding’s historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper Funding’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Prosper Funding was formed in the state of Delaware onin February 17, 2012 as a limited liability company with PMI as its sole equity member being PMI.member. Prosper Funding was formed by PMI to hold Borrower Loans originated through the Note Channel and issue related Notes. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and by implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI.
PFL formed PAH on October 4, 2013 as a limited liability company with the sole equity member being PFL. PAH was formed to purchase certain Borrower Loans from PFL and, sell them to certain participants in the Whole Loan Channel. PFL formed Prosper Depositor LLC on March 29, 2017 as a limited liability company with the sole equity member being PFL.
As a credit marketplace, we believe our customers are more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate onin our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
A novel strain of coronavirus, known as SARS-CoV-2, which causes COVID-19, first surfaced in December 2019. COVID-19 continues to spread globally and the World Health Organization has declared the COVID-19 outbreak to be a global pandemic. The COVID-19 outbreak has led to federal, state and local governments enacting various restrictions in an attempt to limit the spread of the virus, including declaration of a federal National State of Emergency, multiple cities and states declaring states of emergency, school and business closings, limitations on social or public gatherings and other social distancing measures, such as working remotely, travel restrictions, quarantines and shelter in place orders. While state and local governments across the U.S. have been in various stages of easing shelter-in-place orders and other restrictions, officials continue to monitor rates of infection and hospitalization, and summertime surges in COVID-19 cases threaten many states’ plans to reopen. The financial markets, which have been recovering from the steep declines seen in February and March 2020, are experiencing continued trading volatility as a result of the pandemic and related economic disruption. In addition, unemployment rates remain high, and U.S. gross domestic product contracted at a record annualized 32.9% rate during the second quarter of 2020.
In response to the economic and financial effects of COVID-19, the Federal Reserve has sharply reduced interest rates and instituted quantitative easing measures as well as domestic and global capital market support programs, and the Trump Administration and Congress enacted fiscal measures to address the economic and social consequences of the pandemic, including the CARES Act, which was signed into law on March 27, 2020. The CARES Act includes, among other matters, expanded eligibility for Small Business Administration loans under a new Paycheck Protection Program (“PPP loans”), provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits, and technical corrections to tax depreciation methods for qualified improvement property. As disclosed above in Note 10, Debt, to Prosper’s Notes to Consolidated Financial Statements, Prosper has obtained a PPP loan in the amount of $8.4 million, which we applied towards payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. The Company is also deferring applicable payroll taxes as permitted under the CARES Act.
Prosper is also actively tracking the impact of COVID-19 on our communities, and offering assistance to qualified borrowers who are facing financial hardship as a result of the COVID-19 pandemic. These relief options include, among other things, the ability to delay up to four monthly loan payments, the ability to reduce minimum monthly payments for up to six months and extend the term of the loan by up to 11 months, and waived late and non-sufficient funds fees. Since COVID-19 relief was first offered in March 2020, approximately 13% of our outstanding loan balances on a cumulative basis have enrolled
in at least one of these COVID-19 relief programs. Approximately four percent of our outstanding loan balances are actively enrolled in at least one relief program as of August 3, 2020. Currently, approximately 90% of borrowers graduating from payment delay relief have either made a loan payment or enrolled in our payment reduction program. Overall requests for COVID-19 relief are declining; however, enrollment may continue as long as the pandemic continues to trigger increased work stoppages and unemployment. Prosper is also complying with new state mandates that may temporarily impact collections activity with respect to delinquent loans.
Over the last few years, Prosper has been tightening credit and focusing on borrowers’ ability and intent to pay in order to generate sustainable and attractive risk-adjusted returns for our investors. In light of changes in the economic environment caused by COVID-19, we have taken additional actions to actively manage investor returns and adapt to this rapidly changing environment. As a result, we have seen a significant reduction in approved loan listings with higher risk C, D, E or HR Prosper Ratings.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. While marketplace activity has declined as a result of COVID-19, it is uncertain as to the full magnitude that the pandemic will have on our workforce, financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of COVID-19. Although Prosper cannot predict the length or gravity of the impacts of these events at this time, if the pandemic continues for an extended period of time, it may have a material adverse effect on our results of future operations, financial position, and liquidity.
Results of Operations
Overview
The following table summarizestables summarize Prosper Funding’s net income for the three months and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Total Net Revenues | $ | 11,119 | | | $ | 19,341 | | | $ | (8,222) | | | (43) | % |
| Total Expenses | 10,744 | | | 18,111 | | | (7,367) | | | (41) | % |
| Net Income | $ | 375 | | | $ | 1,230 | | | $ | (855) | | | (70) | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Total Net Revenue | $ | 22,116 |
| | $ | 14,230 |
| | $ | 7,886 |
| | 55 | % |
| Total Expenses | 20,817 |
| | 13,959 |
| | 6,858 |
| | 49 | % |
| Net Income (Loss) | $ | 1,299 |
| | $ | 271 |
| | $ | 1,028 |
| | 379 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Total Net Revenues | $ | 26,278 | | | $ | 36,787 | | | $ | (10,509) | | | (29) | % |
| Total Expenses | 24,355 | | | 34,266 | | | (9,911) | | | (29) | % |
| Net Income | $ | 1,923 | | | $ | 2,521 | | | $ | (598) | | | (24) | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Total Net Revenue | $ | 61,961 |
| | $ | 56,321 |
| | $ | 5,640 |
| | 10 | % |
| Total Expenses | 58,670 |
| | 53,721 |
| | 4,949 |
| | 9 | % |
| Net Income | $ | 3,291 |
| | $ | 2,600 |
| | $ | 691 |
| | 27 | % |
Total net revenuerevenues for the three months ended SeptemberJune 30, 2017 increased $7.92020 decreased $8.2 million, a 55% increase43% decrease from the three months ended SeptemberJune 30, 2016,2019, primarily due to the increaseddecreased number of loan listings on the marketplace during the quarter,period, which resulted in increaseddecreased administration fee revenue for the listing drivenlisting-driven portion of the administrationsuch fee. Additionally the administration fee increased due to increased administration fees in relation to rebates given to purchasers of borrower loans. Total expenses for the three months ended SeptemberJune 30, 2017 increased $6.92020 decreased $7.4 million, a 49% increase41% decrease from the three months ended SeptemberJune 30, 2016,2019, primarily due to higher corporate administration fees related to the listing driven portiondecreased origination volume of Borrower Loans during the current quarter.period. The decreases in loan listings and originations are due to reduced investor demand, tighter underwriting and higher borrower rates starting in March 2020 to address the negative economic impact of the COVID-19 outbreak.
Total net revenuerevenues for the ninesix months ended SeptemberJune 30, 2017 increased $5.62020 decreased $10.5 million, a 10% increase29% decrease from the ninesix months ended SeptemberJune 30, 2016,2019, primarily due to the increaseddecreased number of loan listingslisting on the marketplace during the quarter,period, which resulted in increaseddecreased administration fee revenue for the listing drivenlisting-driven portion of the administrationsuch fee. Total expenses for the ninesix months ended SeptemberJune 30, 2017 increased $4.92020 decreased $9.9 million, a 9% increase29% decrease from the ninesix months ended SeptemberJune 30, 2016,2019, primarily due to higher corporate administration fees related to the listing driven portiondecreased origination volume of Borrower Loans during the current period. The decreases in loan listings and originations are due to increased competition in early 2020 followed by reduced investor demand, tighter underwriting and higher borrower rates starting in March 2020 to address the negative economic impact of the COVID-19 outbreak.
Revenues
The following tables summarizesummarizes Prosper Funding’s revenue for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Operating Revenues: | | | | | | | |
| Administration Fee Revenue - Related Party | $ | 3,740 | | | $ | 16,640 | | | $ | (12,900) | | | (78) | % |
| Servicing Fees, Net | 5,257 | | | 6,231 | | | (974) | | | (16) | % |
| Gain (Loss) on Sale of Borrower Loans | 1,182 | | | (4,053) | | | 5,235 | | | (129) | % |
| Other Revenues | 165 | | | (14) | | | 179 | | | n/m |
| Total Operating Revenues | 10,344 | | | 18,804 | | | (8,460) | | | (45) | % |
| Interest Income on Borrower Loans | 9,309 | | | 10,403 | | | (1,094) | | | (11) | % |
| Interest Expense on Notes | (8,728) | | | (9,735) | | | 1,007 | | | (10) | % |
| Net Interest Income | 581 | | | 668 | | | (87) | | | (13) | % |
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net | 194 | | | (131) | | | 325 | | | n/m |
| Total Net Revenue | $ | 11,119 | | | $ | 19,341 | | | $ | (8,222) | | | (43) | % |
|
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Revenues | |
| | |
| | |
| | |
|
| Operating Revenues | |
| | |
| | |
| | |
|
| Administration Fee Revenue - Related Party | $ | 32,198 |
| | $ | 5,530 |
| | 26,668 |
| | 482 | % |
| Servicing Fees, Net | 6,626 |
| | 7,026 |
| | (400 | ) | | (6 | )% |
| Gain (Loss) on Sale of Borrower Loans | (17,399 | ) | | 761 |
| | (18,160 | ) | | (2,386 | )% |
| Other Revenues | 45 |
| | 30 |
| | 15 |
| | 50 | % |
| Total Operating Revenues | 21,470 |
| | 13,347 |
| | 8,123 |
| | 61 | % |
| Interest Income on Borrower Loans | 12,066 |
| | 11,566 |
| | 500 |
| | 4 | % |
| Interest Expense on Notes | (11,247 | ) | | (10,636 | ) | | (611 | ) | | 6 | % |
| Net Interest Income | 819 |
| | 930 |
| | (111 | ) | | (12 | )% |
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net | (173 | ) | | (47 | ) | | (126 | ) | | 268 | % |
| Total Revenue | $ | 22,116 |
| | $ | 14,230 |
| | 7,886 |
| | 55 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Operating Revenues: | | | | | | | |
| Administration Fee Revenue - Related Party | $ | 9,575 | | | $ | 33,615 | | | $ | (24,040) | | | (72) | % |
| Servicing Fees, Net | 11,716 | | | 12,876 | | | (1,160) | | | (9) | % |
| Gain (Loss) on Sale of Borrower Loans | 3,182 | | | (10,879) | | | 14,061 | | | (129) | % |
| Other Revenues | 345 | | | 43 | | | 302 | | | n/m |
| Total Operating Revenues | 24,818 | | | 35,655 | | | (10,837) | | | (30) | % |
| Interest Income on Borrower Loans | 19,147 | | | 20,734 | | | (1,587) | | | (8) | % |
| Interest Expense on Notes | (17,944) | | | (19,384) | | | 1,440 | | | (7) | % |
| Net Interest Income | 1,203 | | | 1,350 | | | (147) | | | (11) | % |
| Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net | 257 | | | (218) | | | 475 | | | n/m |
| Total Net Revenue | $ | 26,278 | | | $ | 36,787 | | | $ | (10,509) | | | (29) | % |
n/m: not meaningful
|
| | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Revenues | |
| | | | |
| | |
|
| Operating Revenues | |
| | |
| | |
| | |
|
| Administration Fee Revenue - Related Party | $ | 74,661 |
| | $ | 27,878 |
| | 46,783 |
| | 168 | % |
| Servicing Fees, Net | 19,027 |
| | 21,650 |
| | (2,623 | ) | | (12 | )% |
| Gain (Loss) on Sale of Borrower Loans | (34,108 | ) | | 3,865 |
| | (37,973 | ) | | (982 | )% |
| Other Revenues | 109 |
| | 448 |
| | (339 | ) | | (76 | )% |
| Total Operating Revenues | 59,689 |
| | 53,841 |
| | 5,848 |
| | 11 | % |
| Interest Income on Borrower Loans | 35,572 |
| | 33,062 |
| | 2,510 |
| | 8 | % |
| Interest Expense on Notes | (33,102 | ) | | (30,456 | ) | | (2,646 | ) | | 9 | % |
| Net Interest Income | 2,470 |
| | 2,606 |
| | (136 | ) | | (5 | )% |
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net | (198 | ) | | (126 | ) | | (72 | ) | | 57 | % |
| Total Revenue | $ | 61,961 |
| | $ | 56,321 |
| | 5,640 |
| | 10 | % |
Administration Fee Revenue - Related Party
Prosper Funding primarily generates revenue through license fees it earns under its Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper FundingPFL to PMI that entitles PMI to use the marketplace for, and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement. Effective July 1, 2016 theThe Administration Agreement was amended. The amendments included amendingrequires PMI to pay PFL a monthly license fee that is partially based on the License Fee to includenumber of loan listings posted on the marketplace in that month, as well as a fixed monthlyrebate fee alongside a reduced variable fee and the introduction of a Rebates Fee related tobased on rebates given to investors.investors as an incentive to purchase Borrower Loans from PFL. The increasedecrease in Administrative Fee Revenue of $12.9 million for the three months ended SeptemberJune 30, 20172020, as compared to the corresponding period in 2019, was primarily due to (a) a decrease in license fees owing to fewer loan listings generated on the result of an increasemarketplace during the period, and (b) a decrease in the listing driven portionrebate fee to zero due to the fact that no additional rebates were provided under the Consortium Purchase Agreement after it ended in May 2019. The decrease in Administrative Fee Revenue of administration$24.0 million for the six months ended June 30, 2020, as compared to the corresponding period in 2019, was primarily due to (a) a decrease in license fees asowing to fewer loan listings generated on the marketplace during the period, and (b) a result of higher listingsdecrease in the three monthsrebate fee to zero due to the fact that no additional rebates were provided under the Consortium Purchase Agreement after it ended September 30, 2017 and the above changes in the administration agreement, which was designed to compensate Prosper Funding for any rebates offered to whole loan investors. The increase for the nine months ended September 30, 2017, was driven by an increase in the listing driven portion of administration fees as a result of higher listings in the nine months ended September 30, 2017 and was the result of the above changes in the administration agreement, which was designed to compensate Prosper Funding for any rebates offered to whole loan investors.May 2019.
Servicing Fee Revenue,Fees, Net
Prosper Funding earns a fee from investorsInvestors who purchase Borrower Loans from Prosper Funding through the Whole Loan Channel for servicing such loans on their behalf. Thetypically pay Prosper Funding a servicing fee, compensates Prosper Funding for the costs it incurs in servicing these Borrower Loans, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Historically, the servicing fee has been generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has beenwhich is currently set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower LoanLoans prior to applying the current payment. The decreaseservicing fee compensates Prosper Funding for the costs incurred in servicing fees wasthe Borrower Loans, including managing payments from borrowers, managing payments to investors and maintaining investors’ account portfolios. Prosper Funding records Servicing Fees from investors as a component of operating revenue when received. The decreases in Servicing Fees of $1.0 million and $1.2 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding period in 2019, were primarily due to the decrease inlower outstanding balances of Borrower Loans being serviced as a result ofin the decrease in loan originations in 2016.servicing pool.
Gain (Loss) on Sale of Borrower Loans
Gain (Loss) on Sale of Borrower Loans consists of net gains (losses)and losses on Borrower Loans sold through the Whole Loan Channel. The increase in theThis account went from a loss of $4.1 million for the three months ended SeptemberJune 30, 20172019 to a $1.2 million gain for the three months ended June 30, 2020. This $5.2 million increase was due to increase in rebates offered to certain whole loan investors to facilitate the sale of large volumes of Borrower Loans through the Whole Loan Channel. The increase in rebates of $21.3 million is primarily due to warrantsthe fact that no rebates were issued by PMI in relationrelated to the agreement with the Consortium that was reached in 2017 that results in warrants for convertible preferred stock vestingthe three months ended June 30, 2020, as loans are purchased by the Consortium.
The increaserelated Consortium Purchase Agreement ended in the lossMay 2019. These rebates totaled $7.8 million for the ninethree months ended SeptemberJune 30, 20172019. This account went from a loss of $10.9 million for the six months ended June 30, 2019 to a $3.2 million gain for the six months ended June 30, 2020. This $14.1 million increase was due to increase in rebates offered to certain whole loan investors to facilitate the sale of large volumes of Borrower Loans through the Whole Loan Channel. The increase in rebates of $42.6 million is primarily due to warrantsthe fact that no rebates were issued by PMI in relationrelated to the agreement with the Consortium that was reached in 2017 that results in warrants for convertible preferred stock vestingthe six months ended June 30, 2020, as loans are purchased by the Consortium. related Consortium Purchase Agreement ended in May 2019. These rebates totaled $17.6 million for the six months ended June 30, 2019.
Other RevenueRevenues
Other revenueRevenues consists primarily of fees earned from assistingfacilitating securitizations for whole loan purchasers, with securitizationswhich are recognized over the term of their holdings. Thethe underlying securitization, as well as the impact of changes in the reserve for loan repurchases and other revenuesmiscellaneous items.. Other Revenues for the three and six months ended June 30, 2020 were not considered to be material. significant.
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper Funding recognizes interest income on Borrower Loans fundedoriginated through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes itthem to be collectible.collectable. Prosper Funding also records interest expense on the corresponding Notes using the accrual method based on the contractual interest rates. The interest rate charged on athe Borrower LoanLoans is generally 1% higher than the interest rate paid on the corresponding Notes in order to compensate Prosper Funding for servicing the Borrower Loan. This is recorded in interest income.Loans.
Overall, the increasedecreases in net interest income for the three and six months ended June 30, 2020, as compared to the same periods above was primarily driven by the increase in volume of2019, were not significant.
Change in Fair Value on Borrower Loans, funded through the Note Channel.Loans Held for Sale and Notes, Net
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net
TheNet captures changes in fair value of Borrower Loans, Loans Held for Sale and Notes are estimatedestimates using discounted cash flow methodologies that are based upon a set of valuation assumptions. The mainkey assumptions used to value such Borrower Loans, Loans Held for Sale and Notesin
these valuations include default and prepayment rates derived primarily from historical performance, and discount rates.rates based on estimates of the rates of return that investors would require when investing in other financial instruments with similar characteristics. Changes in fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of the corresponding Notes due to the borrower payment dependent structure. Loans Held for Sale are primarily comprised of Borrower Loans held for short durations and are recorded usingtheir valuation uses the same approach as the Borrower Loans held at fair value.
Loans.
The following table summarizes the fair value adjustments for the three and ninesix month periods ended SeptemberJune 30, 20172020 and 2016, respectively2019 (in thousands):
| | | | Three Months Ended
September 30, | Nine Months Ended September 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2017 | | 2016 | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| Borrower Loans | $ | (7,219 | ) | | $ | (7,028 | ) | $ | (18,041 | ) | | $ | (19,962 | ) | Borrower Loans | $ | (3,653) | | | $ | (5,589) | | | $ | (22,119) | | | $ | (11,177) | |
| Loans held for sale | — |
| | (2 | ) | 6 |
| | (2 | ) | |
| Notes | 7,045 |
| | 6,983 |
| 17,837 |
| | 19,838 |
| Notes | 3,848 | | | 5,458 | | | 22,377 | | | 10,960 | |
| Total | $ | (174 | ) | | $ | (47 | ) | $ | (198 | ) | | $ | (126 | ) | |
| | | $ | 195 | | | $ | (131) | | | $ | 258 | | | $ | (217) | |
Expenses
The following tables summarize Prosper Funding’s expenses for the three and ninesix month periods ended SeptemberJune 30, 20172020 and 20162019 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Expenses | | | | | | | |
| Administration Fee Expense – Related Party | $ | 9,494 | | | $ | 16,773 | | | $ | (7,279) | | | (43) | % |
| Servicing | 1,137 | | | 1,304 | | | (167) | | | (13) | % |
| General and Administrative | 113 | | | 34 | | | 79 | | | 232 | % |
| Total Expenses | $ | 10,744 | | | $ | 18,111 | | | $ | (7,367) | | | (41) | % |
|
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Expenses | |
| | |
| | |
| | |
|
| Administration Fee Expense – Related Party | $ | 19,078 |
| | $ | 12,243 |
| | 6,835 |
| | 56 | % |
| Servicing | 1,553 |
| | 1,374 |
| | 179 |
| | 13 | % |
| General and Administrative | 186 |
| | 342 |
| | (156 | ) | | (46 | )% |
| Total Expenses | $ | 20,817 |
| | $ | 13,959 |
| | 6,858 |
| | 49 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Expenses | | | | | | | |
| Administration Fee Expense – Related Party | $ | 21,858 | | | $ | 31,765 | | | $ | (9,907) | | | (31) | % |
| Servicing | 2,330 | | | 2,372 | | | (42) | | | (2) | % |
| General and Administrative | 167 | | | 129 | | | 38 | | | 29 | % |
| Total Expenses | $ | 24,355 | | | $ | 34,266 | | | $ | (9,911) | | | (29) | % |
|
| | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | | |
| | 2017 | | 2016 | | $ Change | | % Change |
| Expenses | |
| | |
| | |
| | |
|
| Administration Fee Expense – Related Party | $ | 53,359 |
| | $ | 48,500 |
| | 4,859 |
| | 10 | % |
| Servicing | 4,808 |
| | 4,139 |
| | 669 |
| | 16 | % |
| General and Administrative | 503 |
| | 1,082 |
| | (579 | ) | | (54 | )% |
| Total Expenses | $ | 58,670 |
| | $ | 53,721 |
| | 4,949 |
| | 9 | % |
Administration Fee Expense - Related Party
Pursuant to anthe Administration Agreement between Prosper Funding and PMI, PMI manages the marketplace on behalf of Prosper Funding. Accordingly, each month Prosper Funding is required to pay PMI (a) a Corporate Administration Fee,corporate administration fee of $500,000 per month, (b) a fee for each Borrower Loan originated through the marketplace, a proportion(c) 62.5% of all servicing feesServicing Fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of Prosper Funding. Effective July 1, 2016 the Administration Agreement was amended. The amendments included amending the Corporatedecreases in Administration Fee to a fixed amountexpense of $500,000 per month, increasing the Loan Platform Servicing Fee to $150 per Borrower Loan originated through the marketplace$7.3 million and reducing the Loan and Note Servicing Fee to 62.5% of all servicing fees collected by or on behalf of Prosper Funding. The increase in fees$9.9 million for the three and six months ended SeptemberJune 30, 2017 was due2020, as compared to higher fees paid on the origination of borrower loanssame periods in 2019, were primarily due to the increase indecreased origination volume. The increase in feesvolume of Borrower Loans for the nine months ended September 30, 2017 was due to higher fees paid on the origination of borrower loans due to the increase in origination volume.current periods.
Servicing
ServicingServicing costs consistsconsist primarily of vendor costs and depreciation of internal useinternal-use software costs associated with servicing Borrower Loans. The increasedecreases in Servicing costs for the three and ninesix months ended SeptemberJune 30, 2017 was primarily due2020, as compared to an increasethe corresponding periods in amortization of internal use software.
2019, were not significant.
General and Administrative
General and administrativeAdministrative costs consist primarily of bank service charges and professional fees. The decreasesGeneral and Administrative costs were not significant for the three and ninesix months ended SeptemberJune 30, 2017 was primarily due to an decrease in outsourced costs as Prosper made an effort to reduce its spending on outsourced services during the period.2020 and 2019.
Liquidity and Capital Resources
We anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for at least the next 12 months. However, there remains significant uncertainty regarding the future impact of the COVID-19 outbreak on our financial condition and liquidity. Management is continuing to monitor the impact of COVID-19 on its operations and financial results.
The following table summarizes Prosper Funding’s cash flow activities for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 (in thousands):
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| Net Income | $ | 3,291 |
| | $ | 2,600 |
|
| Net cash provided by (used in) operating activities | 9,027 |
| | $ | 7,845 |
|
| Net cash used in investing activities | (8,746 | ) | | (44,719 | ) |
| Net cash provided by financing activities | 4,506 |
| | 36,124 |
|
| Net increase (decrease) in cash and cash equivalents | 4,787 |
| | (750 | ) |
| Cash and cash equivalents at the beginning of the period | 6,929 |
| | 15,026 |
|
| Cash and cash equivalents at the end of the period | $ | 11,716 |
| | $ | 14,276 |
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| Net Income | $ | 1,923 | | | $ | 2,521 | |
| | | |
| Net cash provided by (used in) operating activities | 9,937 | | | (8,255) | |
| Net cash provided by (used in) investing activities | 10,227 | | | (4,262) | |
| Net cash (used in) provided by financing activities | (16,565) | | | 985 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 3,599 | | | (11,532) | |
| Cash, cash equivalents and restricted cash at the beginning of the period | 117,861 | | | 147,181 | |
| Cash, cash equivalents and restricted cash at the end of the period | $ | 121,460 | | | $ | 135,649 | |
The net increase in
Cash, Cash Equivalents and Restricted Cash increased $3.6 million for the ninesix months ended SeptemberJune 30, 2017, is2020, based on the following components:
Operating Activities: $9.9 million was provided by operating activities, driven by cash from working capital of $3.4 million, primarily due to the timing of payments to PMI, and $6.5 million from net income, net of $3.3non-cash adjustments.
Investing Activities: $10.2 million was provided by investing activities, due to $77.2 million in principal payments under Borrower Loans, partially offset by purchases of Borrower Loans of $65.7 million and an increaseproperty and equipment of $1.3 million.
Financing Activities: $16.6 million was used by financing activities, due to $77.1 million in payments for Notes Held at Fair Value and $4.5 million in distributions to PMI, partially offset by $65.0 million from proceeds from the issuance of Notes Held at Fair Value.
Cash, Cash Equivalents and Restricted Cash decreased $11.5 million for the six months ended June 30, 2019, based on the following components:
Operating Activities: Cash used in operating activities is primarily attributable to the net related party payables of 2.2 million. Net$9.6 million less cash held on the platform that is classified as restricted cash.
Investing Activities: $4.3 million was used in investing primarily represents acquisitionsactivities, due to purchases of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties which is included in cash flow from operating activities along with the corresponding proceeds from sale$86.1 million and property and equipment of Borrower Loans),$2.3 million, partially offset by repayment of$84.1 million in principal payments under Borrower Loans. Net cash
Financing Activities: $0.9 million was provided by financing activities primarily representsdue to $86.7 million in proceeds from the issuance of Notes, partially offset by $85.7 million in payments on Notes.
Income Taxes
Prosper Funding incurred no income tax expense for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. Prosper Funding is a US disregarded entity for income tax purposes and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses, and inability to achieve profitable operations, it is difficult to accurately forecast how Prosper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.
Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, Prosper Funding is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special interest entities are consolidated as Prosper Funding is not the primary beneficiary. Otherwise as of SeptemberJune 30, 2017,2020, Prosper Funding has not engaged in any off-balance sheet financing activities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk and Interest Rate Risk
Prosper Marketplace, Inc.
Market Risk
Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.
Through the Warehouse Lines we invest in Loans Held for Sale. Investments in interest-earning instruments carry a degree of interest rate risk. Changes in U.S. interest rates affect the market value of these Loans Held for Sale held on our balance sheet. Our future investment income may fall short of expectations, or we may suffer a loss in principal if we are forced to sell Loans Held for Sale, which have declined in market value due to changes in interest rates, as stated above, as well as the economic impact of the COVID-19 outbreak. Additionally, if the fair value of the Loans Held for Sale continues to decline, we may not be able to repay the Warehouse Lines using the sale of Loans Held for Sale alone. Changes in the market value of Loans Held for Sale are recorded on the Consolidated Statement of Operations. The fair value of Loans Held for Sale was $216.2 million and $142.0 million as of June 30, 2020 and December 31, 2019, respectively.
The fair values of Borrower Loans, Loans Held for Sale, Notes, Certificates Issued by the Securitization Trust are determined using discounted cash flow methodologies based upon a set of valuation assumptions such as default rate, prepayment rate and discount rate. Default rate, prepayment rate and discount rate may change due to expected loan performance or changes in the expected returns of similar financial instruments available in the market. We are exposed to the risk of decrease in the fair value of loans held in the warehouse and securitization trusts. For Borrower Loans and Notes presented on our Balance Sheet on behalf of our Note Channel investors, the fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
We are also exposed to variable interest rate risk under the debt from the Warehouse Lines, which had an outstanding balance of $198.9 million and $131.6 million as of June 30, 2020 and December 31, 2019, respectively. To reduce the impact of large fluctuations in interest rates, we hedged a portion of our interest rate risk by entering into a derivative agreement with a financial institution, which is currently out of the money. The derivative agreement that we use to manage the risk associated with fluctuations in interest rates may not be able to eliminate the exposure to these changes. Interest rates are sensitive to numerous factors outside of our control, such as government and central bank monetary policy in the United States. Depending on the size of the exposures and the relative movements of interest rates, if we choose not to hedge or fail to effectively hedge our exposure, we could experience a material adverse effect on our results of operations and financial condition.
Prosper had cash and cash equivalents of $46.6 million and $64.6 million as of June 30, 2020 and December 31, 2019, respectively. These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities which may include money market funds, U.S. Treasury securities, and U.S. agency securities. Cash and Cash Equivalents are held for working capital purposes. Due to their short-term nature, Prosper believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will moderately reduce interest income on these Cash and Cash Equivalents. Increases in short-term interest rates will moderately increase the interest income earned on the Cash and Cash Equivalents.
Interest Rate Sensitivity
As more fully described in Note 7, Fair Value of Assets and Liabilities, of Prosper's condensed consolidated financial statements attached to this Quarterly Report on Form 10-Q, the combined fair value of Borrower Loans and Loans Held for Sale is $673.7 million as of June 30, 2020, determined using a weighted-average discount rate of 11.59%. The combined fair value of Borrower Loans and Loans Held for Sale was $776.0 million as of December 31, 2019, determined using a weighted-average discount rate of 7.00%. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $5.7 million and $7.1 million in the fair value of Prosper’s investment in Borrower Loans and Loans Held for Sale as of June 30, 2020 and December 31, 2019, respectively. A hypothetical 100 basis point decrease in interest rates would
result in an increase of approximately $5.9 million and $7.3 million in the fair value of Prosper’s investment in Borrower Loans and Loans Held for Sale as of June 30, 2020 and December 31, 2019, respectively. Any realized or unrealized gains or losses resulting from such interest rate change would be recorded in our statement of operations so long as we hold these Borrower Loans and Loans Held for Sale on our balance sheet.
Prosper Funding LLC
Market Risk
Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.
Because balances, interest rates, and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net of our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.
The fair values of Borrower Loans Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by
the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
Prosper had cash and cash equivalents of $73.0 million as of September 30, 2017, and $22.3 million as of December 31, 2016. These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities consisting primarily of money market funds, commercial paper, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, Prosper believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will moderately increase the interest income earned on these cash balances.
Interest Rate Sensitivity
Prosper holds available for sale investments. The fair value of Prosper’s available for sale investment portfolio was $24.6 million and $32.8 million as of September 30, 2017 and December 31, 2016, respectively. These investments consisted of U.S. agency bonds, corporate bonds and U.S. Treasury securities. To mitigate the risk of loss, Prosper’s investment policy and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns. To manage this risk, Prosper limits and monitors maturities, credit ratings, and concentrations within the investment portfolio. Changes in U.S. interest rates affect the interest earned on Prosper’s available for sale investments and the market value of those investments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $168 thousand in the fair value of Prosper’s available for sale investments as of September 30, 2017, and of approximately $147 thousand in the fair value of Prosper’s available for sale investments as of December 31, 2016. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $168 thousand in the fair value of Prosper’s available for sale investments as of September 30, 2017, and of approximately $134 thousand in the fair value of Prosper’s available for sale investments as of December 31, 2016. Any realized gains or losses resulting from such interest rate changes would only be recorded if Prosper sold the investments prior to maturity and the investments were not considered other-than-temporarily impaired.
Prosper Funding LLC
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in financial market prices and interest rates.
Because balances, interest rates and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.
The fair values of Borrower Loans, Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
Prosper Funding had cash and cash equivalentsequivalents of $11.7$7.8 million as of SeptemberJune 30, 2017,2020, and $6.9$7.5 million as of December 31, 2016.2019. These amounts were held in various unrestrictedunrestricted deposits with highly rated financial institutions and short-term,short term, highly liquid marketable securities consisting primarily ofwhich may include money market funds, commercial paper, U.S. treasury securities corporate bonds and U.S. agency securities. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, Prosper Funding believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materiallymoderately reduce interest income on these cash and cash equivalents, because of the current low rate environment. Increaseswhile increases in short-term interest rates will moderately increase the interest income earned on these cash and cash equivalent balances.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Registrants’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including to each of the Registrant’s Principal Executive Officer (PEO) and the Principal Financial Officer (PFO), to allow timely decisions regarding required disclosures. The management of each Registrant, with the participation of such Registrant’s PEO and PFO, has evaluated the effectiveness of such Registrant’s disclosure controls and procedures as of SeptemberJune 30, 2017.2020. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2020.
Changes in Internal Control Over Financial Reporting
There were no changes in either Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934)Act) during the three months ended SeptemberJune 30, 2017,2020, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
PFL is not currently subject to any material legal proceedings. PFL is not aware of any litigation matters which have had, or are expected to have, a material adverse effect on it.
PMI is not currently subject to any material legal proceedings. Except for the matters referenced in Note 17 (“Commitments and Contingencies”) of PMI’s Notes to Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, which information is incorporated into this Item by reference, PMI is not aware of any litigation matters that have had, or are expected to have, a material adverse effect on it.
This Item should be read in conjunction with the Legal Proceedings disclosures contained in Part I, Item 1, “Legal Proceedings” of our AnnualQuarterly Report on Form 10-K10-Q for the yearquarter ended DecemberMarch 31, 2016 (Part I, Item 3).2020.
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below, together with all information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and related notes, and the risks described in "PartPart I, - Item 1A, - Risk"Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2016.2019 and in Part II, Item 1A, "Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
RISKS INHERENT IN INVESTING IN THE NOTES
We may choose or be required to implement payment and collections relief programs in response to the COVID-19 pandemic and other public health emergencies or crises, which may extend or otherwise alter the repayment schedule of Borrower Loans and reduce the expected return on the corresponding Notes.
The continued spread of COVID-19 has caused significant market volatility and workforce disruptions. As a result of state and local governments enacting self-quarantine and shelter-in-place orders to protect public health, businesses have been forced to curtail their operations and unemployment levels have spiked. Prosper recognizes the serious economic hardship triggered by COVID-19, and is offering assistance to qualified borrowers who are facing financial hardship as a result of the COVID-19 pandemic. These relief options include, among other things, the ability to delay up to four monthly loan payments, the ability to reduce minimum monthly payments for up to six months and extend the term of the loan by up to 11 months, and waived late and non-sufficient funds fees. Prosper is also complying with new state mandates that may temporarily impact collections activity with respect to delinquent loans.
Prosper’s current COVID-19 relief options for qualified borrowers allow borrowers to skip loan payments or temporarily reduce their minimum monthly payments and extend the maturity date of their loans, which could impact investor returns on corresponding Notes. No payments will be made on any corresponding Notes during a month in which a borrower relying on our COVID-19 relief options skips a loan payment. Likewise, to the extent Prosper is required to comply with state mandates to pause collections activity on delinquent loans, investors will not receive recoveries on any Notes corresponding to Borrower Loans that cannot be collected upon while such mandates are in effect. Prosper continues to actively monitor the impact of COVID-19 on economic conditions.
RISKS RELATED TO PFL AND PMI, OUR MARKETPLACE AND OUR ABILITY TO SERVICE THE NOTES
Our systems and marketplace utilize complex programs, algorithms and inputs, and if they contain errors,
A decline in economic conditions may adversely affect our customers, which may negatively impact our business and results of operations.
As a lending marketplace, we believe our customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could be adversely affected.
Ourimpact our customers’ ability or desire to participate in our marketplace utilizes complex programs, algorithms and inputs. We depend on these programs, algorithms and inputs to store, retrieve, process and manage data, as well as to provide marketplace features such as the Prosper Rating, estimated loss rates, estimated returns, and individual note, note portfolio and platform wide performance data. Errors or other design defects within these programs, algorithms and inputs may result in a negative experience for borrowers and investors, delay introductions of new features or enhancements, impact the information displayed on our website, or result in negative publicity and unfavorable media coverage, harm to our reputation, litigation, regulatory inquiries or proceedings, loss of or damage to our relationships with borrowers or investors, or loss of revenue or liability for damages, any of whichand consequently could adverselynegatively affect our business and financial results. results of operations. The current COVID-19 pandemic has created turbulent economic conditions, with many businesses grinding to a halt in response to public health orders to shelter in place. The unemployment rate reached a record 14.7% in April 2020 and gross domestic product contracted at an unprecedented annualized rate of 32.9% during the second quarter of this year. While the unemployment rate dropped to 10.2% in July 2020, it remains at more than double the rates reported in 2019, and there is still significant uncertainty regarding the pace of the economic recovery.
Prosper has experienced a decline in marketplace participation as a result of COVID-19. If the effects of COVID-19 continue for an extended period of time and we are unable to originate sufficient loan volumes or attract sufficient investor purchase commitments from new and existing investors, our business and results of operations may be materially adversely affected.
We may be required to repay the loan we received through the CARES Act Paycheck Protection Program if we fail to meet the forgiveness criteria established by the U.S. Small Business Administration.
In April 2017,2020, we became awareobtained an $8.4 million loan under the Paycheck Protection Program (“PPP”), which was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is sponsored by the U.S. Small Business Administration (“SBA”) in order to provide small businesses with assistance in covering qualified payroll costs, mortgage obligations, leases, and utilities during the economic downturn triggered by the COVID-19 pandemic. Payments are deferred on the PPP loan until the earlier of an error inAugust 2021 or the manner in which we calculated the annualized net return and seasoned annualized net return numbers provided to note investors. The error did not affect any other part of note investors’ accounts, nor did it affect any other aspectsSBA’s remittance of the platform, includingforgiveness amount to the receiptlender. The loan carries a two-year term and distributionaccrues interest at one percent per annum. SBA guidance in effect at the time that we received the loan provided that the loan will be forgiven as long as proceeds are used for covered expenses and we meet certain requirements regarding maintenance of full-time employee headcount and limits on compensation reduction for employees who earned less than $100,000 on an annualized basis in 2019. Based on this guidance, we expect to successfully apply for PPP loan payments, deposits, monthly statements or tax documentation, or the note and loan level information provided to investors.forgiveness, although no assurances can be given.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Prosper – None.
Prosper Funding – Information for this Item is not required for Prosper Funding because it meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q; Prosper Funding is therefore filing this Form with the reduced disclosure format.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed on the Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference.
EXHIBIT INDEX
|
| | | | | | | |
Exhibit Number | | Exhibit Description |
| | |
| | Fifth Amended and Restated Limited Liability Company Agreement of PFL, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of the Post-Effective Amendment No. 3 to the Registration Statement on Form S-1, filed October 23, 2013 by PFL and PMI) |
| | |
| | Amended and Restated Certificate of Incorporation of PMI, (2)as further amended on October 15, 2018 (incorporated by reference to Exhibit 3.2 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on November 14, 2018) |
| | |
| | PFL Certificate of Formation (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1/A, filed April 23, 2012 by PFL) |
| | |
| | Bylaws of PMI, as amended by an Amendment No. 1 dated February 15, 2016 (incorporated by reference to Exhibit 3.2 of PMI's and PFL's Form 10-Q, filed on August 15, 2016)Amendment No. 2 dated May 19, 2020 (1) |
| | |
| | Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5)4.2) |
| | | | | | | | |
| | |
| | Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4) |
| | |
| | Supplemental Indenture, dated January 22, 2013, between PMI, PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) |
| | |
| | Indenture, dated June 15, 2009, between PMI and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed June 26, 2009) |
| | |
| | Amended and Restated Indenture, dated January 22, 2013, between PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) |
| | |
| | Form of PFL Borrower Registration Agreement (2) |
| | |
| | Form of PFL Investor Registration AgreementFirst Supplemental Indenture, dated May 10, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 of PMI's and PFL's Annual Report on Form 10-K, filed on March 20, 2017) |
| | |
| | Amendment No. 2 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.34.1 of PMI and PFL’sPFL's Quarterly Report on Form 10-Q, filed on August 15, 2016) (3)14, 2013) |
| | |
| | Asset Sale Agreement,Promissory Note, dated July 1, 2016,April 24, 2020, by and between PFLBroadway National Bank and WebBankProsper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1) |
| | |
| | Marketing Agreement, dated July 1, 2016, between PMI and WebBank (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1) |
| | |
| | Stand By Purchase Agreement, dated July 1, 2016, between PMI and WebBank (incorporated by reference to Exhibit 10.3 of PMI and PFL’sPMI’s Current Report on Form 8-K, filed on July 8, 2016) (1) |
| | |
| | Amendment No. 3 to Administration Agreement between PFL and PMI, dated as of November 8, 2016 and made effective as of July 1, 2016 (incorporated by reference to Exhibit 10.8 of PMI's and PFL's Annual Report on Form 10-K, filed on March 20, 2017) |
| | |
| | Loan Purchase Agreement, dated as of February 27, 2017, among PFL, PF LoanCo Funding LLC, and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee of PF LoanCo Trust (incorporated by reference to Exhibit 10.8 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on May 15, 2017) (1) |
| | |
| April 30, 2020) |
| | |
| | Warrant Agreement, dated as of February 27, 2017, among PMI, PF WarrantCo Holdings, LP, and, for certain limited purposes, New Residential Investment Corp (incorporated by reference to Exhibit 10.9 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on May 15, 2017) (1) |
| | |
| | Back-Up Servicing Agreement (Note Channel), dated as of February 24, 2017, among PFL, PMI, and First Associates Loan Servicing, LLC (incorporated by reference to Exhibit 10.10 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on May 15, 2017) (1) |
| | |
| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017. (2)2020 (1) |
| | |
| | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017. (2)2020 (1) |
| | |
| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017. (2)2020 (1) |
| | |
| | Certification of Principal ExecutiveFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017. (2)2020 (1) |
| | |
| | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017. (2)2020 (1) |
| | |
| | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017. (2)2020 (1) |
| | |
| | XBRL Instance DocumentsDocument - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
| | XBRL Taxonomy Extension Schema Document |
| | |
| | Taxonomy Extension Calculation Linkbase Document |
| | |
| | Taxonomy Extension Label Linkbase Document |
| | |
| | Taxonomy Extension Presentation Linkbase Document |
| | |
| | Taxonomy Extension Definition Linkbase Document |
|
| | |
| (1) | | Certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act.
|
| | |
(2) | | Filed herewith. |
| | |
(3) | | Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | |
| PROSPER MARKETPLACE, INC. |
| PROSPER FUNDING LLC |
| |
Date: November 9, 2017August 14, 2020 | /s/ David Kimball |
| David Kimball |
| Chief Executive Officer of Prosper Marketplace, Inc. |
| Chief Executive Officer and President of
Prosper Funding LLC |
| (Principal Executive Officer) |
| |
Date: November 9, 2017August 14, 2020 | /s/ Usama Ashraf |
| Usama Ashraf |
| Chief Financial Officer of Prosper Marketplace, Inc. |
| Chief Financial Officer and Treasurer of
Prosper Funding LLC |
|
(Principal Financial Officer)
|
| (Principal Financial and Accounting Officer)
|
| |