UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
2021 | | | | | | | | | | | | | | |
Commission File Number | | Exact Name of Registrant as Specified in its Charter | | I.R.S. Employer Identification Number |
333-179941-01 333-204880 333-225797-01 | | PROSPER MARKETPLACE, INC. a Delaware corporation 221 Main Street, 3rd Floor San Francisco, CA 94105 Telephone: (415) 593-5400 | | 73-1733867 |
| | | | |
333-179941 333-204880-01 333-225797 | | PROSPER FUNDING LLC a Delaware limited liability company 221 Main Street, 3rd Floor San Francisco, CA 94105 Telephone: (415) 593-5400 | | 45-4526070 |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Registrant | | Title of Each Class | | Name of Each Exchange on Which Registered |
| Prosper Marketplace, Inc. | | None | | None |
| Prosper Funding LLC | | None | | None |
Securities registered pursuant to Section 12(g) of the Act:
| | | | | | | | | | | | | | |
| Registrant | | Title of Each Class | | Name of Each Exchange on Which Registered |
| Prosper Marketplace, Inc. | | None | | None |
| Prosper Funding LLC | | None | | None |
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| | | | | |
| Prosper Marketplace, Inc. | Yes x No ¨ |
| Prosper Funding LLC | Yes x No ¨ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| | | | | |
| Prosper Marketplace, Inc. | Yes x No ☐ |
| Prosper Funding LLC | Yes x No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large Accelerated Filer | | Accelerated Filer | | Non-accelerated Filer | | Smaller Reporting Company | | Emerging Growth Company |
| Prosper Marketplace, Inc. | ☐ | | ☐ | | x | | ☐ | | ☐ |
| Prosper Funding LLC | ☐ | | ☐ | | x | | ☐ | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| | | | | |
| Prosper Marketplace, Inc. | Yes ☐ No x |
| Prosper Funding LLC | Yes ☐ No x |
Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
As of August 10, 2020,2021, there were 68,455,64170,945,294 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not0t have any common stock outstanding.
THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PROSPER MARKETPLACE, INC. AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.
TABLE OF CONTENTS
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| PART I. | | | | |
| Item 1. | | | | |
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| Item 2. | | | | |
| Item 3. | | | | |
| Item 4. | | | | |
| PART II. | | | | |
| Item 1. | | | | |
| Item 1A. | | | | |
| Item 2. | | | | |
| Item 3. | | | | |
| Item 4. | | | | |
| Item 5. | | | | |
| Item 6. | | | | |
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Except as the context requires otherwise, as used herein, “Registrants” refers to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “we,” “us,” “our,” “Prosper,” and the “Company” refer to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. (“BillGuard”), a Delaware corporation, Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, Prosper Warehouse I Trust (“PWIT”), a Delaware statutory trust, Prosper Warehouse II Trust (“PWIIT”), a Delaware statutory trust, Prosper Marketplace Issuance Trust, Series 2019-1 (“PMIT 2019-1”), a Delaware statutory trust, Prosper Marketplace Issuance Trust, Series 2019-2 (“PMIT 2019-2”), a Delaware statutory trust and Prosper Marketplace Issuance Trust, Series 2019-4 (“PMIT 2019-4”), a Delaware statutory trust, Prosper Grantor Trust (“PGT”), a Delaware statutory trust, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis. In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” Investors currently invest in Borrower Loans through two channels: (i) the “Note Channel,” which allows investors to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows accredited and institutional investors to purchase Borrower Loans in their entirety directly from PFL. The Notes available to Note Channel investors are distinguishable from notes held by certain third party investors pursuant to Prosper’s securitization transactions, which are referred to herein as “Notes Issued by Securitization Trust.” Finally, although historically the Company has referred to investors as “lender members,” PFL calls them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
•the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
•PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding Borrower Loans;
•our ability to attract potential borrowers and investors to our marketplace;
•the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;
•our ability to service the Borrower Loans, and our ability or the ability of a third-party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
•credit risks posed by the credit worthiness of borrowers and the effectiveness of our credit rating systems;
•potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;
•the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;
•our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
•our compliance with applicable regulations and regulatory developments or court decisions affecting our business;
•potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the loans originated through our marketplace;
•the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
•the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;
•the impact of the coronavirus disease 2019 (“COVID-19”) pandemic on our business, results of operations, financial condition and future prospects;
•the lack of a public trading market for the Notes and the current lack of any trading platform on which investors can resell the Notes;
•the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and
•our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of the platform or adversely impact our ability to service Borrower Loans.
There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does occur, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” sections of this Quarterly Report on Form 10-Q
and our Annual Report on Form 10-K for the year ended December 31, 20192020 for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
Where You Can Find More Information
The following filings are available for download free of charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. Our SEC filings are also available to the public on the SEC’s website at www.sec.gov.www.sec.gov. The information contained on our website is not incorporated into this Quarterly Report on Form 10-Q.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Prosper Marketplace, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except for share and per share amounts) | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| Assets: | | | | |
| Cash and Cash Equivalents | | $ | 56,018 | | | $ | 50,145 | |
| Restricted Cash (1) | | 205,377 | | | 163,723 | |
| Accounts Receivable (1) | | 1,088 | | | 605 | |
| Loans Held for Sale, at Fair Value (1) | | 249,955 | | | 274,621 | |
| Borrower Loans, at Fair Value (1) | | 338,939 | | | 378,263 | |
| Property and Equipment, Net | | 30,210 | | | 28,446 | |
| Prepaid and Other Assets (1) | | 7,881 | | | 5,196 | |
| Servicing Assets | | 8,944 | | | 9,242 | |
| Goodwill | | 36,368 | | | 36,368 | |
| Intangible Assets, Net | | 414 | | | 500 | |
| Total Assets | | $ | 935,194 | | | $ | 947,109 | |
| Liabilities, Convertible Preferred Stock and Stockholders' Deficit: | | | | |
| Accounts Payable and Accrued Liabilities | | $ | 20,328 | | | $ | 17,876 | |
| Payable to Investors | | 174,387 | | | 124,094 | |
| Notes, at Fair Value | | 236,041 | | | 208,379 | |
| Notes Issued by Securitization Trust (1) | | 94,811 | | | 156,782 | |
| Certificates Issued by Securitization Trust, at Fair Value (1) | | 15,295 | | | 22,917 | |
| Warehouse Lines (1) | | 219,467 | | | 242,479 | |
| Other Liabilities | | 25,236 | | | 25,057 | |
| Convertible Preferred Stock Warrant Liability | | 162,436 | | | 112,319 | |
| Total Liabilities | | $ | 948,001 | | | $ | 909,903 | |
| Commitments and Contingencies (Note 16) | | 0 | | 0 |
| Convertible Preferred Stock – $0.01 par value; 444,760,848 shares authorized as of June 30, 2021 and December 31, 2020; 209,613,570 issued and outstanding as of June 30, 2021 and December 31, 2020. Aggregate liquidation preference of $370,456 as of June 30, 2021 and December 31, 2020. | | $ | 322,748 | | | $ | 322,748 | |
| Less: Convertible Preferred Stock Held by Consolidated VIE (Note 12), 51,247,915 shares issued and outstanding as of June 30, 2021 and December 31, 2020. | | (2,381) | | | (2,381) | |
| Stockholders' Deficit: | | | | |
| Common Stock – $0.01 par value; 625,000,000 shares authorized; 71,829,765 shares issued and 70,893,830 shares outstanding, as of June 30, 2021; 70,075,307 shares issued and 69,139,372 shares outstanding, as of December 31, 2020. | | 233 | | | 215 | |
| Additional Paid-In Capital | | 156,615 | | | 155,952 | |
| Less: Treasury Stock | | (23,417) | | | (23,417) | |
| Accumulated Deficit | | (466,605) | | | (415,911) | |
| Total Stockholders' Deficit | | $ | (333,174) | | | $ | (283,161) | |
| Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit | | $ | 935,194 | | | $ | 947,109 | |
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| Assets | | | |
| Cash and Cash Equivalents | $ | 46,575 | | | $ | 64,635 | |
| Restricted Cash (1) | 143,318 | | | 155,773 | |
| | | |
| Accounts Receivable (1) | 1,047 | | | 1,695 | |
| Loans Held for Sale, at Fair Value (1) | 216,243 | | | 142,026 | |
| Borrower Loans, at Fair Value (1) | 457,487 | | | 634,019 | |
| Property and Equipment, Net | 30,490 | | | 31,296 | |
| Prepaid and Other Assets (1) | 6,528 | | | 5,694 | |
| Servicing Assets | 10,073 | | | 12,602 | |
| Goodwill | 36,368 | | | 36,368 | |
| Intangible Assets, Net | 610 | | | 720 | |
| Total Assets | $ | 948,739 | | | $ | 1,084,828 | |
| Liabilities, Convertible Preferred Stock and Stockholders' Deficit | | | |
| Accounts Payable and Accrued Liabilities | $ | 12,044 | | | $ | 19,937 | |
| Payable to Investors | 102,405 | | | 101,092 | |
| Notes, at Fair Value | 209,987 | | | 244,171 | |
| Notes Issued by Securitization Trust (1) | 235,353 | | | 347,662 | |
| Certificates Issued by Securitization Trust, at Fair Value (1) | 31,571 | | | 52,168 | |
| Warehouse Lines (1) | 198,857 | | | 131,583 | |
| Other Liabilities | 27,248 | | | 21,726 | |
| Convertible Preferred Stock Warrant Liability | 74,998 | | | 149,996 | |
| Total Liabilities | 892,463 | | | 1,068,335 | |
| Commitments and Contingencies (see Note 17) | | | |
| Convertible Preferred Stock – $0.01 par value; 444,760,848 shares authorized as of June 30, 2020 and December 31, 2019; 209,613,570 issued and outstanding as of June 30, 2020 and December 31, 2019. Aggregate liquidation preference of $370,456 as of June 30, 2020 and December 31, 2019. | 322,748 | | | 322,748 | |
| Stockholders' Deficit | | | |
| Common Stock – $0.01 par value; 625,000,000 shares authorized; 69,391,576 shares issued and 68,455,641 shares outstanding, as of June 30, 2020; 69,387,836 shares issued and 68,451,901 shares outstanding, as of December 31, 2019. | 208 | | | 208 | |
| Additional Paid-In Capital | 152,428 | | | 151,416 | |
| Less: Treasury Stock | (23,417) | | | (23,417) | |
| Accumulated Deficit | (395,691) | | | (434,462) | |
| | | |
| Total Stockholders' Deficit | (266,472) | | | (306,255) | |
| Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit | $ | 948,739 | | | $ | 1,084,828 | |
(1) Includes amounts in consolidated variablevariable interest entities (VIEs) presented separately in the table below.
The following table presents the assets and liabilities of consolidated variable interest entities (VIEs), which are included in the condensed consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. See Note 6, Securitizations, and Note 10, Debt, to our Notes to Condensed Consolidated Financial Statements for additional information.
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| Assets of consolidated VIEs, included in total assets above | | | |
| Restricted Cash | $ | 27,090 | | | $ | 39,118 | |
| Accounts Receivable | — | | | 73 | |
| Loans Held for Sale, at Fair Value | 216,243 | | | 142,026 | |
| Borrower Loans, at Fair Value | 245,712 | | | 388,882 | |
| Prepaid and Other Assets | 2,487 | | | 2,928 | |
| Total assets of consolidated variable interest entities | $ | 491,532 | | | $ | 573,027 | |
| Liabilities of consolidated VIEs, included in total liabilities above | | | |
| Notes Issued by Securitization Trust | $ | 235,353 | | | $ | 347,662 | |
| Certificates Issued by Securitization Trust, at Fair Value | 31,571 | | | 52,168 | |
| Warehouse Lines | 198,857 | | | 131,583 | |
| Total liabilities of consolidated variable interest entities | $ | 465,781 | | | $ | 531,413 | |
information. | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| Assets of consolidated VIEs, included in total assets above: | | | | |
| Restricted Cash | | $ | 20,942 | | | $ | 25,203 | |
| Loans Held for Sale, at Fair Value | | 249,955 | | | 274,621 | |
| Borrower Loans, at Fair Value | | 102,095 | | | 168,593 | |
| Prepaid and Other Assets | | 3,309 | | | 2,043 | |
| Total assets of consolidated variable interest entities | | $ | 376,301 | | | $ | 470,460 | |
| Liabilities of consolidated VIEs, included in total liabilities above: | | | | |
| Notes Issued by Securitization Trust | | $ | 94,811 | | | $ | 156,782 | |
| Certificates Issued by Securitization Trust, at Fair Value | | 15,295 | | | 22,917 | |
| Warehouse Lines | | 219,467 | | | 242,479 | |
| Total liabilities of consolidated variable interest entities | | $ | 329,573 | | | $ | 422,178 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Marketplace, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except for share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | | | | | | | |
| Operating Revenues | | | | | | | |
| Transaction Fees, Net | $ | 11,401 | | | $ | 33,876 | | | $ | 31,814 | | | $ | 60,171 | |
| Servicing Fees, Net | 4,660 | | | 5,172 | | | 10,717 | | | 11,375 | |
| Gain on Sale of Borrower Loans | 617 | | | 3,559 | | | 2,361 | | | 6,256 | |
| Fair Value of Warrants Vested on Sale of Borrower Loans | — | | | (7,805) | | | — | | | (17,553) | |
| Other Revenue | 566 | | | 2,188 | | | 1,578 | | | 3,223 | |
| Total Operating Revenues | 17,244 | | | 36,990 | | | 46,470 | | | 63,472 | |
| Interest Income | | | | | | | |
| Interest Income on Borrower Loans and Loans Held for Sale | 26,645 | | | 23,543 | | | 54,289 | | | 41,972 | |
| Interest Expense on Financial Instruments | (15,270) | | | (15,645) | | | (31,953) | | | (28,765) | |
| Net Interest Income | 11,375 | | | 7,898 | | | 22,336 | | | 13,207 | |
| Change in Fair Value of Financial Instruments, Net | (2,362) | | | (1,958) | | | (39,304) | | | (3,671) | |
| Total Net Revenue | 26,257 | | | 42,930 | | | 29,502 | | | 73,008 | |
| Expenses | | | | | | | |
| Origination and Servicing | 7,365 | | | 9,427 | | | 15,811 | | | 17,589 | |
| Sales and Marketing | 5,022 | | | 21,450 | | | 16,264 | | | 37,791 | |
| General and Administrative | 15,720 | | | 17,908 | | | 33,882 | | | 36,677 | |
| Impairment Expense | 228 | | | — | | | 228 | | | — | |
| Restructuring Charges, Net | — | | | 5 | | | — | | | 86 | |
| Change in Fair Value of Convertible Preferred Stock Warrants | (19,549) | | | (4,729) | | | (74,998) | | | 5,327 | |
| Other Income, Net | (204) | | | (591) | | | (524) | | | (1,237) | |
| Total Expenses | 8,582 | | | 43,470 | | | (9,337) | | | 96,233 | |
| Net Income (Loss) Before Taxes | 17,675 | | | (540) | | | 38,839 | | | (23,225) | |
| Income Tax Expense | 34 | | | 29 | | | 68 | | | 58 | |
| Net Income (Loss) | $ | 17,641 | | | $ | (569) | | | $ | 38,771 | | | $ | (23,283) | |
| Less: Net Income Allocated to Participating Securities | (13,153) | | | — | | | (28,908) | | | — | |
| Net Income (Loss) Attributable to Common Stockholders | $ | 4,488 | | | $ | (569) | | | $ | 9,863 | | | $ | (23,283) | |
| Net Income (Loss) Per Share – Basic | $ | 0.07 | | | $ | (0.01) | | | $ | 0.14 | | | $ | (0.33) | |
| Net Income (Loss) Per Share – Diluted | $ | 0.02 | | | $ | (0.01) | | | $ | 0.03 | | | $ | (0.33) | |
| Weighted-Average Shares – Basic | 68,455,641 | | | 70,502,797 | | | 68,454,872 | | | 70,494,945 | |
| Weighted-Average Shares – Diluted | 281,847,412 | | | 70,502,797 | | | 282,057,163 | | | 70,494,945 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Revenues: | | | | | | | | |
| Operating Revenues: | | | | | | | | |
| Transaction Fees, Net | | $ | 20,941 | | | $ | 11,401 | | | $ | 41,771 | | | $ | 31,814 | |
| Servicing Fees, Net | | 3,553 | | | 4,660 | | | 6,967 | | | 10,717 | |
| Gain on Sale of Borrower Loans | | 1,366 | | | 617 | | | 2,989 | | | 2,361 | |
| | | | | | | | |
| Other Revenue | | 938 | | | 566 | | | 1,465 | | | 1,578 | |
| Total Operating Revenues | | 26,798 | | | 17,244 | | | 53,192 | | | 46,470 | |
| Interest Income (Expense): | | | | | | | | |
| Interest Income on Borrower Loans and Loans Held for Sale | | 21,048 | | | 26,645 | | | 42,946 | | | 54,289 | |
| Interest Expense on Financial Instruments | | (12,953) | | | (15,270) | | | (25,878) | | | (31,953) | |
| Total Interest Income, Net | | 8,095 | | | 11,375 | | | 17,068 | | | 22,336 | |
| Change in Fair Value of Financial Instruments, Net | | (159) | | | (2,362) | | | (2,410) | | | (39,304) | |
| Total Net Revenue | | 34,734 | | | 26,257 | | | 67,850 | | | 29,502 | |
| Expenses: | | | | | | | | |
| Origination and Servicing | | 8,681 | | | 7,365 | | | 17,055 | | | 15,811 | |
| Sales and Marketing | | 7,904 | | | 5,022 | | | 15,626 | | | 16,264 | |
| General and Administrative | | 18,329 | | | 15,720 | | | 35,973 | | | 33,882 | |
| Impairment Expense | | 0 | | | 228 | | | 0 | | | 228 | |
| | | | | | | | |
| Change in Fair Value of Convertible Preferred Stock Warrants | | 5,686 | | | (19,549) | | | 50,117 | | | (74,998) | |
| Other Income, Net | | (82) | | | (204) | | | (269) | | | (524) | |
| Total Expenses | | 40,518 | | | 8,582 | | | 118,502 | | | (9,337) | |
| Net (Loss) Income Before Taxes | | (5,784) | | | 17,675 | | | (50,652) | | | 38,839 | |
| Income Tax Expense | | (21) | | | (34) | | | (42) | | | (68) | |
| Net (Loss) Income | | $ | (5,805) | | | $ | 17,641 | | | $ | (50,694) | | | $ | 38,771 | |
| Plus: Return on Share Purchase | | 0 | | | 0 | | | 0 | | | 0 | |
| Less: Net Income Allocated to Participating Securities | | 0 | | | (13,153) | | | 0 | | | (28,908) | |
| Net (Loss) Income Attributable to Common Stockholders | | $ | (5,805) | | | $ | 4,488 | | | $ | (50,694) | | | $ | 9,863 | |
| Net (Loss) Income Per Share – Basic | | $ | (0.08) | | | $ | 0.07 | | | $ | (0.72) | | | $ | 0.14 | |
| Net (Loss) Income Per Share – Diluted | | $ | (0.08) | | | $ | 0.02 | | | $ | (0.72) | | | $ | 0.03 | |
| Weighted Average Shares – Basic | | 70,868,080 | | | 68,455,641 | | | 70,110,288 | | | 68,454,872 | |
| Weighted Average Shares – Diluted | | 70,868,080 | | | 281,847,412 | | | 70,110,288 | | | 282,057,163 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Marketplace, Inc.
Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)
(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) | |
| Other Comprehensive Income | | | | | | | |
| Change in Net Unrealized Gain on Available for Sale Investments, at Fair Value | — | | | 11 | | | — | | | 21 | |
| | | | | | | |
| Other Comprehensive Income, Before Tax | — | | | 11 | | | — | | | 21 | |
| Income Tax Effect | — | | | — | | | — | | | — | |
| Other Comprehensive Income, Net of Tax | — | | | 11 | | | — | | | 21 | |
| Comprehensive Income (Loss), Net of Tax | $ | 17,641 | | | $ | (558) | | | $ | 38,771 | | | $ | (23,262) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net (Loss) Income | | $ | (5,805) | | | $ | 17,641 | | | $ | (50,694) | | | $ | 38,771 | |
| Other Comprehensive (Loss) Income, Before Tax: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other Comprehensive (Loss) Income, Before Tax | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | | | | | |
| Other Comprehensive (Loss) Income, Net of Tax: | | 0 | | | 0 | | | 0 | | | 0 | |
| Comprehensive (Loss) Income, Net of Tax | | $ | (5,805) | | | $ | 17,641 | | | $ | (50,694) | | | $ | 38,771 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Marketplace, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (Unaudited)
(in thousands, except for share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preferred Stock | | Convertible Preferred Stock Held by Consolidated VIE | | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | | | Accumulated
Deficit | | Total |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance as of January 1, 2021 | | 209,613,570 | | | $ | 322,748 | | | (51,247,915) | | | $ | (2,381) | | | 74,316,607 | | | $ | 215 | | | (5,177,235) | | | $ | (23,417) | | | $ | 155,952 | | | | | $ | (415,911) | | | $ | (283,161) | |
| Exercise of vested stock options | | — | | | — | | | — | | | — | | | 1,754,458 | | | 18 | | | — | | | — | | | 18 | | | | | — | | | 36 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 645 | | | | | — | | | 645 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | (50,694) | | | (50,694) | |
| Balance as of June 30, 2021 | | 209,613,570 | | | $ | 322,748 | | | (51,247,915) | | | $ | (2,381) | | | 76,071,065 | | | $ | 233 | | | (5,177,235) | | | $ | (23,417) | | | $ | 156,615 | | | | | $ | (466,605) | | | $ | (333,174) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preferred Stock | | Convertible Preferred Stock Held by Consolidated VIE | | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | | | Accumulated
Deficit | | Total |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance as of January 1, 2020 | | 209,613,570 | | | $ | 322,748 | | | 0 | | | $ | 0 | | | 73,629,136 | | | $ | 208 | | | (5,177,235) | | | $ | (23,417) | | | $ | 151,416 | | | | | $ | (434,462) | | | $ | (306,255) | |
| Exercise of vested stock options | | — | | | — | | | — | | | — | | | 3,740 | | | 0 | | | — | | | — | | | 1 | | | | | — | | | 1 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,011 | | | | | — | | | 1,011 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 38,771 | | | 38,771 | |
| Balance as of June 30, 2020 | | 209,613,570 | | | $ | 322,748 | | | 0 | | | $ | 0 | | | 73,632,876 | | | $ | 208 | | | (5,177,235) | | | $ | (23,417) | | | $ | 152,428 | | | | | $ | (395,691) | | | $ | (266,472) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Convertible Preferred Stock | | | | Common Stock | | | | Treasury Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | | | | |
| Balance as of January 1, 2020 | | 209,613,570 | | | $ | 322,748 | | | 73,629,136 | | | $ | 208 | | | (5,177,235) | | | $ | (23,417) | | | $ | 151,416 | | | $ | — | | | $ | (434,462) | | | $ | (306,255) | |
| Exercise of vested stock options | | — | | | — | | | 3,740 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| Stock-based Compensation Expense | | — | | | — | | | — | | | — | | | — | | | — | | | 557 | | | — | | | — | | | 557 | |
| | | | | | | | | | | | | | | | | | | | |
| Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 21,130 | | | 21,130 | |
| Balance as of March 31, 2020 | | 209,613,570 | | | $ | 322,748 | | | 73,632,876 | | | $ | 208 | | | (5,177,235) | | | $ | (23,417) | | | $ | 151,974 | | | $ | — | | | $ | (413,332) | | | $ | (284,567) | |
| | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 454 | | | — | | | — | | | 454 | |
| | | | | | | | | | | | | | | | | | | | |
| Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17,641 | | | 17,641 | |
| Balance as of June 30, 2020 | | 209,613,570 | | | $ | 322,748 | | | 73,632,876 | | | $ | 208 | | | (5,177,235) | | | $ | (23,417) | | | $ | 152,428 | | | $ | — | | | $ | (395,691) | | | $ | (266,472) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Convertible Preferred Stock | | | | Common Stock | | | | Treasury Stock | | | | Additional
Paid-In
Capital | | Accumulated Other Comprehensive Income | | Accumulated
Deficit | | Total |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | | | | |
| Balance as of January 1, 2019 | | 214,637,925 | | | $ | 323,793 | | | 75,652,445 | | | $ | 229 | | | (5,177,235) | | | $ | (23,417) | | | $ | 145,486 | | | $ | (13) | | | $ | (420,751) | | | $ | (298,466) | |
| Exercise of vested stock options | | — | | | — | | | 16,085 | | | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
| Stock-based Compensation Expense | | — | | | — | | | — | | | — | | | — | | | — | | | 1,714 | | | — | | | — | | | 1,714 | |
| | | | | | | | | | | | | | | | | | | | |
| Change in net unrealized loss on available for sale investments, at fair value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10 | | | — | | | 10 | |
| Net Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (22,714) | | | (22,714) | |
| Balance as of March 31, 2019 | | 214,637,925 | | | $ | 323,793 | | | 75,668,530 | | | $ | 229 | | | (5,177,235) | | | $ | (23,417) | | | $ | 147,204 | | | $ | (3) | | | $ | (443,465) | | | $ | (319,452) | |
| Exercise of vested stock options | | — | | | — | | | 75,231 | | | 1 | | | — | | | — | | | 8 | | | — | | | — | | | 9 | |
| | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 1,316 | | | — | | | — | | | 1,316 | |
| Change in net unrealized loss on available for sale investments, at fair value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 11 | | | — | | | 11 | |
| Net Loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (569) | | | (569) | |
| Balance as of June 30, 2019 | | 214,637,925 | | | $ | 323,793 | | | 75,743,761 | | | $ | 230 | | | (5,177,235) | | | $ | (23,417) | | | $ | 148,528 | | | $ | 8 | | | $ | (444,034) | | | $ | (318,685) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preferred Stock | | Convertible Preferred Stock Held by Consolidated VIE | | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | | | Accumulated
Deficit | | Total |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance as of January 1, 2021 | | 209,613,570 | | | $ | 322,748 | | | (51,247,915) | | | $ | (2,381) | | | 74,316,607 | | | $ | 215 | | | (5,177,235) | | | $ | (23,417) | | | $ | 155,952 | | | | | $ | (415,911) | | | $ | (283,161) | |
| Exercise of vested stock options | | — | | | — | | | — | | | — | | | 1,624,461 | | | 17 | | | — | | | — | | | 17 | | | | | — | | | 34 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 353 | | | | | — | | | 353 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | (44,889) | | | (44,889) | |
| Balance as of March 31, 2021 | | 209,613,570 | | | $ | 322,748 | | | (51,247,915) | | | $ | (2,381) | | | 75,941,068 | | | $ | 232 | | | (5,177,235) | | | $ | (23,417) | | | $ | 156,322 | | | | | $ | (460,800) | | | $ | (327,663) | |
| Exercise of vested stock options | | — | | | — | | | — | | | — | | | 129,997 | | | 1 | | | — | | | — | | | 1 | | | | | — | | | 2 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 292 | | | | | — | | | 292 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | (5,805) | | | (5,805) | |
| Balance as of June 30, 2021 | | 209,613,570 | | | $ | 322,748 | | | (51,247,915) | | | $ | (2,381) | | | 76,071,065 | | | $ | 233 | | | (5,177,235) | | | $ | (23,417) | | | $ | 156,615 | | | | | $ | (466,605) | | | $ | (333,174) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preferred Stock | | Convertible Preferred Stock Held by Consolidated VIE | | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | | | Accumulated
Deficit | | Total |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance as of January 1, 2020 | | 209,613,570 | | | $ | 322,748 | | | 0 | | | $ | 0 | | | 73,629,136 | | | $ | 208 | | | (5,177,235) | | | $ | (23,417) | | | $ | 151,416 | | | | | $ | (434,462) | | | $ | (306,255) | |
| Exercise of vested stock options | | — | | | — | | | — | | | — | | | 3,740 | | | — | | | — | | | — | | | 1 | | | | | — | | | 1 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 557 | | | | | — | | | 557 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 21,130 | | | 21,130 | |
| Balance as of March 31, 2020 | | 209,613,570 | | | $ | 322,748 | | | 0 | | | $ | 0 | | | 73,632,876 | | | $ | 208 | | | (5,177,235) | | | $ | (23,417) | | | $ | 151,974 | | | | | $ | (413,332) | | | $ | (284,567) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 454 | | | | | — | | | 454 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 17,641 | | | 17,641 | |
| Balance as of June 30, 2020 | | 209,613,570 | | | $ | 322,748 | | | 0 | | | 0 | | | 73,632,876 | | | $ | 208 | | | (5,177,235) | | | $ | (23,417) | | | $ | 152,428 | | | | | $ | (395,691) | | | $ | (266,472) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Prosper Marketplace, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands) | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
| Cash flows from Operating Activities: | | | | |
| Net (Loss) Income | | $ | (50,694) | | | $ | 38,771 | |
| Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by (Used in) Operating Activities: | | | | |
| Change in Fair Value of Financial Instruments, Net | | 2,410 | | | 39,300 | |
| Depreciation and Amortization | | 4,642 | | | 4,041 | |
| Amortization of Operating Lease Right-of-use Asset | | 1,818 | | | 1,752 | |
| Impairment of Operating Lease Right-of-use Asset | | 0 | | | 228 | |
| Gain on Sales of Borrower Loans | | (3,778) | | | (2,703) | |
| Change in Fair Value of Servicing Rights | | 4,077 | | | 5,232 | |
| Stock-Based Compensation Expense | | 587 | | | 897 | |
| Change in Fair Value of Convertible Preferred Stock Warrants | | 50,117 | | | (74,998) | |
| Other, Net | | 1,606 | | | 264 | |
| Changes in Operating Assets and Liabilities: | | | | |
| Purchase of Loans Held for Sale at Fair Value | | (792,674) | | | (622,122) | |
| Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value | | 836,302 | | | 568,402 | |
| Accounts Receivable | | (483) | | | 648 | |
| Prepaid and Other Assets | | (972) | | | (834) | |
| Accounts Payable and Accrued Liabilities | | 2,251 | | | (7,599) | |
| Payable to Investors | | 50,293 | | | 1,313 | |
| Other Liabilities | | (2,238) | | | (2,804) | |
| Net Cash Provided by (Used in) Operating Activities | | 103,264 | | | (50,212) | |
| Cash Flows from Investing Activities: | | | | |
| Purchase of Borrower Loans Held at Fair Value | | (107,609) | | | (65,664) | |
| Proceeds from Sales and Principal Payments of Borrower Loans Held at Fair Value | | 128,192 | | | 150,262 | |
| Purchases of Property and Equipment | | (5,486) | | | (5,286) | |
| Net Cash Provided by Investing Activities | | 15,097 | | | 79,312 | |
| Cash Flows from Financing Activities: | | | | |
| Proceeds from Issuance of Notes Held at Fair Value | | 108,203 | | | 65,043 | |
| Payments of Notes Held at Fair Value | | (81,042) | | | (77,107) | |
| Principal Payments on Notes Issued by Securitization Trust | | (62,448) | | | (113,423) | |
| Principal Payments on Certificates Issued by Securitization Trust | | (10,893) | | | (9,875) | |
| | | | |
| Proceeds from Warehouse Lines | | 36,950 | | | 73,299 | |
| Principal Payments on Warehouse Lines | | (59,900) | | | (6,000) | |
| | | | |
| Proceeds from Paycheck Protection Program Loan | | 0 | | | 8,447 | |
| Payments of Debt Issuance Costs | | (1,740) | | | 0 | |
| Proceeds from Exercise of Stock Options | | 36 | | | 1 | |
| Net Cash Used in Financing Activities | | (70,834) | | | (59,615) | |
| Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | | 47,527 | | | (30,515) | |
| Cash, Cash Equivalents and Restricted Cash at Beginning of the Period | | 213,868 | | | 220,408 | |
| Cash, Cash Equivalents and Restricted Cash at End of the Period | | $ | 261,395 | | | $ | 189,893 | |
| | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | |
| Cash Paid for Interest | | $ | 25,315 | | | $ | 30,522 | |
| Non-Cash Investing Activity- Accrual for Property and Equipment, Net | | 1,034 | | | 413 | |
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| Cash flows from Operating Activities: | | | |
| Net Income (Loss) | $ | 38,771 | | | $ | (23,283) | |
| Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities: | | | |
| Change in Fair Value of Financial Instruments, Net | 39,300 | | | 5,045 | |
| Depreciation and Amortization | 4,041 | | | 3,743 | |
| Amortization of Operating Lease Right-of-Use Asset | 1,752 | | | 1,632 | |
| Impairment of Operating Lease Right-of-Use Asset | 228 | | | — | |
| Gain on Sales of Borrower Loans | (2,703) | | | (6,378) | |
| Change in Fair Value of Servicing Rights | 5,232 | | | 6,621 | |
| Stock-Based Compensation Expense | 897 | | | 2,850 | |
| | | |
| Fair Value of Warrants Vested on Sale of Borrower Loans | — | | | 17,553 | |
| Change in Fair Value of Convertible Preferred Stock Warrants | (74,998) | | | 5,327 | |
| Other, Net | 264 | | | 1,303 | |
| 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 | 568,402 | | | 1,108,814 | |
| Accounts Receivable | 648 | | | 4,035 | |
| Prepaid and Other Assets | (834) | | | (601) | |
| Accounts Payable and Accrued Liabilities | (7,599) | | | 601 | |
| Payable to Investors | 1,313 | | | (12,727) | |
| Other Liabilities | (2,804) | | | (2,632) | |
| Net Cash Used in Operating Activities | (50,212) | | | (49,334) | |
| Cash Flows from Investing Activities: | | | |
| Purchase of Borrower Loans Held at Fair Value | (65,664) | | | (86,064) | |
| Proceeds from Sales and Principal Payments of Borrower Loans Held at Fair Value | 150,262 | | | 106,940 | |
| Purchases of Property and Equipment | (5,286) | | | (5,032) | |
| Purchases of Available for Sale Investments, at Fair Value | — | | | (1,488) | |
| Maturities of Available for Sale Investments | — | | | 22,271 | |
| Net Cash Provided by Investing Activities | 79,312 | | | 36,627 | |
| 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 | (77,107) | | | (85,728) | |
| Principal Payments on Notes Issued by Securitization Trust | (113,423) | | | (30,221) | |
| Principal Payments on Certificates Issued by Securitization Trust | (9,875) | | | (4,272) | |
| Proceeds from Securitization Issuance | — | | | 5,454 | |
| Proceeds from Warehouse Lines | 73,299 | | | 69,411 | |
| Principal payments on Warehouse Lines | (6,000) | | | — | |
| Proceeds from Paycheck Protection Program loan | 8,447 | | | — | |
| Payment for Debt Issuance Costs | — | | | (6,608) | |
| Proceeds from Exercise of Warrants and Stock Options | 1 | | | 13 | |
| 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 Beginning of the Period | 220,408 | | | 207,059 | |
| Cash, Cash Equivalents and Restricted Cash at End of the Period | $ | 189,893 | | | $ | 229,114 | |
| | | |
| Supplemental Disclosure of Cash Flow Information: | | | |
| Cash Paid for Interest | $ | 30,522 | | | $ | 27,560 | |
| Non-Cash Investing Activity - Accrual for Property and Equipment, Net | 413 | | | 411 | |
| Non-Cash Investing Activity - Consolidation of Borrower Loans, at Fair Value | $ | — | | | $ | (262,565) | |
| Non-Cash Financing Activity - Issuance of Securitization Notes and Certificates | — | | | 395,544 | |
| Non-Cash Financing Activity - Derecognition of Warehouse Line debt | — | | | (130,322) | |
| | | |
| Reconciliation to Amounts on Consolidated Balance Sheets | | | |
| Cash and Cash Equivalents | $ | 46,575 | | | $ | 68,124 | |
| Restricted Cash | 143,318 | | | 160,990 | |
| Total Cash, Cash Equivalents and Restricted Cash | $ | 189,893 | | | $ | 229,114 | |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
| | | | |
| | | | |
| Reconciliation to Amounts on Consolidated Balance Sheets: | | | | |
| Cash and Cash Equivalents | | $ | 56,018 | | | $ | 46,575 | |
| Restricted Cash | | 205,377 | | | 143,318 | |
| Total Cash, Cash Equivalents and Restricted Cash | | $ | 261,395 | | | $ | 189,893 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Prosper Marketplace, Inc.
Notes to Condensed Consolidated Financial Statements
PROSPER MARKETPLACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005. Except as the context requires otherwise, as used in these notes to the condensed consolidated financial statements of PMI, “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019.2020. The balance sheet at December 31, 20192020 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The preparation of Prosper’s condensed consolidated financial statements and related disclosures in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in Prosper’s financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions.
The accompanying interim condensed consolidated financial statements include the accounts of PMI, its wholly-owned subsidiaries and consolidated variable interest entities (“VIEs”). All intercompany balances have been eliminated in consolidation.
Securitization Notes are notes held by certain third partythird-party investors pursuant to Prosper’s securitization transactions, and are distinguishable from the borrower payment dependent Notes available to investors through our Note Channel.
2. Summary of Significant Accounting Policies
Prosper’s significant accounting policies are included in Note 2, Summary of Significant Accounting Policies, in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. There have been no changes to these accounting policies during the first six months of 2020 unless noted below.2021.
Fair Value Measurements
Financial instruments measured at fair value consist principally of Borrower Loans, Loans Held for Sale, Servicing Assets, Loan Trailing Fee Liabilities (Note 9), Notes, Certificates Issued by Securitization Trust and Convertible Preferred Stock Warrant Liability. The estimated fair values of other financial instruments, including Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short-term nature. The estimated fair values of the Paycheck Protection Program loan (Note 9 and 10), Notes Issued by Securitization Trust and Warehouse Lines do not approximate their carrying values due primarily to differences in the stated and market rates associated with these instruments.
Refer to Note 7, Fair Value of Assets and Liabilities, for additional fair value disclosures.
Restricted Cash
Restricted Cash consists primarily of cash deposits, money market funds and short termshort-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, Notes and Certificates Issued by Securitization Trust
Borrower Loans are funded either through the Note Channel or through the Whole Loan Channel. Through the Note Channel, Prosper purchases Borrower Loans from WebBank, then issues Notes and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s condensed consolidated balance sheets as assets and liabilities, respectively.
In 2019, Prosper began refinancing the purchase of Borrower Loans through the Whole Loan Channel through securitization transactions, which issue senior notes, risk retention interests and residual certificates. Associated securitization trusts are deemed consolidated VIEs, and as a result the Borrower Loans held in the securitization trusts are included in “Borrower Loans, at Fair Value,” seniorValue”. Senior notes sold to third party investors are included in “Notes Issued by Securitization Trust,” and the risk retention interest and residual certificates held by third party investors are included in “Certificates Issued by Securitization Trust, at Fair Value” on the accompanying condensed consolidated balance sheets. Refer to Note 6, Securitization for additional disclosures.
Prosper uses Warehouse Lines to purchase Loans Held for Sale that may be subsequently contributed to securitization transactions or sold to investors. Loans Held for Sale are included in “Loans Held for Sale, at Fair Value” on the Consolidated Balance Sheets. See Note 10, Debt for more details on Warehouse Lines.
Borrower Loans and Loans Held for Sale are purchased from WebBank. Prosper places Borrower Loans and Loans Held for Sale on non-accrual status when they are 120 days past due. When a loan is placed on non-accrual status, Prosper stops accruing interest and reverses all accrued but unpaid interest as of such date. Additionally, Prosper charges-off Borrower Loans and Loans Held for Sale when they are 120 days past due. The fair value of loans 120 or more days past due generally consists of the expected recovery from debt sales in subsequent periods.
Prosper has elected the fair value option for Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust. Changes in fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of Notes due to the borrower payment-dependent design of the Notes. Changes in fair value of Borrower Loans held in consolidated securitization trusts are partially offset by changes in fair value of the Certificates Issued by Securitization Trust. Changes in fair value of Loans Held for Sale are recorded through Proper's earnings and Prosper collects interest on Loans Held for Sale. Changes in the fair values of Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust are included in “Change in Fair Value of Financial Instruments, Net” on the Consolidated Statements of Operations.
Prosper primarily uses a discounted cash flow model to estimate the fair value of Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust. 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.
Leases
Management determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are included on the Consolidated Balance Sheets in Property and Equipment, Net and in Other Liabilities, respectively. For certain leases with original terms of twelve months or less, PMI recognizes the lease expense as incurred and does not record ROU assets and lease liabilities.
If a contract contains a lease, management evaluates whether it should be classified as an operating or finance lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of PMI's leases do not provide an implicit rate, management uses an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The operating lease ROU assets are evaluated for impairment utilizing the same impairment model used for Property and Equipment.
Consolidation of Variable Interest Entities
The determination of whether to consolidate a VIE in which we have a variable interest requires a significant amount of analysis and judgment regarding whether we are the primary beneficiary of a VIE due to our holding a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that
most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is
insufficient to allow the entity to finance its activities without additional subordinated financial support and (ii) whether a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity.
Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.
Recent Accounting Pronouncements
Accounting Standards Adopted by the Company in the Current Year
In June 2016, the Financial Accounting Standards Board (“FASB”) amended guidance related to impairment of financial instruments as part of Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which is effective for interim and annual periods beginning after December 15, 2019. Prosper adopted the standard in the first quarter of 2020. For loans accounted for at amortized cost, the guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. Because Prosper accounts for Borrower Loans at fair value through net income there was no impact on Prosper loan portfolios upon adoption. For certain available for sale investments, the guidance requires recognition of expected credit losses through recording an allowance for credit losses. The recognition of this allowance is limited to the difference between the security’s amortized cost basis and fair value. The amendments to the available for sale debt securities impairment model did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Prior to ASU No. 2017-04, the goodwill impairment test was a two-step assessment, if indicators of impairment existed. The standard eliminates Step 2 from the goodwill impairment test, which requires a hypothetical purchase price allocation. Instead, entities will record a goodwill impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Prosper adopted the guidance on a prospective basis in the first quarter of 2020, and there was no impact on the Company's consolidated financial statements.
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 are no longer 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. Prosper adopted the guidance in the first quarter of 2020. The guidance only affects disclosures in the notes to the consolidated financial statements and it had no effect on Prosper’s balance sheet or statement of operations.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year and early adoption is permitted. The Company adopted the new guidance in the first quarter of 2020, and will prospectively capitalize all eligible costs related to cloud computing arrangements starting January 1, 2020. There was, however, no impact on the Company’s consolidated financial statements for the first six months of 2020.
Accounting Standards Issued, to be Adopted by the Company in Future PeriodsPeriod
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions related to the incremental approach for intraperiod tax allocation, the requirement to recognize or derecognize deferred tax liabilities related to equity method investments that are also foreign subsidiaries and the methodology for calculating income taxes in an interim period.
The guidance also clarifies and simplifies other aspects of the accounting for income taxes, including a modification in the guidance for franchise taxes that are partially based on income and recognizing deferred taxes for a subsequent step-up in the tax basis of goodwill. ThisThe ASU is effective for annual periodsthe Company beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period.the first quarter of 2021. The Company is currently evaluatinghas adopted ASU 2019-12 and concluded that the impact this new standard will have on the Company’sits condensed consolidated financial statements.statements was immaterial.
Accounting Standards Issued, to be Adopted by the Company in Future Periods
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848),” which provides optional expedients and exceptions for applying GAAP on contract modifications and hedge accounting, in order to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative referenced rates, such as the Secured Overnight Financing Rate. This ASU can be adopted after its issuance date through December 31, 2022. The Company is currently evaluating the impact reference rate reform will have on its contracts that reference LIBOR in order to determine whether to adopt this guidance.
3. Property and Equipment, Net
Property and Equipment consists of the following at the dates presented (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| | | |
| Operating lease right-of-use assets | $ | 15,694 | | | $ | 16,213 | |
| Computer equipment | 13,724 | | | 13,420 | |
| Internal-use software and website development costs | 32,057 | | | 28,904 | |
| Office equipment and furniture | 2,999 | | | 2,999 | |
| Leasehold improvements | 7,158 | | | 7,158 | |
| Assets not yet placed in service | 3,697 | | | 2,445 | |
| Property and equipment | 75,329 | | | 71,139 | |
| Less: Accumulated depreciation and amortization | (44,839) | | | (39,843) | |
| Total Property and Equipment, Net | $ | 30,490 | | | $ | 31,296 | |
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| | | | |
| Operating lease right-of-use assets | | $ | 17,532 | | | $ | 15,767 | |
| Computer equipment | | 15,081 | | | 13,841 | |
| Internal-use software and website development costs | | 37,767 | | | 33,176 | |
| Office equipment and furniture | | 2,872 | | | 2,872 | |
| Leasehold improvements | | 7,167 | | | 7,167 | |
| Assets not yet placed in service | | 4,855 | | | 5,035 | |
| Property and equipment | | 85,274 | | | 77,858 | |
| Less: Accumulated depreciation and amortization | | (55,064) | | | (49,412) | |
| Total Property and Equipment, Net | | $ | 30,210 | | | $ | 28,446 | |
Depreciation and amortization expense for Property and Equipment, Net for the three months ended June 30, 20202021 and June 30, 20192020 waswas $2.4 million and $2.0 million and $1.8 million, respectively. Depreciation and amortization expense for Property and Equipment, Net for the six months ended June 30, 20202021 and June 30, 2019 was $3.92020 was $4.6 million and $3.6and $3.9 million, respectively. These charges are included in General and Administrative expenses on the condensed consolidated statements of operations. ProsperPMI capitalized internal-use software and website development costs in the amount of $2.1$2.5 million and $2.3$2.1 million for the three months ended June 30, 20202021 and June 30, 2019, respectively,2020, respectively. PMI capitalized internal-use software and $4.8website development costs in the amount of $4.5 million and $4.3$4.8 million for the six months ended June 30, 20202021 and June 30, 2019,2020, respectively. Additionally, disclosures aroundaround the operating lease right-of-use assetsassets are included in Note 16.15.
4. Borrower Loans, Loans Held for Sale and Notes, Held at Fair Value
The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale, and Notes as of June 30, 20202021 and December 31, 2019,2020, are presented in the following table (in thousands):
| | | Borrower Loans | | | Loans Held for Sale | | | Notes | | | Borrower Loans | | Loans Held for Sale | | Notes | |
| | June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 | | | June 30, 2021 | | December 31, 2020 | | June 30, 2021 | | December 31, 2020 | | June 30, 2021 | | December 31, 2020 | |
| Aggregate principal balance outstanding | Aggregate principal balance outstanding | $ | 497,817 | | | $ | 647,209 | | | $ | 227,127 | | | $ | 143,261 | | | $ | (227,675) | | | $ | (250,281) | | | Aggregate principal balance outstanding | $ | 342,478 | | | $ | 393,642 | | | $ | 250,989 | | | $ | 279,113 | | | $ | 239,126 | | | $ | 217,110 | | |
| Fair value adjustments | Fair value adjustments | (40,330) | | | (13,190) | | | (10,884) | | | (1,235) | | | 17,688 | | | 6,110 | | | Fair value adjustments | (3,539) | | | (15,379) | | | (1,034) | | | (4,492) | | | (3,085) | | | (8,731) | | |
| Fair value | Fair value | $ | 457,487 | | | $ | 634,019 | | | $ | 216,243 | | | $ | 142,026 | | | $ | (209,987) | | | $ | (244,171) | | | Fair value | $ | 338,939 | | | $ | 378,263 | | | $ | 249,955 | | | $ | 274,621 | | | $ | 236,041 | | | $ | 208,379 | | |
PMI has offered 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 12 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 and through June 30, 2021, approximately 11% of the total outstanding balances of all loans originated on our platform on a cumulative basis have enrolled in at least one of these COVID-19 relief programs. Approximately 2% of the total outstanding balances of all loans originated on our platform are actively enrolled in at least one relief program as of June 30, 2021.
Borrower Loans
AtAs of June 30, 2020,2021, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.92%31.82%, and hadhad various original maturity dates through June 2025.2026. At December 31, 2019,2020, outstanding Borrower Loans had original maturities of either 36 or 60 months, had monthlymonthly payments with fixed interest rates ranging from 5.31% to 31.92%31.82%, and had various original maturity dates through December 2024.2025.
As of June 30, 2021, 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, 2020, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $3.9 million and a fair value of $0.4 million. As of December 31, 2019, Borrower Loans that were 90 days or more delinquent had
an aggregate principal amount of $6.5$2.8 million and a fair value of $1.90.3 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of June 30, 20202021 and December 31, 2019,2020, Borrower Loans in non-accrual status had a fair value of $0.6$0.2 million and $0.7$0.4 million, respectively.
Loans Held for Sale
AtAs of June 30, 2020,2021, outstanding Loans Held for Sale had original terms to maturity between 36 months and 60 months, had monthlymonthly payments with fixed interest rates ranging from 5.31% to 31.82% and had various original maturity dates through June 2025. 2026. At December 31, 2019,2020, outstanding Loans Held for Sale had original terms to maturity between 36 months and 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.82% and had various original maturity dates through December 2024. Fair value adjustments recorded in earnings on loans invested in by the Company resulted in net losses of $13.8 million and $2.5 million for the six months ended June 30, 2020 and 2019, respectively.2025. Interest income earned on Loans Held for Sale by the Company was $11.6$15.2 million and $7.511.6 million for the six months ended June 30, 20202021 and June 30, 2019,2020, respectively.
As of June 30, 2020,2021, Loans Held for Sale that were 90 days or more delinquent had an aggregate principal amount of $0.7$0.6 million and a fair value of $0.1 million.million. As of December 31, 2019,2020, Loans Held for Sale that were 90 days or more delinquent had an aggregate principal amount of $0.7$0.8 million and a fair value of $0.2$0.1 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of June 30, 20202021 and December 31, 2019,2020, Loans Held for Sale in non-accrual status had a fair value of $0.1$0.1 million (for both periods).
5. Loan Servicing Assets
Prosper accounts for Servicing Assets at their estimated fair values with changes in fair values recorded in Servicing Fees. The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The Servicing Assets are measured at fair value throughout the servicing period. The total gaingains recognized on the sale of such Borrower Loans for the three months ended June 30, 2021 and 2020 was $0.7were $1.4 million, and $0.6 million, respectively, recognized in Gain on Sale of Borrower Loans on the condensed consolidated statementstatements of operations.operations. The total gains and losses recognized on the sale of such Borrower Loans for the three months ended June 30, 2019 consisted of a gain of $3.6 million, and a loss of $7.8 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium. The total gain recognized on the sale of such Borrower Loans for the six months ended June 30, 2021 and 2020 was $2.7were $3.0 million and $2.4 million, respe,ctively, recognized in Gain on Sale of Borrower Loans on the condensed consolidated statementstatements of operations. The total gains and losses recognized on the sale of such Borrower Loans for the six months ended June 30, 2019 was a gain of $6.3 million, and a loss of $17.6 million from the Fair Value of Warrants Vested on the Sale of Borrower Loans to the Consortium.
As of June 30, 2021, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $2.2 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.82%, and various original maturity dates through June 2026. At December 31, 2020, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $2.6$2.4 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%31.82%, and various maturity dates through June 2025. At December 31, 2019, Borrower Loans that were sold but for which Prosper 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 December 2024.2025.
Contractually-specified servicing fees and ancillary fees totalingtotaling $6.0 million and $7.3 million and $9.4 million for the three months ended June 30, 20202021 and 2019,2020, respectively, and $16.5$11.7 million and $18.5$16.5 million for the six months ended June 30, 2020 2021 and 2019,2020, respectively, are included on the condensed consolidated statements of operations in Servicing Fees, Net.
Fair Value Valuation Method
Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the Level 3 Servicing Assets. The following is a description of the significant unobservable inputs provided in the table.
Market Servicing Rate
Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of
outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from backup service providers.
Discount Rate
The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the Servicing Assets based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets.
Default Rate
The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default 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. Securitizations
In 2019, Prosper co-sponsored and retained residual certificates in securitizations of unsecured personal whole loans facilitated through our marketplace with an aggregate outstanding principal balance of $573.0 million through three securitization trusts (PMIT 2019-1, PMIT 2019-2, and PMIT 2019-4). Each securitization trust issued senior notes, a risk retention interest and residual certificates to finance the purchase of Borrower Loans. The risk retention interest represents the right to receive 5.0% of all amounts collected on the Borrower Loans held by the securitization trusts. The resulting senior notes were sold to third party investors. Prosper retained 65.5%, 16.4%, and 19.6% of the residual certificates issued by PMIT 2019-1, PMIT 2019-2, and PMIT 2019-4, respectively. The remaining residual certificates and all the risk retention interests
are held by third-party investors. In addition to the retained residual certificates, Prosper's continued involvement includes loan servicing responsibilities over the life of the underlying loans.
PMIT 2019-1, 2019-2 and 2019-4 are deemed VIEs. Prosper consolidated the VIEs as the primary beneficiary because Prosper, through its role as the servicer, has both the power to direct the activities that most significantly affect the VIEs' economic performance and a variable interest that could potentially be significant to the VIEs through holding the retained residual certificates. In evaluating whether Prosper is the primary beneficiary, management considers both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIEs. Management assesses whether Prosper is the primary beneficiary of the VIEs on an on-going basis. For these VIEs, the creditors have no recourse to the general credit of Prosper and the liabilities of the VIEs can only be settled by the respective VIEs' assets. Additionally, the assets of the VIEs can be used only to settle obligations of the VIEs. Because Prosper consolidates the securitization trusts, the loans held in the securitization trusts are included in “Borrower Loans, at Fair Value”, the notes sold to third party investors recorded in “Notes Issued by Securitization Trust”, and the risk retention interests and residual certificates held by third party investors in “Certificates Issued by Securitization Trust, at Fair Value” in the condensed consolidated balance sheets.
PMIT 2019-1
The notes under the PMIT 2019-1 securitization were issued in three classes: Class A in the amount of $127.3 million, Class B in the amount of $25.0 million and Class C in the amount of $19.3 million (collectively, the “2019-1 Notes”). The Class A, Class B and Class C notes bear interest at a fixed rate of 3.54%, 4.03% and 5.27%, respectively. Principal and interest payments began in March 2019 and are payable monthly. These notes are recorded at amortized cost on the balance sheet. The associated debt issuance costs of $2.3 million are deferred and amortized into interest expense over the contractual life of the notes. The notes held by third-party investors and the unamortized debt issuance costs are included in “Notes Issued by Securitization Trust” with a balance of $59.1$18.9 million on the condensed consolidated balance sheets as of June 30, 2020 and are
secured by Borrower Loans at fair value of $60.4$20.1 million included in “Borrower Loans, at Fair Value” on the condensed consolidated balance sheets as of June 30, 2020.2021. The risk retention and residual certificates held by third party investors at fair value of $5.5$2.1 million are included in “Certificates Issued by Securitization Trust, at Fair Value” on the condensed consolidated balance sheets as of June 30, 2020.2021.
PMIT 2019-2
The notes under the PMIT 2019-2 securitization were issued in three classes: Class A in the amount of $110.1 million, Class B in the amount of $31.4 million and Class C in the amount of $32.7 million (collectively, the “2019-2 Notes”). The Class A, Class B and Class C notes bear interest at a fixed rate of 3.20%, 3.69% and 5.05%, respectively. Principal and interest payments began in July 2019 and are payable monthly. These notes are recorded at amortized cost on the balance sheet. The associated debt issuance costs of $1.9 million are deferred and amortized into interest expense over the contractual life of the notes. The notes held by third-party investors and the unamortized debt issuance costs are included in “Notes Issued by Securitization Trust” with a balance of $83.8$35.6 million on the condensed consolidated balance sheets as of June 30, 2020 and are secured by Borrower Loans at fair value of $87.8$39.1 million of included in “Borrower Loans, at Fair Value” on the condensed consolidated balance sheets as of June 30, 2020.2021. The risk retention and residual certificates held by third party investors at fair value of $12.4$6.7 million are included in “Certificates Issued by Securitization Trust, at Fair Value” on the condensed consolidated balance sheets as of June 30, 2020.2021.
PMIT 2019-4
The notes under the PMIT 2019-4 securitization were issued in three classes: Class A in the amount of $102.6 million, Class B in the amount of $19.5 million and Class C in the amount of $16.8 million (collectively, the “2019-4 Notes”). The Class A, Class B and Class C notes bear interest at a fixed rate of 2.48%, 3.2%3.20% and 4.95% respectively. Principal and interest payments began in December 2019 and are payable monthly. These notes are recorded at amortized cost on the balance sheet. The associated debt issuance costs of $1.2 million are deferred and amortized into interest expense over the contractual life of the notes. The notes held by third-party investors and the unamortized debt issuance costs are included in Notes“Notes Issued by Securitization TrustTrust” with a balance of $92.4$40.4 million and are secured by Borrower Loans with aat fair value of $97.6$42.9 million included in “Borrower Loans, at Fair Value” on the condensed consolidated balance sheets as of June 30, 2020.2021. The risk retention interest and residual certificates held by third party investors at fair value of $13.6$6.5 million are included in “Certificates Issued by Securitization Trust, at Fair Value” in the condensed consolidated balance sheets as of June 30, 2020.2021.
7. Fair Value of Assets and Liabilities
Prosper measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. The Company applies this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability. Prosper did not transfer any assets or liabilities in or out of Level 3 for the three and six months ended June 30, 20202021 or 2019.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale, Notes, Certificates Issued by Securitization Trust, Servicing Rights and loan trailing fee liability are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used in the discounted cash flow model include default and prepayment rates primarily derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
The Convertible Preferred Stock Warrant Liability is valued using a Black-Scholes option pricing model. Refer to Note 12 for further details.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | | | | | | | | |
| Borrower Loans, at Fair Value | | $ | 0 | | | $ | 0 | | | $ | 338,939 | | | $ | 338,939 | |
| Loans Held for Sale at Fair Value | | 0 | | | 0 | | | 249,955 | | | 249,955 | |
| Servicing Assets | | 0 | | | 0 | | | 8,944 | | | 8,944 | |
| Total Assets | | $ | 0 | | | $ | 0 | | | $ | 597,838 | | | $ | 597,838 | |
| Liabilities: | | | | | | | | |
| Notes, at Fair Value | | $ | 0 | | | $ | 0 | | | $ | 236,041 | | | $ | 236,041 | |
| Certificates Issued by Securitization Trust, at Fair Value | | 0 | | | 0 | | | 15,295 | | | 15,295 | |
| Convertible Preferred Stock Warrant Liability | | 0 | | | 0 | | | 162,436 | | | 162,436 | |
| Loan Trailing Fee Liability | | 0 | | | 0 | | | 2,145 | | | 2,145 | |
| Total Liabilities | | $ | 0 | | | $ | 0 | | | $ | 415,917 | | | $ | 415,917 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | | | | | | | |
| Borrower Loans | $ | — | | | $ | — | | | $ | 457,487 | | | $ | 457,487 | |
| Loans Held for Sale | — | | | — | | | 216,243 | | | 216,243 | |
| | | | | | | |
| Servicing Assets | — | | | — | | | 10,073 | | | 10,073 | |
| Total Assets | $ | — | | | $ | — | | | $ | 683,803 | | | $ | 683,803 | |
| Liabilities: | | | | | | | |
| Notes | $ | — | | | $ | — | | | $ | 209,987 | | | $ | 209,987 | |
| | | | | | | |
| Certificates Issued by Securitization Trust, at Fair Value | — | | | — | | | 31,571 | | | 31,571 | |
| Convertible Preferred Stock Warrant Liability | — | | | — | | | 74,998 | | | 74,998 | |
| Loan Trailing Fee Liability | — | | | — | | | 2,403 | | | 2,403 | |
| Total Liabilities | $ | — | | | $ | — | | | $ | 318,959 | | | $ | 318,959 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | | | | | | | |
| Borrower Loans | $ | — | | | $ | — | | | $ | 634,019 | | | $ | 634,019 | |
| Loans Held for Sale | — | | | — | | | 142,026 | | | 142,026 | |
| | | | | | | |
| Servicing Assets | — | | | — | | | 12,602 | | | 12,602 | |
| Total Assets | $ | — | | | $ | — | | | $ | 788,647 | | | $ | 788,647 | |
| Liabilities: | | | | | | | |
| Notes | $ | — | | | $ | — | | | $ | 244,171 | | | $ | 244,171 | |
| | | | | | | |
| Certificates Issued by Securitization Trust | — | | | — | | | 52,168 | | | 52,168 | |
| Convertible Preferred Stock Warrant Liability | — | | | — | | | 149,996 | | | 149,996 | |
| Loan Trailing Fee Liability | — | | | — | | | 2,997 | | | 2,997 | |
| Total Liabilities | $ | — | | | $ | — | | | $ | 449,332 | | | $ | 449,332 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | | | | | | | | |
| Borrower Loans, at Fair Value | | $ | 0 | | | $ | 0 | | | $ | 378,263 | | | $ | 378,263 | |
| Loans Held for Sale at Fair Value | | 0 | | | 0 | | | 274,621 | | | 274,621 | |
| Servicing Assets | | 0 | | | 0 | | | 9,242 | | | 9,242 | |
| Total Assets | | $ | 0 | | | $ | 0 | | | $ | 662,126 | | | $ | 662,126 | |
| Liabilities: | | | | | | | | |
| Notes, at Fair Value | | $ | 0 | | | $ | 0 | | | $ | 208,379 | | | $ | 208,379 | |
| Certificates Issued by Securitization Trust, at Fair Value | | 0 | | | 0 | | | 22,917 | | | 22,917 | |
| Convertible Preferred Stock Warrant Liability | | 0 | | | 0 | | | 112,319 | | | 112,319 | |
| Loan Trailing Fee Liability | | 0 | | | 0 | | | 2,233 | | | 2,233 | |
| Total Liabilities | | $ | 0 | | | $ | 0 | | | $ | 345,848 | | | $ | 345,848 | |
As Prosper’sPMI’s Borrower Loans, Loans Held for Sale, Notes, Certificates Issued by Securitization Trust, Convertible Preferred Stock Warrant Liability, servicing rightsassets and loan trailing fee liability do not trade in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, gains and losses for assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs. Prosper did not transfer any assets or liabilities in or out of Level 3 for the six months ended June 30, 2021 and June 30, 2020.
Significant Unobservable Inputs
The following tables present quantitative information about the ranges of significant unobservable inputs used for the Company’s Level 3 fair value measurements at June 30, 20202021 and December 31, 2019:
| | | | | | | | | | | | | | |
| | Range | | |
Borrower Loans, Loans Held for Sale and NotesNotes: | | June 30, 20202021 | | December 31, 20192020 |
| Discount rate | | 6.4%4.6% - 15.9%16.1% | | 4.4%4.5% - 12.2%17.7% |
| Default rate | | 0.3% - 17.3% | | 2.3% - 19.0%17.9% |
| | 2.1% | | | | | | | | | | | | |
| | Range |
| Certificates Issued by Securitization Trust: | | June 30, 2021 | | December 31, 2020 |
| Discount rate | | 3.1% - 18.6%14.0% | | 3.3% - 16.0% |
| Default rate | | 0.3% - 13.0% | | 3.2% - 15.3% |
| Prepayment rate | | 3.4% - 35.5% | | 7.6% - 35.4% |
| | | | |
| | | | | | | | | | | | | | |
| | Range | | |
Certificates Issued by Securitization TrustServicing Assets: | | June 30, 20202021 | | December 31, 2019 |
Discount rate | | 8.8% - 19.9% | | 4.0% - 15.0% |
Default rate | | 3.2% - 17.7% | | 2.0% - 17.0% |
Prepayment rate | | 11.1% - 34.2% | | 14.5% - 33.0% |
| | | | |
| | | | | | | | | | | | | | |
| | 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%16.8% | | 1.7%1.9% - 18.8%17.7% |
| Prepayment rate | | 15.3%11.6% - 28.5%28.6% | | 16.5%12.4% - 28.1%28.9% |
Market servicing rate (1) (2) | | 0.625% - 0.818% | | 0.625 | %0.625% - 0.818% |
(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, 2021 and December 31, 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, 20202021 and December 31, 2019,2020, the market rate for collection fees and non-sufficient fund fees was assumed to be 46 basis points and 67 basis points, respectively, for a total market servicing rate range of 66.568.5 - 85.887.8 basis points and a total market servicing rate of 68.569.5 - 88.8 basis points, respectively.
| | | | | | | | | | | | | | |
| | Range | | |
| Loan Trailing Fee Liability | | June 30, 20202021 | | December 31, 20192020 |
| Discount rate | | 15.0% - 25.0% | | 15.0% - 25.0% |
| Default rate | | 1.9% - 19.4%16.8% | | 1.7%1.9% - 18.8%17.7% |
| Prepayment rate | | 15.3%11.6% - 28.5%28.6% | | 16.5%12.4% - 28.1%28.9% |
At June 30, 20202021 and December 31, 2019,2020, the discounted cash flow methodology used to estimate the Notes fair values used the same projected cash flows as the related Borrower Loans.
Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis
The following tables present additional information about Level 3 Borrower Loans, Loans Held for Sale, Notes and NotesCertificates Issued by Securitization Trust measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Assets | | Liabilities | | |
| | Borrower Loans | | Loans Held For Sale | | Notes | | Certificates Issued by Securitization Trust | | Total |
| Balance at January 1, 2021 | | $ | 378,263 | | | $ | 274,621 | | | $ | (208,379) | | | $ | (22,917) | | | $ | 421,588 | |
| Purchase of Borrower Loans/Issuance of Notes | | 107,609 | | | 792,674 | | | (108,203) | | | 0 | | | 792,080 | |
| Principal repayments | | (145,982) | | | (73,454) | | | 81,042 | | | 10,893 | | | (127,501) | |
| Borrower Loans sold to third parties | | (1,724) | | | (743,334) | | | 0 | | | 0 | | | (745,058) | |
| Other changes | | (1,192) | | | (267) | | | 219 | | | 72 | | | (1,168) | |
| Change in fair value | | 1,965 | | | (285) | | | (720) | | | (3,343) | | | (2,383) | |
| Balance at June 30, 2021 | | $ | 338,939 | | | $ | 249,955 | | | $ | (236,041) | | | $ | (15,295) | | | $ | 337,558 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Assets | | Liabilities | | |
| | Borrower Loans | | Loans Held for Sale | | Notes | | Certificates Issued by Securitization Trust | | Total |
| Balance at January 1, 2020 | | $ | 634,019 | | | $ | 142,026 | | | $ | (244,171) | | | $ | (52,168) | | | $ | 479,706 | |
| Purchase of Borrower Loans/Issuance of Notes | | 65,664 | | | 622,122 | | | (65,043) | | | 0 | | | 622,743 | |
| Principal repayments | | (179,552) | | | (43,076) | | | 77,107 | | | 9,875 | | | (135,646) | |
| Borrower Loans sold to third parties | | (4,254) | | | (491,782) | | | 0 | | | 0 | | | (496,036) | |
| Other changes | | (158) | | | 779 | | | (257) | | | 341 | | | 705 | |
| Change in fair value | | (58,232) | | | (13,826) | | | 22,377 | | | 10,381 | | | (39,300) | |
| Balance at June 30, 2020 | | $ | 457,487 | | | $ | 216,243 | | | $ | (209,987) | | | $ | (31,571) | | | $ | 432,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Assets | | Liabilities | | |
| | Borrower Loans | | Loans Held For Sale | | Notes | | Certificates Issued by Securitization Trust | | Total |
| Balance at April 1, 2021 | | $ | 351,101 | | | $ | 240,379 | | | $ | (218,494) | | | $ | (19,726) | | | $ | 353,260 | |
| Purchase of Borrower Loans/Issuance of Notes | | 58,651 | | | 386,440 | | | (58,342) | | | 0 | | | 386,749 | |
| Principal repayments | | (70,592) | | | (38,583) | | | 41,254 | | | 5,408 | | | (62,513) | |
| Borrower Loans sold to third parties | | (715) | | | (338,506) | | | 0 | | | 0 | | | (339,221) | |
| Other changes | | (523) | | | (132) | | | 32 | | | 39 | | | (584) | |
| Change in fair value | | 1,017 | | | 357 | | | (491) | | | (1,016) | | | (133) | |
| Balance at June 30, 2021 | | $ | 338,939 | | | $ | 249,955 | | | $ | (236,041) | | | $ | (15,295) | | | $ | 337,558 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | | |
| Assets | | | | Liabilities | | | | |
| Borrower Loans | | Loans Held For Sale | | Notes | | Certificates Issued by Securitization Trust | | Total |
| Balance at January 1, 2020 | $ | 634,019 | | | $ | 142,026 | | | $ | (244,171) | | | $ | (52,168) | | | $ | 479,706 | |
| Purchase of Borrower Loans/Issuance of Notes | 65,664 | | | 622,122 | | | (65,043) | | | — | | | 622,743 | |
| Principal repayments | (179,552) | | | (43,076) | | | 77,107 | | | 9,875 | | | (135,646) | |
| Borrower Loans sold to third parties | (4,254) | | | (491,782) | | | — | | | — | | | (496,036) | |
| Other changes | (158) | | | 779 | | | (257) | | | 341 | | | 705 | |
| Change in fair value | (58,232) | | | (13,826) | | | 22,377 | | | 10,381 | | | (39,300) | |
| Balance at June 30, 2020 | $ | 457,487 | | | $ | 216,243 | | | $ | (209,987) | | | $ | (31,571) | | | $ | 432,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | | |
| Assets | | | | Liabilities | | | | |
| Borrower Loans | | Loans Held for Sale | | Notes | | Certificates Issued by Securitization Trust | | Total |
| Balance at January 1, 2019 | $ | 263,522 | | | $ | 183,788 | | | $ | (264,003) | | | $ | — | | | $ | 183,307 | |
| Purchase of Borrower Loans/Issuance of Notes | 348,629 | | | 1,161,237 | | | (86,713) | | | (51,595) | | | 1,371,558 | |
| Transfers in (Transfers out) | 147,773 | | | (147,773) | | | — | | | — | | | — | |
| Principal repayments | (134,031) | | | (26,529) | | | 85,728 | | | 4,272 | | | (70,560) | |
| Borrower Loans sold to third parties | (1,886) | | | (1,053,308) | | | — | | | — | | | (1,055,194) | |
| Other changes | 91 | | | 89 | | | 603 | | | (603) | | | 180 | |
| Change in fair value | (17,299) | | | (2,542) | | | 10,960 | | | 3,836 | | | (5,045) | |
| Balance at June 30, 2019 | $ | 606,799 | | | $ | 114,962 | | | $ | (253,425) | | | $ | (44,090) | | | $ | 424,246 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | | |
| Assets | | | | Liabilities | | | | |
| Borrower Loans | | Loans Held For Sale | | Notes | | Certificates Issued by Securitization Trust | | Total |
| Balance at April 1, 2020 | $ | 522,404 | | | $ | 153,236 | | | $ | (225,491) | | | $ | (35,316) | | | $ | 414,833 | |
| Purchase of Borrower Loans/Issuance of Notes | 24,363 | | | 222,572 | | | (24,468) | | | — | | | 222,467 | |
| Principal repayments | (82,837) | | | (24,516) | | | 36,520 | | | 5,042 | | | (65,791) | |
| Borrower Loans sold to third parties | (1,991) | | | (136,148) | | | — | | | — | | | (138,139) | |
| Other changes | 584 | | | 673 | | | (396) | | | 303 | | | 1,164 | |
| Change in fair value | (5,036) | | | 426 | | | 3,848 | | | (1,600) | | | (2,362) | |
| Balance at June 30, 2020 | $ | 457,487 | | | $ | 216,243 | | | $ | (209,987) | | | $ | (31,571) | | | $ | 432,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Assets | | Liabilities | | |
| | Borrower Loans | | Loans Held for Sale | | Notes | | Certificates Issued by Securitization Trust | | Total |
| Balance at April 1, 2020 | | $ | 522,404 | | | $ | 153,236 | | | $ | (225,491) | | | $ | (35,316) | | | $ | 414,833 | |
| Purchase of Borrower Loans/Issuance of Notes | | 24,363 | | | 222,572 | | | (24,468) | | | 0 | | | 222,467 | |
| Principal repayments | | (82,837) | | | (24,516) | | | 36,520 | | | 5,042 | | | (65,791) | |
| Borrower Loans sold to third parties | | (1,991) | | | (136,148) | | | 0 | | | 0 | | | (138,139) | |
| Other changes | | 584 | | | 673 | | | (396) | | | 303 | | | 1,164 | |
| Change in fair value | | (5,036) | | | 426 | | | 3,848 | | | (1,600) | | | (2,362) | |
| Balance at June 30, 2020 | | $ | 457,487 | | | $ | 216,243 | | | $ | (209,987) | | | $ | (31,571) | | | $ | 432,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | | |
| Assets | | | | Liabilities | | | | |
| Borrower Loans | | Loans Held for Sale | | Notes | | Certificates Issued by Securitization Trust | | Total |
| Balance at April 1, 2019 | $ | 448,710 | | | $ | 106,640 | | | $ | (258,722) | | | $ | (19,134) | | | $ | 277,494 | |
| Purchase of Borrower Loans/Issuance of Notes | 213,370 | | | 670,382 | | | (41,774) | | | (30,979) | | | 810,999 | |
| Transfers in (Transfers out) | 33,457 | | | (33,457) | | | — | | | — | | | — | |
| Principal repayments | (77,402) | | | (11,790) | | | 41,611 | | | 3,139 | | | (44,442) | |
| Borrower Loans sold to third parties | (912) | | | (615,835) | | | — | | | — | | | (616,747) | |
| Other changes | (48) | | | 255 | | | 2 | | | (436) | | | (227) | |
| Change in fair value | (10,376) | | | (1,233) | | | 5,458 | | | 3,320 | | | (2,831) | |
| Balance at June 30, 2019 | $ | 606,799 | | | $ | 114,962 | | | $ | (253,425) | | | $ | (44,090) | | | $ | 424,246 | |
The following tables present additional information about Level 3 Servicing Assets measured at fair value on a recurring basis for the three and six month periods ending June 30, 20202021 and 20192020 (in thousands):
| | | | | | | | |
| | Servicing Assets |
| Fair Value at January 1, 2021 | | $ | 9,242 | |
| Additions | | 3,779 | |
| | |
| Less: Changes in fair value | | (4,077) | |
| Fair Value at June 30, 2021 | | $ | 8,944 | |
| | | | | | | | |
| | Servicing Assets |
| Fair Value at January 1, 2020 | | $ | 12,602 | |
| Additions | | 2,703 | |
| | |
| Less: Changes in fair value | | (5,232) | |
| Fair Value at June 30, 2020 | | $ | 10,073 | |
| | | | | | | | |
| | Servicing Assets |
Fair Value at JanuaryApril 1, 20192021 | | $ | 14,6879,248 | |
| Additions | | 6,3781,760 | |
Derecognition | (1,049) | |
| Less: Changes in fair value | | (6,629)(2,064) | |
Fair Value at June 30, 20192021 | | $ | 13,3878,944 | |
| | | | | | | | |
| | Servicing Assets |
| Fair Value at April 1, 2020 | | $ | 11,742 | |
| Additions | | 729 | |
| | |
| Less: Changes in fair value | | (2,398) | |
| Fair Value at June 30, 2020 | | $ | 10,073 | |
| | | | | |
| Servicing Assets |
Fair Value at April 1, 2019 | $ | 13,814 | |
Additions | 3,636 | |
Derecognition | (685) | |
Less: Changes in fair value | (3,378) | |
Fair Value at June 30, 2019 | $ | 13,387 | |
The following tables present additional information about the Level 3 Convertible Preferred Stock Warrant Liability measured at fair value on a recurring basis for the three and six month periods ending June 30, 20202021 and 20192020 (in thousands):
| | | | | | | | |
| | Convertible Preferred Stock
Warrant Liability |
| Balance as of January 1, 2021 | | $ | 112,319 | |
| | |
| Change in fair value | | 50,117 | |
| Balance as of June 30, 2021 | | $ | 162,436 | |
| | | | | | | | |
| | Convertible Preferred Stock
Warrant Liability |
| Balance as of January 1, 2020 | | $ | 149,996 | |
| | |
| Change in fair value | | (74,998) | |
| Balance as of June 30, 2020 | | $ | 74,998 | |
| | | | | | | | |
| | Convertible Preferred Stock
Warrant Liability |
Balance as of JanuaryApril 1, 20192021 | | $ | 143,679156,750 | |
Issuance of Stock Warrants | 17,553 | |
| Change in fair value | | 5,3275,686 | |
Balance as of June 30, 20192021 | | $ | 166,559162,436 | |
| | | | | | | | |
| | Convertible Preferred Stock
Warrant Liability |
| Balance as of April 1, 2020 | | $ | 94,547 | |
| | |
| Change in fair value | | (19,549) | |
| Balance as of June 30, 2020 | | $ | 74,998 | |
| | | | | |
| Convertible Preferred Stock
Warrant Liability |
Balance as of April 1, 2019 | $ | 163,483 | |
Issuance of Stock Warrants | 7,805 | |
Change in fair value | (4,729) | |
Balance as of June 30, 2019 | $ | 166,559 | |
Loan Trailing Fee
The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and default rates using a discounted cash flow model. The assumptions used are the same as those used for the valuation of Servicing Assets, as described below.
The following tables present additional information about the Level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis for the three and six month periods ending June 30, 20202021 and 20192020 (in thousands):
| | | | | | | | |
| | Loan Trailing Fee Liability |
| Balance at January 1, 2021 | | $ | 2,233 | |
| Issuances | | 817 | |
| Cash Payment of Loan Trailing Fee | | (1,066) | |
| Change in Fair Value | | 161 | |
| Balance at June 30, 2021 | | $ | 2,145 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
| Balance at January 1, 2020 | | $ | 2,997 | |
| Issuances | | 625 | |
| Cash Payment of Loan Trailing Fee | | (1,271) | |
| Change in Fair Value | | 52 | |
| Balance at June 30, 2020 | | $ | 2,403 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
Balance at JanuaryApril 1, 20192021 | | $ | 3,1182,189 | |
| Issuances | | 1,297407 | |
| Cash Payment of Loan Trailing Fee | | (1,298)(522) | |
| Change in Fair Value | | 13271 | |
Balance at June 30, 20192021 | | $ | 3,2492,145 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
| Balance at April 1, 2020 | | $ | 2,646 | |
| Issuances | | 240 | |
| Cash Payment of Loan Trailing Fee | | (596) | |
| Change in Fair Value | | 113 | |
| Balance at June 30, 2020 | | $ | 2,403 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
Balance at April 1, 2019 | | $ | 3,084 | |
Issuances | | 731 | |
Cash Payment of Loan Trailing Fee | | (640) | |
Change in Fair Value | | 74 | |
Balance at June 30, 2019 | | $ | 3,249 | |
Significant Recurring Level 3 Fair Value Input Sensitivity
Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at June 30, 2020 and December 31, 2019 for Borrower Loans and Loans Held for Sale are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | | | | | | | |
| Borrower Loans and Loans Held for Sale | June 30, 2020 | | | December 31, 2019 | |
| Fair value, using the following assumptions: | $ | 673,730 | | | | $ | 776,045 | | |
| Weighted-average discount rate | 11.59 | % | | | 7.00 | % | |
| Weighted-average default rate | 13.15 | % | | | 12.63 | % | |
| | | | | |
| Fair value resulting from: | | | | | |
| 100 basis point increase in discount rate | $ | 667,986 | | | | $ | 768,924 | | |
| 200 basis point increase in discount rate | $ | 662,372 | | | | $ | 761,971 | | |
| Fair value resulting from: | | | | | |
| 100 basis point decrease in discount rate | $ | 679,607 | | | | $ | 783,344 | | |
| 200 basis point decrease in discount rate | $ | 685,623 | | | | $ | 790,823 | | |
| | | | | |
| Fair value resulting from: | | | | | |
| 10 percent increase in default rate | $ | 666,236 | | | | $ | 765,894 | | |
| 20 percent increase in default rate | $ | 658,771 | | | | $ | 756,007 | | |
| Fair value resulting from: | | | | | |
| 10 percent decrease in default rate | $ | 681,254 | | | | $ | 786,541 | | |
| 20 percent decrease in default rate | $ | 688,814 | | | | $ | 797,065 | | |
Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at June 30, 20202021 and December 31, 20192020 for NotesBorrower Loans and Loans Held for Sale are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | | | | | | | |
| Notes | June 30, 2020 | | | December 31, 2019 | |
| Fair value, using the following assumptions: | $ | 209,987 | | | | $ | 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 and the sensitivity of the fair value to immediate changes in those assumptions at June 30, 2020 and December 31, 2019 for Certificates Issued by Securitization Trust are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | | | | | | | |
| Certificates Issued by Securitization Trust | June 30, 2020 | | | December 31, 2019 | |
| Fair value, using the following assumptions: | $ | 31,571 | | | | $ | 52,168 | | |
| Weighted-average discount rate | 14.55 | % | | | 9.59 | % | |
| Weighted-average default rate | 13.86 | % | | | 10.12 | % | |
| Weighted-average prepayment rate | 22.40 | % | | | 21.41 | % | |
| | | | | |
| Fair value resulting from: | | | | | |
| 100 basis point increase in discount rate | $ | 31,313 | | | | $ | 51,813 | | |
| 200 basis point increase in discount rate | $ | 31,060 | | | | $ | 51,466 | | |
| Fair value resulting from: | | | | | |
| 100 basis point decrease in discount rate | $ | 31,836 | | | | $ | 52,533 | | |
| 200 basis point decrease in discount rate | $ | 32,108 | | | | $ | 52,909 | | |
| | | | | |
| Fair value resulting from: | | | | | |
| 10 percent increase in default rate | $ | 29,670 | | | | $ | 48,986 | | |
| 20 percent increase in default rate | $ | 27,777 | | | | $ | 45,926 | | |
| Fair value resulting from: | | | | | |
| 10 percent decrease in default rate | $ | 33,482 | | | | $ | 55,369 | | |
| 20 percent decrease in default rate | $ | 35,405 | | | | $ | 58,613 | | |
| | | | | |
| Fair value resulting from: | | | | | |
| 10 percent increase in prepayment rate | $ | 31,514 | | | | $ | 52,085 | | |
| 20 percent increase in prepayment rate | $ | 31,451 | | | | $ | 52,008 | | |
| Fair value resulting from: | | | | | |
| 10 percent decrease in prepayment rate | $ | 31,631 | | | | $ | 52,253 | | |
| 20 percent decrease in prepayment rate | $ | 31,693 | | | | $ | 52,340 | | |
| | | | | | | | | | | | | | |
| Borrower Loans and Loans Held for Sale | | June 30, 2021 | | December 31, 2020 |
| Fair value, using the following assumptions: | | $ | 588,894 | | | $ | 652,884 | |
| Weighted-average discount rate | | 6.81 | % | | 8.26 | % |
| Weighted-average default rate | | 10.44 | % | | 11.58 | % |
| | | | |
| Fair value resulting from: | | | | |
| 100 basis point increase in discount rate | | $ | 583,202 | | | $ | 647,093 | |
| 200 basis point increase in discount rate | | $ | 577,651 | | | $ | 641,437 | |
| Fair value resulting from: | | | | |
| 100 basis point decrease in discount rate | | $ | 594,733 | | | $ | 658,817 | |
| 200 basis point decrease in discount rate | | $ | 600,724 | | | $ | 664,895 | |
| | | | |
| Fair value resulting from: | | | | |
| 10 percent increase in default rate | | $ | 583,270 | | | $ | 646,421 | |
| 20 percent increase in default rate | | $ | 577,684 | | | $ | 639,987 | |
| Fair value resulting from: | | | | |
| 10 percent decrease in default rate | | $ | 594,551 | | | $ | 659,377 | |
| 20 percent decrease in default rate | | $ | 600,243 | | | $ | 665,904 | |
Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at June 30, 20202021 and December 31, 20192020 for Notes are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | | | | |
| Notes | | June 30, 2021 | | December 31, 2020 |
| Fair value, using the following assumptions: | | $ | 236,041 | | | $ | 208,379 | |
| Weighted-average discount rate | | 6.74 | % | | 8.93 | % |
| Weighted-average default rate | | 11.20 | % | | 12.26 | % |
| | | | |
| Fair value resulting from: | | | | |
| 100 basis point increase in discount rate | | $ | 233,756 | | | $ | 206,528 | |
| 200 basis point increase in discount rate | | $ | 231,528 | | | $ | 204,720 | |
| Fair value resulting from: | | | | |
| 100 basis point decrease in discount rate | | $ | 238,385 | | | $ | 210,274 | |
| 200 basis point decrease in discount rate | | $ | 240,789 | | | $ | 212,217 | |
| | | | |
| Fair value resulting from: | | | | |
| 10 percent increase in default rate | | $ | 233,774 | | | $ | 206,304 | |
| 20 percent increase in default rate | | $ | 231,521 | | | $ | 204,238 | |
| Fair value resulting from: | | | | |
| 10 percent decrease in default rate | | $ | 238,322 | | | $ | 210,463 | |
| 20 percent decrease in default rate | | $ | 240,617 | | | $ | 212,558 | |
Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at June 30, 2021 and December 31, 2020 for Certificates Issued by Securitization Trust are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | | | | |
| Certificates Issued by Securitization Trust | | June 30, 2021 | | December 31, 2020 |
| Fair value, using the following assumptions: | | $ | 15,295 | | | $ | 22,917 | |
| Weighted-average discount rate | | 9.77 | % | | 11.12 | % |
| Weighted-average default rate | | 10.42 | % | | 12.93 | % |
| Weighted-average prepayment rate | | 19.17 | % | | 20.86 | % |
| | | | |
| Fair value resulting from: | | | | |
| 100 basis point increase in discount rate | | $ | 15,171 | | | $ | 22,729 | |
| 200 basis point increase in discount rate | | $ | 15,051 | | | $ | 22,545 | |
| Fair value resulting from: | | | | |
| 100 basis point decrease in discount rate | | $ | 15,422 | | | $ | 23,110 | |
| 200 basis point decrease in discount rate | | $ | 15,552 | | | $ | 23,308 | |
| | | | |
| Fair value resulting from: | | | | |
| 10 percent increase in default rate | | $ | 14,732 | | | $ | 21,798 | |
| 20 percent increase in default rate | | $ | 14,175 | | | $ | 20,690 | |
| Fair value resulting from: | | | | |
| 10 percent decrease in default rate | | $ | 15,854 | | | $ | 24,030 | |
| 20 percent decrease in default rate | | $ | 16,417 | | | $ | 25,150 | |
| | | | |
| Fair value resulting from: | | | | |
| 10 percent increase in prepayment rate | | $ | 15,300 | | | $ | 22,933 | |
| 20 percent increase in prepayment rate | | $ | 15,307 | | | $ | 22,958 | |
| Fair value resulting from: | | | | |
| 10 percent decrease in prepayment rate | | $ | 15,284 | | | $ | 22,891 | |
| 20 percent decrease in prepayment rate | | $ | 15,279 | | | $ | 22,872 | |
Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at June 30, 2021 and December 31, 2020 for Servicing Assets is presented in the following table (in thousands, except percentages).
| | | | | | | | | | | | | | |
| Servicing Assets | | June 30, 2021 | | December 31, 2020 |
| Fair value, using the following assumptions | | $ | 8,944 | | | $ | 9,242 | |
| Weighted-average market servicing rate | | 0.628 | % | | 0.631 | % |
| Weighted-average prepayment rate | | 19.77 | % | | 19.84 | % |
| Weighted-average default rate | | 12.99 | % | | 12.78 | % |
| | | | |
| Fair value resulting from: | | | | |
| Market servicing rate increase of 0.025% | | $ | 8,404 | | | $ | 8,689 | |
| Market servicing rate decrease of 0.025% | | $ | 9,483 | | | $ | 9,796 | |
| | | | |
| Fair value resulting from: | | | | |
| Applying a 1.1 multiplier to prepayment rate | | $ | 8,768 | | | $ | 9,064 | |
| Applying a 0.9 multiplier to prepayment rate | | $ | 9,121 | | | $ | 9,423 | |
| | | | |
| Fair value resulting from: | | | | |
| Applying a 1.1 multiplier to default rate | | $ | 8,816 | | | $ | 9,116 | |
| Applying a 0.9 multiplier to default rate | | $ | 9,071 | | | $ | 9,369 | |
| | | | | | | | | | | | | | | | | |
| Servicing Assets | June 30, 2020 | | | December 31, 2019 | |
| Fair value, using the following assumptions | $ | 10,073 | | | | $ | 12,602 | | |
| 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% | $ | 9,467 | | | | $ | 11,825 | | |
| Market servicing rate decrease of 0.025% | $ | 10,680 | | | | $ | 13,387 | | |
| | | | | |
| Fair value resulting from: | | | | | |
| Applying a 1.1 multiplier to prepayment rate | $ | 9,872 | | | | $ | 12,348 | | |
| Applying a 0.9 multiplier to prepayment rate | $ | 10,276 | | | | $ | 12,868 | | |
| | | | | |
| Fair value resulting from: | | | | | |
| Applying a 1.1 multiplier to default rate | $ | 9,925 | | | | $ | 12,377 | | |
| Applying a 0.9 multiplier to default rate | $ | 10,222 | | | | $ | 12,840 | | |
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.
Assets and Liabilities Not Recorded at Fair Value
The following table presents the fair value hierarchy for assets, and liabilities not recorded at fair value (in thousands):
| | June 30, 2020 | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value | |
| June 30, 2021 | | June 30, 2021 | | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | Assets: | | | | | | | | | | Assets: | | | | | | | | | | |
| Cash and Cash Equivalents | Cash and Cash Equivalents | $ | 46,575 | | | $ | 46,575 | | | $ | — | | | $ | — | | | $ | 46,575 | | Cash and Cash Equivalents | | $ | 56,018 | | | $ | 56,018 | | | $ | 0 | | | $ | 0 | | | $ | 56,018 | |
| Restricted Cash | 143,318 | | | — | | | 143,318 | | | — | | | 143,318 | | |
| Restricted Cash - Cash and Cash Equivalents | | Restricted Cash - Cash and Cash Equivalents | | 200,500 | | | 200,500 | | | 0 | | | 0 | | | 200,500 | |
| Restricted Cash - Certificates of Deposit | | Restricted Cash - Certificates of Deposit | | 4,877 | | | 0 | | | 4,877 | | | 0 | | | 4,877 | |
| Accounts Receivable | Accounts Receivable | 1,047 | | | — | | | 1,047 | | | — | | | 1,047 | | Accounts Receivable | | 1,088 | | | 0 | | | 1,088 | | | 0 | | | 1,088 | |
| Total Assets | Total Assets | $ | 190,940 | | | $ | 46,575 | | | $ | 144,365 | | | $ | — | | | $ | 190,940 | | Total Assets | | $ | 262,483 | | | $ | 256,518 | | | $ | 5,965 | | | $ | 0 | | | $ | 262,483 | |
| Liabilities: | Liabilities: | | | | | | | | | | Liabilities: | | | | | | | | | | |
| Accounts Payable and Accrued Liabilities | Accounts Payable and Accrued Liabilities | $ | 12,044 | | | $ | — | | | $ | 12,044 | | | $ | — | | | $ | 12,044 | | Accounts Payable and Accrued Liabilities | | $ | 20,328 | | | $ | 0 | | | $ | 20,328 | | | $ | 0 | | | $ | 20,328 | |
| Payable to Investors | Payable to Investors | 102,405 | | | — | | | 102,405 | | | — | | | 102,405 | | Payable to Investors | | 174,387 | | | 0 | | | 174,387 | | | 0 | | | 174,387 | |
| Notes Issued by Securitization Trust | Notes Issued by Securitization Trust | 235,353 | | | — | | | 228,924 | | | — | | | 228,924 | | Notes Issued by Securitization Trust | | 94,811 | | | 0 | | | 97,556 | | | 0 | | | 97,556 | |
| Warehouse Lines | Warehouse Lines | 198,857 | | | — | | | 198,212 | | | — | | | 198,212 | | Warehouse Lines | | 219,467 | | | 0 | | | 222,015 | | | 0 | | | 222,015 | |
| Paycheck Protection Program loan (Note 10) | | Paycheck Protection Program loan (Note 10) | | 8,547 | | | 0 | | | 8,544 | | | 0 | | | 8,544 | |
| Total Liabilities | Total Liabilities | $ | 548,659 | | | $ | — | | | $ | 541,585 | | | $ | — | | | $ | 541,585 | | Total Liabilities | | $ | 517,540 | | | $ | 0 | | | $ | 522,830 | | | $ | 0 | | | $ | 522,830 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | | | | |
| Cash and Cash Equivalents | | $ | 50,145 | | | $ | 50,145 | | | $ | 0 | | | $ | 0 | | | $ | 50,145 | |
| Restricted Cash - Cash and Cash Equivalents | | 158,846 | | | 158,846 | | | 0 | | | 0 | | | 158,846 | |
| Restricted Cash - Certificates of Deposit | | 4,877 | | | 0 | | | 4,877 | | | 0 | | | 4,877 | |
| Accounts Receivable | | 605 | | | 0 | | | 605 | | | 0 | | | 605 | |
| Total Assets | | $ | 214,473 | | | $ | 208,991 | | | $ | 5,482 | | | $ | 0 | | | $ | 214,473 | |
| Liabilities: | | | | | | | | | | |
| Accounts Payable and Accrued Liabilities | | $ | 17,876 | | | $ | 0 | | | $ | 17,876 | | | $ | 0 | | | $ | 17,876 | |
| Payable to Investors | | 124,094 | | | 0 | | | 124,094 | | | 0 | | | 124,094 | |
| Notes Issued by Securitization Trust | | 156,782 | | | 0 | | | 158,951 | | | 0 | | | 158,951 | |
| Warehouse Lines | | 242,479 | | | 0 | | | 242,261 | | | 0 | | | 242,261 | |
| Paycheck Protection Program loan (Note 10) | | 8,505 | | | 0 | | | 8,540 | | | 0 | | | 8,540 | |
| Total Liabilities | | $ | 549,736 | | | $ | 0 | | | $ | 551,722 | | | $ | 0 | | | $ | 551,722 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | Carrying Amount | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Balance at Fair Value |
| Assets: | | | | | | | | | |
| Cash and Cash Equivalents | $ | 64,635 | | | $ | 64,635 | | | $ | — | | | $ | — | | | $ | 64,635 | |
| Restricted Cash | 155,773 | | | — | | | 155,773 | | | — | | | 155,773 | |
| Accounts Receivable | 1,695 | | | — | | | 1,695 | | | — | | | 1,695 | |
| Total Assets | $ | 222,103 | | | $ | 64,635 | | | $ | 157,468 | | | $ | — | | | $ | 222,103 | |
| Liabilities: | | | | | | | | | |
| Accounts Payable and Accrued Liabilities | $ | 19,937 | | | $ | — | | | $ | 19,937 | | | $ | — | | | $ | 19,937 | |
| Payable to Investors | 101,092 | | | — | | | 101,092 | | | — | | | 101,092 | |
| Notes Issued by Securitization Trust | 347,662 | | | — | | | 353,028 | | | — | | | 353,028 | |
| Warehouse Lines | 131,583 | | | — | | | 131,090 | | | — | | | 131,090 | |
| Total Liabilities | $ | 600,274 | | | $ | — | | | $ | 605,147 | | | $ | — | | | $ | 605,147 | |
8. Goodwill and Other Intangible Assets, Net
Goodwill
Prosper’s goodwill balance of $36.4$36.4 million at December 31, 20192020 did not change during the six months ended June 30, 2020.2021. The Company did 0t recordrecorded 0 goodwill impairment expensefor the six months ended June 30, 20202021 and 2019.2020.
Other Intangible Assets
The following table presents the detail of other intangible assets subject to amortization foras of the period presentedfollowing date (dollars in thousands):
| | | June 30, 2020 | | | June 30, 2021 |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Remaining Useful Life (In Years) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Remaining Useful Life (In Years) |
| Developed technology | Developed technology | $ | 3,060 | | | $ | (3,060) | | | $ | — | | | — | | Developed technology | | $ | 3,060 | | | $ | (3,060) | | | $ | 0 | | | — | |
| User base and customer relationships | User base and customer relationships | 5,050 | | | (4,440) | | | 610 | | | 4.8 | User base and customer relationships | | 5,050 | | | (4,636) | | | 414 | | | 3.8 |
| Brand name | Brand name | 60 | | | (60) | | | — | | | — | | Brand name | | 60 | | | (60) | | | 0 | | | — | |
| Total Intangible Assets subject to amortization | Total Intangible Assets subject to amortization | $ | 8,170 | | | $ | (7,560) | | | $ | 610 | | | Total Intangible Assets subject to amortization | | $ | 8,170 | | | $ | (7,756) | | | $ | 414 | | |
Prosper’s intangible asset balance was $0.6$0.4 million and $0.7$0.5 million at June 30, 20202021 and December 31, 2019,2020, respectively. The user base and customer relationships intangible assets are being amortized on an accelerated basis over a three-to-ten-to-ten year period.
Amortization expense for the three months ended June 30, 2021 and 2020 and 2019 was $0.1 millionnot material and $0.1 million, respectively. Amortization expense for the six months ended June 30, 20202021 and 20192020 was $0.1 million and $0.1 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):
| | | | | | | | |
| Year Ending December 31, | | |
| 2021 (remainder thereof) | | $ | 86 | |
| 2022 | | 136 | |
| 2023 | | 107 | |
| 2024 | | 85 | |
| Total | | $ | 414 | |
| | | | | |
| Year Ending December 31, | |
| 2020 (remainder thereof) | $ | 110 | |
| 2021 | 172 | |
| 2022 | 136 | |
| 2023 | 107 | |
| 2024 | 85 | |
| Total | $ | 610 | |
9. Other Liabilities
Other Liabilities consist of the following (in thousands):
| | | June 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Loan trailing fee | $ | 2,403 | | | $ | 2,997 | | |
| Operating lease liabilities | | Operating lease liabilities | | $ | 13,540 | | | $ | 13,342 | |
| Paycheck Protection Program loan (Note 10) | | Paycheck Protection Program loan (Note 10) | | 8,547 | | | 8,505 | |
| Loan trailing fee liability | | Loan trailing fee liability | | 2,145 | | | 2,233 | |
| Deferred income tax liability | | Deferred income tax liability | | 531 | | | 489 | |
| Financing lease liabilities | | Financing lease liabilities | | 155 | | | 0 | |
| Deferred revenue | Deferred revenue | 132 | | | 241 | | Deferred revenue | | 26 | | | 63 | |
| | Deferred income tax liability | 473 | | | 405 | | |
| | Operating lease liability | 15,311 | | | 17,507 | | |
| Paycheck Protection Program loan (Note 10) | 8,447 | | | — | | |
| Other | Other | 482 | | | 576 | | Other | | 292 | | | 425 | |
| Total Other Liabilities | Total Other Liabilities | $ | 27,248 | | | $ | 21,726 | | Total Other Liabilities | | $ | 25,236 | | | $ | 25,057 | |
Additionally, disclosures around the operating lease liabilities are included in Note 16.15.
10. Debt
PWIT Warehouse Trust Agreements
Prosper’s consolidated VIEs, PWIT and PWIIT (together, “Warehouse VIEs”), each entered into an agreement (together, “Warehouse Agreements”) with certain lenders for committed revolving lines of credit (“Warehouse Lines”) during 2018 and 2019, and 2018.respectively. In connection with the Warehouse Agreements, the Warehouse VIEs each entered into a security agreement with a bank as administrative agent and a national banking association as collateral trustee and paying agent. Proceeds under the Warehouse Lines may only be used to purchase certain unsecured consumer loans and related rights and
documents from Prosper and to pay fees and expenses related to the Warehouse Lines. Both Warehouse VIEs are consolidated because Prosper is the primary beneficiary of the VIEs. The assets of the VIEs can be used only to settle obligations of the VIEs. Additionally, the creditors of the Warehouse Lines have no recourse to the general credit of Prosper. Additionally, the assets of the VIEs can be used only to settle obligations of the VIEs. The loans held in the Warehouse VIEs are included in Loans Held for Sale, at Fair Value and Warehouse Lines are in Warehouse Lines in the condensed consolidated balance sheets.
Both Warehouse Agreements contain the same certain covenants including restrictions on each Warehouse VIE's ability to incur indebtedness, pledge assets, merge or consolidate and enter into certain affiliate transactions. Each Warehouse Agreement also requires Prosper to maintain a minimum tangible net worth of $25 million, minimum net liquidity of $15 million and a maximum leverage ratio of 5:1. Tangible net worth is defined as the sum of (i) (A) Convertible Preferred Stock, (B) total Stockholders’ Deficit and (C) Convertible Preferred Stock Warrant Liability, less the sum of (ii) (A) goodwill and (B) intangible assets. Net liquidity is defined as the sum of cash, cash equivalents and Available for Sale Investments. The leverage ratio is defined as the ratio of total consolidated indebtedness other than non-recourse securitization indebtedness, non-recourse or limited recourse warehouse indebtedness and borrower dependent notes, to tangible net worth. As of June 30, 2020,2021, Prosper was in compliance with the covenants under each Warehouse Agreement.
PWIT Warehouse Line
On January 19, 2018, through PWIT, Prosper entered into a Warehouse Agreement for a Warehouse Line. Effective June 12, 2018, the Warehouse Agreement was amended. The amendments included increasing the committed line of credit from $100 million to $200 million, extending the term of the PWIT Warehouse Line (including the final maturity date), amending the monthly unused commitment fee and reducing the rate at which the PWIT Warehouse Line bears interest.
Subsequently the Warehouse Agreement was amended on June 20, 2019 to extend the facility, to reduce the interest rate and unused commitment fee and to expand the eligibility criteria for unsecured consumer loans that can be financed through the PWIT Warehouse Line. It was amended again on May 19, 2021 to extend the facility, to reduce the interest and advance rates and to include provisions for an alternative benchmark rate in light of the ongoing phaseout of LIBOR.
Under the amended agreement, proceeds of loans made under the PWIT Warehouse Line may be borrowed, repaid and reborrowed until the earlier of June 20, 2021 and at2023 or the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over the 24 month period ending June 20, 2023,2025, excluding the occurrence of any accelerated amortization event or event of default.
Under the amended agreement, the PWIT Warehouse Line bears interest at a rate of LIBORan established benchmark rate (currently LIBOR) plus 2.9%2.75% and has an advance rate of 89%87%. Additionally, the PWIT Warehouse Line bears a monthly unused commitment fee of 0.50% per annum on the undrawn portion available under the PWIT Warehouse Line.
As of June 30, 2020,2021, Prosper had $100.3$101.3 million in debt and accrued interest outstanding under the PWIT Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $114.6$117.1 million included in “Loans Held for Sale, at Fair Value” on the condensed consolidated balance sheets. At June 30, 20202021 the undrawn portion available under the Warehouse Line was $99.7$98.7 million. Prosper incurred $1.8$2.2 million of deferred debt issuance costs associated with the PWIT Warehouse Line, including $0.3 million from the amendment signed on May 19, 2021, which are included in “Prepaids and Other Assets” and amortized to interest expense over the term of the revolving arrangement.
Prosper purchased a swaption to limit the Company's exposure to increases in LIBOR. The swaption is recorded on the consolidated balance sheet at fair value in Prepaids and Other Assets. Any changes in the fair value are recorded in the Change in Fair Value of Financial Instruments, Net on the Consolidated Statement of Operations. The fair value of the swaption was not material$0.1 million at June 30, 2020.2021.
PWIIT Warehouse Line
On March 28, 2019, through PWIIT, Prosper entered into a second Warehouse Agreement for a $300 million Warehouse Line with a national banking association different than that of PWIT. Under the PWIIT Warehouse Agreement, proceeds of loans made under the PWIIT Warehouse Line may be borrowed, repaid, and reborrowed until the earlier of March 28, 2021 and at the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over the 24 month24-month period ending March 28, 2023, excluding the occurrence of any accelerated amortization event or event of default.
On March 4, 2021, PMI extended its $300 million PWIIT Warehouse Line (“PWIIT Extension”). The PWIIT Extension consists of a $230 million Class A loan with the existing PWIIT Warehouse Line national banking association and a $70 million Class B loan with an asset manager. The advance rate on the PWIIT Extension is 90%. Under the agreement,PWIIT Extension, proceeds of loans made under the PWIIT Warehouse Line may be borrowed, repaid and reborrowed until the earlier
of March 3, 2023 or the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over a 24-month period ending March 4, 2025, excluding the occurrence of any accelerated amortization event or event of default.
Under the PWIIT Extension, the Class A loan bears interest at a rate of LIBOR, or the lender'snational banking association's asset-backed commercial paper rate, plus a spread of 2.9%2.05%. The spread increases by 0.375% during the first 12 months immediately following the termination of the revolving period with an additional increase of 0.375% one year later. Additionally, the Class A loan bears a monthly unused commitment fee of 0.50% per annum on the undrawn portion available under the Class A loan.
The Class B loan bears interest at a rate of one-month LIBOR, plus a spread of 8.75%. The spread increases by 0.375% during the first twelve months immediately following the termination of the revolving period with an additional increase of 0.375% one year later. The PWIIT Warehouse Line has an advance rate of 90%. Additionally, the PWIIT Warehouse LineClass B loan bears a monthly unused commitment fee of 0.50% or 1.00% per annum on the undrawn portion available under the PWIIT Warehouse Line.Class B loan, depending on the Class B loan utilization percentage.
As of June 30, 2020,2021, Prosper had $98.5$118.2 million in debt and accrued interest outstanding under the PWIIT Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $110.8$132.0 million included in Loans Held for Sale, at Fair Value on the Consolidated Balance Sheets. At June 30, 20202021 the undrawn portion available under the PWIIT Warehouse Line was $201.5$181.8 million. ProsperPMI incurred $2.1$1.3 million of deferred debt issuance costs for the extension in March 2021, which are included in Prepaids and Other Assets and will be amortized to interest expense over the term of the revolving arrangement.
Phaseout of LIBOR
A portion of the interest rate charged on our Warehouse Lines is currently based on LIBOR. LIBOR has been the subject of reform and was expected to phase out by the end of fiscal 2021; however, on November 30, 2020, the ICE Benchmark Administration Limited (“ICE”) announced plans to delay the phase out of LIBOR to June 30, 2023. The consequences of the discontinuation of LIBOR cannot be entirely predicted but could impact the interest expense incurred on these debt instruments. We have negotiated alternatives to LIBOR on the PWIT and PWIIT Warehouse Lines, which we may renegotiate before LIBOR ceases to be a widely available reference rate.
Paycheck Protection Program Loan
The Paycheck Protection Program (“PPP”), established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and sponsored by the U.S. Small Business Administration (“SBA”), provides small businesses – sole proprietors, independent contractors, and, with certain industry exceptions, businesses with fewer than 500 employees – the opportunity to apply for a loan of up to $10 million to cover up to 24 weeks (the “covered period”) of payroll costs, including benefits. Funds may also be used to cover interest on mortgage obligations, leases, and utilities incurred or in place before February 15, 2020. PPP loan payments are deferred as described below, and, based on SBA guidance, will be forgiven as long as (i) loan proceeds are used for covered expenses, (ii) full-time employee headcount is maintained during the eight-week period covered by the PPP loan and (iii) compensation for employees who earned less than $100,000 on an annualized basis in 2019 is not reduced by more than 25% during the covered period. For purposes of calculating maximum loan eligibility, payroll costs per employee are capped at $100,000 on an annualized basis. Due to anticipated high PPP participation rates, the SBA expects that not more than 40% of any forgiven loan amount may be for non-payroll costs.
In April 2020, the Company obtained an $8.4 million loan under the PPP. The loan accrues interest at one1 percent per annum and has a two year term. Payments under the loan are deferred until the earlier of (a) August 2021 or (b) receipt oftwo-year term through April 2022. PMI has formally applied for forgiveness of the loan fromwith the lender and the SBA, and that application remains under review. Pursuant to the Paycheck Protection Flexibility Act of 2020, PMI is permitted to defer monthly payments of principal and interest until such time as an approval or denial of forgiveness is received from the SBA.
The Company used the PPP Loan proceeds to cover payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. As of June 30, 2020,2021, principal and interest outstanding under the PPP loan totaled $8.5 million and is included in Other Liabilities on the accompanying condensed consolidated balance sheet.
11. Net Income (Loss) Per Share
ProsperPMI computes Net Income (Loss) Per Shareit net income (loss) per share in accordance with ASC Topic 260, Earnings Per Share (“ASC Topic 260”). Under ASC Topic 260, basic Net Income (Loss) Per Sharenet income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
Proper computes its earningsNet income (loss) per share is calculated using the two-class method in accordance with ASC Topic 260. The two-class method allocates earnings that otherwise would have been available to common shareholders to holders of participating securities. Management considers all series of our Convertible Preferred Stock to be participating securities due to their rights to participate in dividends with Common Stock. As such, earnings allocated to these participating securities, which include
participation rights in undistributed earnings, are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders.
All participating securities are excluded from basic weighted-average common shares outstanding. Prior to any conversion to common shares, each series of Prosper’s Convertible Preferred Stock wasis entitled to participate on an if-converted basis in distributions of earnings, when and if declared by the board of directors, that wereare made to common stockholders and consequently, these shares were considered participating securities. During the periodssix months ended June 30, 20202021 and 2019,June 30, 2020, certain shares issued as a result of the early exercise of stock options which are subject to a repurchase right by PMI were entitled to receive non-forfeitable dividends during the vesting period and consequently, are considered participating securities.
The weighted average shares used in calculating basic and diluted Net Income (Loss) Per Sharenet income (loss) per share excludes certain shares that are disclosed as outstanding shares in the Consolidated Balance Sheetscondensed consolidated balance sheets because such shares are restricted as they were associated with options that were early exercised and continue to remain unvested.
Basic and diluted income (loss) per share waswere calculated as follows for the periods presented (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Numerator: | | | | | | | |
| Net Income (Loss) | $ | 17,641 | | | $ | (569) | | | $ | 38,771 | | | $ | (23,283) | |
| Less: net income allocated to participating securities | (13,153) | | | — | | | (28,908) | | | — | |
| Net income (loss) available to common stockholders | $ | 4,488 | | | $ | (569) | | | $ | 9,863 | | | $ | (23,283) | |
| Denominator: | | | | | | | |
| Weighted average shares used in computing net income (loss) per share - basic | 68,455,641 | | | 70,502,797 | | | 68,454,872 | | | 70,494,945 | |
| Effect of dilutive securities: | | | | | | | |
| Stock options | 126,926 | | | — | | | 337,446 | | | — | |
| Convertible preferred stock warrants | 213,264,845 | | | — | | | 213,264,845 | | | — | |
| Weighted average shares used in computing diluted net income (loss) per share - diluted | 281,847,412 | | | 70,502,797 | | | 282,057,163 | | | 70,494,945 | |
| Net income (loss) per share - basic | $ | 0.07 | | | $ | (0.01) | | | $ | 0.14 | | | $ | (0.33) | |
| Net income (loss) per share - diluted | $ | 0.02 | | | $ | (0.01) | | | $ | 0.03 | | | $ | (0.33) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, 2021 |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Numerator: | | | | | | | | |
| Net (Loss) Income | | $ | (5,805) | | | $ | 17,641 | | | $ | (50,694) | | | $ | 38,771 | |
| Plus: Return on Share Purchase | | 0 | | | 0 | | | 0 | | | 0 | |
| Less: Net Income Allocated to Participating Securities | | 0 | | | (13,153) | | | 0 | | | (28,908) | |
| Net (Loss) Income Attributable to Common Stockholders | | $ | (5,805) | | | $ | 4,488 | | | $ | (50,694) | | | $ | 9,863 | |
| Denominator: | | | | | | | | |
| Weighted average shares used in computing basic net (loss) income per share | | 70,868,080 | | | 68,455,641 | | | 70,110,288 | | | 68,454,872 | |
| Effect of dilutive securities: | | | | | | | | |
| Stock options | | 0 | | | 126,926 | | | 0 | | | 337,446 | |
| Convertible preferred stock warrants | | 0 | | | 213,264,845 | | | 0 | | | 213,264,845 | |
| Weighted average shares used in computing diluted Net (Loss) Income per Share | | 70,868,080 | | | 281,847,412 | | | 70,110,288 | | | 282,057,163 | |
| Net (Loss) Income Per Share – Basic | | $ | (0.08) | | | $ | 0.07 | | | $ | (0.72) | | | $ | 0.14 | |
| Net (Loss) Income Per Share – Diluted | | $ | (0.08) | | | $ | 0.02 | | | $ | (0.72) | | | $ | 0.03 | |
The following common stock equivalents were excluded from the computation of diluted net (loss) income (loss) per share for the periods presented because including them would have been anti-dilutive:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | (shares) | | (shares) | | (shares) | | (shares) | | (shares) | | (shares) | | (shares) | | (shares) |
| Excluded securities: | Excluded securities: | | Excluded securities: | |
| Convertible preferred stock issued and outstanding | 209,613,570 | | | 214,637,925 | | | 209,613,570 | | | 214,637,925 | | |
| Convertible preferred stock issued and outstanding, excluding shares held by consolidated VIE | | Convertible preferred stock issued and outstanding, excluding shares held by consolidated VIE | | 158,365,655 | | | 209,613,570 | | | 158,365,655 | | | 209,613,570 | |
| Stock options issued and outstanding | Stock options issued and outstanding | 73,045,220 | | | 73,234,877 | | | 72,460,458 | | | 71,592,576 | | Stock options issued and outstanding | | 74,638,057 | | | 73,045,220 | | | 73,986,598 | | | 72,460,458 | |
| | Warrants issued and outstanding | Warrants issued and outstanding | 1,080,349 | | | 1,080,349 | | | 1,080,349 | | | 1,080,349 | | Warrants issued and outstanding | | 1,080,349 | | | 1,080,349 | | | 1,080,349 | | | 1,080,349 | |
| Series E-1 convertible preferred stock warrants | Series E-1 convertible preferred stock warrants | — | | | 35,544,141 | | | — | | | 35,544,141 | | Series E-1 convertible preferred stock warrants | | 35,544,141 | | | 0 | | | 35,544,141 | | | 0 | |
| Series F convertible preferred stock warrants | Series F convertible preferred stock warrants | — | | | 177,720,704 | | | — | | | 177,720,704 | | Series F convertible preferred stock warrants | | 177,720,704 | | | 0 | | | 177,720,704 | | | 0 | |
| Total common stock equivalents excluded from diluted net income (loss) per common share computation | 283,739,139 | | | 502,217,996 | | | 283,154,377 | | | 500,575,695 | | |
| Total common stock equivalents excluded from diluted net (loss) income per common share computation | | Total common stock equivalents excluded from diluted net (loss) income per common share computation | | 447,348,906 | | | 283,739,139 | | | 446,697,447 | | | 283,154,377 | |
12. Convertible Preferred Stock, Convertible Preferred Stock Warrant Liability and Stockholders’ DeficitCommon Stock
Convertible Preferred Stock and Warrants
Under PMI’s amended and restated certificate of incorporation, preferred stock is issuable in series, and the Board of Directors is authorized to determine the rights, preferences, and terms of each series.
On July 13, 2020, the Company established Prosper Grantor Trust (“PGT”), a revocable grantor trust administered by an independent trustee, with the intention of contributing assets to PGT for the benefit of PMI employees in the event of a change in control through an Eligible Employee Retention Plan. PGT was determined to be a VIE and PMI was determined to be its primary beneficiary due to the fact that the Company, through its role as the grantor, has both (a) the power to direct the activities that most significantly affect the VIE’s economic performance, including its funding decisions and investment strategy, and (b) the obligation to absorb losses that could be potentially significant to the economic performance of the VIE by virtue of the Company’s requirement to fund PGT in the event that it is unable to meet its obligations to PMI’s employees. PMI also maintains a contingent call liability on PGT’s assets in the event of a bankruptcy. As a result, PGT is fully consolidated into PMI’s consolidated financial statements.
On July 21, 2020, PGT entered into a Stock Transfer Agreement with a PMI investor to purchase 34,670,420 shares of Series A Convertible Preferred Stock and 16,577,495 shares of Series B Convertible Preferred Stock for nominal consideration. Upon execution of the Stock Transfer Agreement, these shares were purchased by a consolidated VIE of the Company, and thus the difference between the fair value of the repurchased stock and the purchase price is included in Convertible Preferred Stock
Held by Consolidated VIE on PMI’s accompanying condensed consolidated balance sheet as of June 30, 2021. These shares remain outstanding for legal purposes and retain their voting rights, but are excluded from the earnings per share calculation.
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of June 30, 20202021 are disclosed in the table below (amounts in thousands except share and par value amounts):
| | Convertible Preferred Stock | Convertible Preferred Stock | | Par Value | | Authorized Shares | | Outstanding and Issued Shares | | Liquidation Preference (Outstanding Shares) | Convertible Preferred Stock | | Par Value | | Authorized Shares | | Outstanding and Issued Shares | | Liquidation Preference, Outstanding Shares |
| Series A | Series A | | $ | 0.01 | | | 68,558,220 | | | 66,428,185 | | | $ | 19,160 | | Series A | | $ | 0.01 | | | 68,558,220 | | | 66,428,185 | | * | $ | 19,160 | |
| Series A-1 | Series A-1 | | $ | 0.01 | | | 24,760,915 | | | 22,515,315 | | | 45,031 | | Series A-1 | | $ | 0.01 | | | 24,760,915 | | | 22,515,315 | | | 45,031 | |
| Series B | Series B | | $ | 0.01 | | | 35,775,880 | | | 35,127,160 | | | 21,190 | | Series B | | $ | 0.01 | | | 35,775,880 | | | 35,127,160 | | * | 21,190 | |
| Series C | Series C | | $ | 0.01 | | | 24,404,770 | | | 24,404,770 | | | 70,075 | | Series C | | $ | 0.01 | | | 24,404,770 | | | 24,404,770 | | | 70,075 | |
| Series D | Series D | | $ | 0.01 | | | 23,888,640 | | | 23,888,640 | | | 165,000 | | Series D | | $ | 0.01 | | | 23,888,640 | | | 23,888,640 | | | 165,000 | |
| Series E-1 | Series E-1 | | $ | 0.01 | | | 35,544,141 | | | — | | | — | | Series E-1 | | $ | 0.01 | | | 35,544,141 | | | 0 | | | 0 | |
| Series E-2 | Series E-2 | | $ | 0.01 | | | 16,858,078 | | | — | | | — | | Series E-2 | | $ | 0.01 | | | 16,858,078 | | | 0 | | | 0 | |
| Series F | Series F | | $ | 0.01 | | | 177,720,707 | | | 3 | | | — | | Series F | | $ | 0.01 | | | 177,720,707 | | | 3 | | | 0 | |
| Series G | Series G | | $ | 0.01 | | | 37,249,497 | | | 37,249,497 | | | 50,000 | | Series G | | $ | 0.01 | | | 37,249,497 | | | 37,249,497 | | | 50,000 | |
| Total | Total | | 444,760,848 | | | 209,613,570 | | | $ | 370,456 | | Total | | 444,760,848 | | | 209,613,570 | | | $ | 370,456 | |
* Series A and Series B Convertible Preferred Stock totals are inclusive of 34,670,420 and 16,577,495 shares, respectively, held by PGT, a consolidated VIE.
Dividends
Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then-effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights. To date, no dividends have been declared on any of PMI’s preferred stock or common stock.
Conversion
Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an initial public offering that values Prosper at least at $2 billion and that results in aggregate proceeds to Prosper of at least $100 million or (ii) upon a written request from the holders of at least 60% of the voting power of the outstanding preferred stock (on an as-converted basis), provided that (i) the Series A-1 convertible preferred stock shall not be converted without at least 14% of the voting power of the outstanding Series A-1 convertible preferred stock; (ii) the Series D shall not be converted without at least 60% of the voting power of the outstanding Series D; (iii) the Series E-1 and Series E-2 shall not be converted without at least 60% of the voting power of the outstanding Series E-1 and Series E-2, voting together as a single class; (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F, and (v) the shares of Series G Preferred Stock will not be automatically converted unless the holders of at least 60% of the outstanding shares of Series G Preferred Stock approve such conversion. In addition, if a holder of the Series A convertible preferred stock has converted any of the Series A convertible preferred stock, then all of such holder’s shares of Series A-1 convertible preferred stock also will be converted upon a liquidation event. 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 Series F convertible preferred stock converts into PMI common stock at a 1:1 ratio. The Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio and the Series G convertible preferred stock converts into common stock at a 1:1.36 ratio. The Series G convertible preferred stock conversion ratio reflects the Series G true-up that occurred at end of the vesting period for the Series E-2 and Series F Preferred Stock warrants.
For the Series G true-up, the conversion price of the Series G Convertible Preferred Stock was reduced to a number equal to the Series G Preferred Stock original issuance price, divided by the quotient obtained by dividing the Series G true-up amount by the total number of Series G Preferred Stock issued as of the Series G closing date. The Series G true-up amount means the aggregate number of shares of Series G Preferred Stock that would have been issued to the purchasers of the Series G Preferred Stock on the Series G closing date, if warrants to purchase shares of Series E-2 Preferred Stock or Series F Preferred Stock that were exercisable or exercised as of the true-up time (end of vesting period) had been exercisable or exercised as of such Series G closing date.
Liquidation Rights
PMI’s convertible preferred stock has been classified as temporary equity on the condensed consolidated balance sheets. The preferred stock is not redeemable; however, in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of Series E-1, Series E-2, and Series F convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event 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 3 times the original issue price for the Series A convertible preferred stock.
At present, the liquidation preferences are equal to $0.29 per share for the Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the Series B convertible preferred stock, $2.87 per share for the Series C convertible preferred stock, $6.91 per share for the Series D convertible preferred stock, $0.84 per share for the Series E-1 convertible preferred stock, $0.84 per share for the Series E-2 convertible preferred stock, $0.84 per share for the Series F convertible preferred stock and $1.34 per share for the Series G convertible preferred stock.
Voting
Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the Bylaws of PMI.
Convertible Preferred Stock Warrant Liability
Series E-1 Warrants
In connection with the Settlement and Release Agreement dated November 17, 2016 among PMI, its wholly owned subsidiary Prosper Funding LLC (“PFL”) and Colchis, on December 16, 2016, PMI issued the First Series E-1 Warrant. The Second Series E-1 Warrant for an additional 15,277,006 shares of Series E-1 convertible preferred stock was granted on the signing of the Consortium Purchase Agreement (as defined in Note 15) on February 27, 2017. The warrants expire ten years from the date of issuance. For the three months ended June 30, 20202021 and 2019,2020, Prosper recognized $3.6$0.4 million of expense and $1.1$3.6 million of income, respectively, from the re-measurement of the fair value of the warrants. For the six months ended June 30, 20202021 and 2019,2020, Prosper recognized $7.5 million of expense and $12.8 million of income, and $1.0 million of expense, respectively, from the re-measurement of the fair value of the warrants. The income or expense resulted from the remeasurement of the fair value of the warrants is recorded throughin Change in Fair Value of Convertible Preferred Stock Warrants on the condensed consolidated statements of operations.
To determine the fair value of the Series E-1 Warrants, the Company first determined the value of a share of a Series E-1 Convertible Preferred Stock. To determine the fair value of the Convertible Preferred Stock, the Company first derived the business enterprise value (“BEV”) of the Company using a variety of valuation methods, including discounted cash flow models and market based methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the option pricing method ("OPM") was used to allocate the BEV to the various classes of our equity, including our preferred stock. The concluded per share value for the Series E-1 Convertible Preferred Stock was utilized as an input to the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding Series E-1 Warrants utilizing the following assumptions as of the following dates:
| | | June 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Volatility | Volatility | 66.0 | % | | 46.0 | % | Volatility | | 58.0 | % | | 60.0 | % |
| Risk-free interest rate | Risk-free interest rate | 0.20 | % | | 1.60 | % | Risk-free interest rate | | 0.40 | % | | 0.20 | % |
| Expected term (in years) | Expected term (in years) | 2.75 | | 2.75 | Expected term (in years) | | 2.75 | | 2.75 |
| Dividend yield | Dividend yield | — | % | | — | % | Dividend yield | | 0 | % | | 0 | % |
The above assumptions were determined as follows:
VolatilityVolatility:. The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant as the Company has limited information on the volatility of its preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest RateRate:. The risk-free interest rate is based on the U.S. Treasury yield in effect as of the period end date June 30, 2021,and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.
Expected TermTerm:. The expected term is the period of time for which the warrants are expected to be outstanding.
Dividend YieldYield:. The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
Series F Warrants
In connection with the Consortium Purchase Agreement (as described in Note 15),16 of PMI’s 10-K for the year ended December 31, 2021) on February 27, 2017, PMI issued warrants to purchase up to 177,720,706 shares of PMI's Series F convertible preferred stock at $0.01 per share. The warrants expire ten years from the date of issuance. For the three months ended June 30, 20202021 and 2019,2020, Prosper recognized $16.0$5.3 million of expense and $3.6$16.0 million of income, respectively, from the re-measurement of the fair value of the warrants. For the six months ended June 30, 20202021 and 2019,2020, Prosper recognized $62.2 million of income and $4.3$42.7 million of expense and $62.2 million of income, respectively, from the re-measurement of the fair value of the warrants. The income or expense resulting from changes in the fair value of the warrant is recorded through Change in Fair Value of Convertible Preferred Stock Warrants on the condensed consolidated statements of operations.
To determine the fair value of the Series F Warrants, the Company first determined the value of a share of a Series F Convertible Preferred Stock. To determine the fair value of the Convertible Preferred Stock, the Company first derived the BEV
using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the OPM was used to allocate the BEV to the various classes of Prosper's equity, including our preferred stock. The concluded per share value for the Series F Convertible Preferred Stock warrants utilized the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding Series F Warrants utilizing the following assumptions as of the following dates:
| | | June 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Volatility | Volatility | 66.0 | % | | 46.0 | % | Volatility | | 58.0 | % | | 60.0 | % |
| Risk-free interest rate | Risk-free interest rate | 0.20 | % | | 1.60 | % | Risk-free interest rate | | 0.40 | % | | 0.20 | % |
| Expected term (in years) | Expected term (in years) | 2.75 | | 2.75 | Expected term (in years) | | 2.75 | | 2.75 |
| Dividend yield | Dividend yield | — | % | | — | % | Dividend yield | | 0 | % | | 0 | % |
The above assumptions were determined using the same criteria described above for the Series E-1 Warrants.
The combined activity of the Convertible Preferred Stock Warrant Liability for the six months ended June 30, 20202021 and 20192020 are as follows (in thousands):
| | | | | | | | |
| | Warrant Activity |
| Balance at January 1, 2021 | | $ | 112,319 | |
| | |
| Change in fair value | | 50,117 | |
| Balance at June 30, 2021 | | $ | 162,436 | |
| | | | | | | | |
| | Warrant Activity |
| Balance at January 1, 2020 | | $ | 149,996 | |
| | |
| Change in fair value | | (74,998) | |
| Balance at June 30, 2020 | | $ | 74,998 | |
| | | | | |
| Warrant Activity |
Balance at January 1, 2019 | $ | 143,679 | |
Warrants vested | 17,553 | |
Change in fair value | 5,327 | |
Balance at June 30, 2019 | $ | 166,559 | |
Common Stock
PMI, through its Amended and Restated Certificate of Incorporation, is the sole issuer of common stock and related options, restricted stock units ("RSUs") and warrants. On February 16, 2016, PMI amended and restated its Certificate of Incorporation to, among other things, effect a 5-for-1 forward stock split. On September 20, 2017, PMI further amended its Amended and Restated Certificate of Incorporation to increase the number of shares of common stock authorized for issuance. The total number of shares of stock which PMI has the authority to issue is 1,069,760,848, consisting of 625,000,000 shares of common stock, $0.01$0.01 par value per share, and 444,760,848 shares of preferred stock, $0.01 par value per share. As of June 30, 2020, 69,391,5762021, 71,829,765 shares of common stock were issued and 68,455,64170,893,830 shares of common stock were outstanding. As of December 31, 2019, 69,387,8362020, 70,075,307 shares of common stock were issued and 68,451,90169,139,372 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held.
Common Stock Issued upon Exercise of Stock Options
For the six months ended June 30, 2020,2021, PMI issued 3,740issued 1,754,458 shares of common stock upon the exercise of vested options for cash proceeds of $1$36 thousand.
13. Share Based Incentive Plan andStock-Based Compensation
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1, Amendment No. 2 and Amendment No. 3, which were approved by PMI's stockholders effective as of February 15, 2016, May 31, 2016, and
September 5, 2018 respectively (as amended, the “2015 Plan”). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms.
Stock Option Reprice
On May 3, 2016 and March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved two separate stock option repricing programs authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that had exercise prices above the current fair market value of PMI’s Common Stock on those respective dates.
On August 11, 2020, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2016“2020 Repricing” and together with the 2016 Repricing and the 2017 Repricing, the “Repricings”), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the
current fair market value of PMI’s common stock. The repricing was effected on 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 Repricing” and together with the 2016 Repricing, the “Repricings”), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock. The 2017 Repricing was effected on March 17, 2017August 11, 2020 for eligible directors and employees.
ProsperPMI 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’sthe Company’s continued success. ProsperPMI expects to incur additional stock based compensation charges as a result of the Repricings.
The financial statement impact of the above Repricings was not material for the three and six months ended June 30, 2020, and2021. As of June 30, 2021, the unamortized Repricings amountexpense (net of forfeitures) is also not material as of June 30, 2020.$46 thousand will be recognized over the remaining weighted-average vesting period of 1.8 years.
Stock Option ActivityReprice
On May 3, 2016 and March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved two separate stock option repricing programs authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that had exercise prices above the current fair market value of PMI’s Common Stock on those respective dates.
On August 11, 2020, the Compensation Committee of the Board of Directors of PMI approved a stock option activity underrepricing program (the “2020 Repricing” and together with the 2005 Plan2016 Repricing and 2015 Plan is summarizedthe 2017 Repricing, the “Repricings”) authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the
current fair market value of PMI’s common stock. The repricing was effected on August 11, 2020 for eligible directors and employees.
PMI 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 the Company’s continued success. PMI expects to incur additional stock based compensation charges as a result of the Repricings.
The financial statement impact of the above Repricings was not material for the six months ended June 30, 2020 below:
| | | | | | | | | | | |
| Options Issued and Outstanding | | Weighted- Average Exercise Price |
| Balance as of January 1, 2020 | 76,236,757 | | | $ | 0.31 | |
| Options issued | 4,125,900 | | | 0.14 | |
| Options exercised | (3,740) | | | 0.38 | |
| Options forfeited | (5,573,980) | | | 0.36 | |
| Options expired | (3,329,460) | | | 0.13 | |
| Balance as of June 30, 2020 | 71,455,477 | | | 0.30 | |
| Options vested and expected to vest as of June 30, 2020 | 58,749,776 | | | 0.30 | |
| Options vested and exercisable at June 30, 2020 | 48,934,035 | | | 0.30 | |
Other Information Regarding Stock Options
The weighted-average remaining life for options outstanding as2021. As of June 30, 2020 was 7.37 years.
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires Prosper to make assumptions and judgments about the variables used in the calculation, including the fair value of PMI’s common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of PMI’s common stock, a risk-free interest rate, and expected dividends. Given the absence of a publicly traded market, Prosper considered numerous objective and subjective factors to determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists, (ii) the prices for PMI’s preferred stock sold to outside investors, (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock, (iv) the lack of marketability of PMI’s common stock, (v) developments in the business, (vi) secondary transactions of PMI’s common and preferred shares, and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not publicly traded, volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of Prosper. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Prosper uses an expected dividend yield of 0 as it does not anticipate paying any dividends in the foreseeable future.
Prosper also estimates forfeitures of unvested stock options. Expected forfeitures are based on Prosper’s historical experience. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. NaN compensation cost is recorded for options that do not vest.
The fair value of PMI’s stock option awards granted during the three and six months ended June 30, 2020 and 2019 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Volatility of common stock | 55.37 | % | | 46.72 | % | | 47.93 | % | | 46.72 | % |
| Risk-free interest rate | 0.44 | % | | 2.28 | % | | 0.66 | % | | 2.28 | % |
| Expected life | 6.0 years | | 5.9 years | | 6.0 years | | 5.9 years |
| Dividend yield | — | % | | — | % | | — | % | | — | % |
Restricted Stock Unit Activity
For the six months ended June 30, 2020, PMI did not grant any RSUs to employees. In previous reporting periods, PMI granted certain employees RSUs that are subject to three-year or four-year vesting terms and the occurrence of a liquidity event.
The following table summarizes the number of PMI’s outstanding RSUs and their weighted-average grant date fair value for the six months ended June 30, 2020:
| | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
| Unvested - January 1, 2020 | 4,803,141 | | | $ | 0.95 | |
| Forfeited | (141,500) | | | $ | 2.18 | |
| Unvested - June 30, 2020 | 4,661,641 | | | $ | 0.91 | |
The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended 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 June 30, 2020 and 2019, and $0.1 million and $0.2 million for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020,2021, the unamortized stock-based compensationRepricings expense adjusted for forfeiture estimates related to our employees’ unvested stock-based awards was approximately $2.6 million, which(net of forfeitures) of $46 thousand will be recognized over the remaining weighted-average vesting period of approximately 2.01.8 years.
14. Income Taxes
For the three months ended June 30, 2020 and 2019, Prosper recognized $34 thousand and $29 thousand of income tax expense, respectively. For the six months ended June 30, 2020 and 2019, Prosper recognized $68 thousand and $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 and six month periods ended June 30, 2020 and June 30, 2019 due to a full valuation allowance recorded against the Company’s deferred tax assets.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, it is not more likely than not that our deferred tax assets will be realized and therefore a full valuation allowance has been recorded.
15. Consortium Purchase Agreement
On February 27, 2017, Prosper entered into a series of agreements (the “Consortium Purchase Agreement”) with a consortium of investors (the “Consortium”), pursuant to which the Consortium agreed to purchase Borrower Loans in an aggregate principal amount of up to $5.0 billion (including certain loans purchased by one of the investors prior to the date of the Consortium Purchase Agreement). PFL was 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 3 warrants 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's right to exercise these Series F Warrants was subject to monthly vesting and was fully vested in May 2019.
On vesting of the Series F Warrants, Prosper recorded a liability as Convertible Preferred Stock Warrant Liability on the condensed consolidated balance sheets at fair value and a corresponding amount as Fair Value of Warrants Vested on Sale of Borrower Loans on the condensed consolidated statement of operations. Subsequent changes in the fair value of the vested warrants are recorded in Change in Fair Value of Convertible Preferred Stock Warrants on the condensed consolidated statement of 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 Change in Fair Value of Convertible Preferred Stock Warrants on the condensed consolidated statement of 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.
16. Leases
Prosper has operating leases for corporate offices and datacenters. Our leases have remaining lease terms of one year to seven years. Some of the lease agreements include options to extend the lease term for up to an additional five years. Rental expense under operating lease arrangements was $1.5 million and $1.4 million for the three months ended June 30, 2020 and 2019, respectively. Rental expense under operating lease arrangements was $3.0 million and $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 three months ended June 30, 2020.
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 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 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 $15.0 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. As of June 30, 2020, Prosper was in compliance with the covenant.
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 May 3, 2016 and March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved two separate stock option repricing programs authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that had exercise prices above the current fair market value of PMI’s Common Stock on those respective dates.
On August 11, 2020, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2020 Repricing” and together with the 2016 Repricing and the 2017 Repricing, the “Repricings”), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the
current fair market value of PMI’s common stock. The repricing was effected on August 11, 2020 for eligible directors and employees.
PMI 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 the Company’s continued success. PMI expects to incur additional stock based compensation charges as a result of the Repricings.
The financial statement impact of the above Repricings was not material for the six months ended June 30, 2021. As of June 30, 2021, the unamortized Repricings expense (net of forfeitures) of $46 thousand will be recognized over the remaining weighted-average vesting period of 1.8 years.
Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized for the six months ended June 30, 2021 below:
| | | | | | | | | | | | | | |
| | Options Issued and Outstanding | | Weighted Average Exercise Price |
| Balance as of January 1, 2021 | | 72,915,449 | | | $ | 0.02 | |
| Options issued | | 8,668,166 | | | $ | 0.10 | |
| Options exercised | | (1,754,458) | | | $ | 0.02 | |
| Options forfeited | | (11,742,812) | | | $ | 0.02 | |
| Options expired | | (14,595) | | | $ | 0.02 | |
| Balance as of June 30, 2021 | | 68,071,750 | | | $ | 0.03 | |
| Options vested and expected to vest as of June 30, 2021 | | 52,252,350 | | | $ | 0.03 | |
| Options vested and exercisable at June 30, 2021 | | 47,648,686 | | | $ | 0.02 | |
Other Information Regarding Stock Options
The weighted-average remaining life for options outstanding as of June 30, 2021 was 6.87 years.
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires PMI to make assumptions and judgments about the variables used in the calculation, including the fair value of PMI’s common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of PMI’s common stock, a risk-free interest rate, and expected dividends. Given the absence of a publicly traded market, the Company considered numerous objective and subjective factors to determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists, (ii) the prices for PMI’s preferred stock sold to outside investors, (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock, (iv) the lack of marketability of PMI’s common stock, (v) developments in the business, (vi) secondary transactions of PMI’s common and preferred shares, and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not publicly traded, volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of PMI. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. PMI uses an expected dividend yield of 0 as it does not anticipate paying any dividends in the foreseeable future.
PMI also estimates forfeitures of unvested stock options. Expected forfeitures are based on the Company’s historical experience. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. NaN compensation cost is recorded for options that do not vest.
The fair value of PMI’s stock option awards granted during the three and six months ended June 30, 2021 and 2020 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Volatility of common stock | | 67.60 | % | | 55.37 | % | | 64.00 | % | | 47.93 | % |
| Risk-free interest rate | | 1.04 | % | | 0.44 | % | | 1.01 | % | | 0.66 | % |
| Expected life | | 6.0 years | | 6.0 years | | 6.0 years | | 6.0 years |
| Dividend yield | | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Restricted Stock Unit Activity
For the six months ended June 30, 2021, PMI did not grant any RSUs. In previous years, PMI granted RSUs to certain employees that are subject to three-year or four-year vesting terms and the occurrence of a liquidity event.
The following table summarizes the number of PMI’s RSU activity for the six months ended June 30, 2021:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Unvested at January 1, 2021 | | 4,661,141 | | | $ | 0.91 | |
| Forfeited | | (1,786,793) | | | $ | 0.54 | |
| Unvested at June 30, 2021 | | 2,874,348 | | | $ | 1.14 | |
Share Based Compensation
The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Origination and servicing | | $ | 30 | | | $ | 34 | | | $ | 62 | | | $ | 72 | |
| Sales and marketing | | 16 | | | 15 | | | 32 | | | 26 | |
| General and administrative | | 222 | | | 343 | | | 493 | | | 799 | |
| Total stock-based compensation | | $ | 268 | | | $ | 392 | | | $ | 587 | | | $ | 897 | |
Prosper capitalized stock-based compensation as internal-use software and website development costs of an immaterial amount and $0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, the unamortized stock-based compensation expense, adjusted for forfeiture estimates, related to unvested stock-based awards was approximately $1.3 million, which will be recognized over a remaining weighted-average vesting period of approximately 2.0 years.
14. Income Taxes
For the three months ended June 30, 2021 and 2020, PMI recognized $21 thousand and $34 thousand of income tax expense, respectively. For the six months ended June 30, 2021 and 2020, PMI recognized $42 thousand and $68 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 six month periods ended June 30, 2021 and 2020 due to a full valuation allowance recorded against the Company’s deferred tax assets.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, it is not more likely than not that our deferred tax assets will be realized and therefore a full valuation allowance has been recorded.
15. Leases
Prosper has operating leases for corporate offices and datacenters. These leases have remaining lease terms of one year to six years. Some of the lease agreements include options to extend the lease term for up to an additional five years. Rental expense under operating lease arrangements was $1.1 million and $1.5 million for the three months ended June 30, 2021 and 2020, respectively, and $2.2 million and $3.0 million for the six months ended June 30, 2021 and 2020, 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 $0.1 million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively, and $0.2 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively.
Operating Lease Right-of-Use (“ROU”) Assets
The following table summarizes the operating lease right-of-use assets as of June 30, 2021, which are included in “Property and Equipment, Net” on the condensed consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| ROU Assets - Office buildings | | $ | 16,756 | | | $ | 7,719 | | | $ | 9,037 | |
| ROU Assets - Other | | 776 | | | 161 | | | 615 | |
| Total right-of-use assets subject to amortization | | $ | 17,532 | | | $ | 7,880 | | | $ | 9,652 | |
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 three months ended June 30, 2020. NaN impairment was identified in 2021.
Lease Liabilities
Future maturities of operating lease liabilities as of June 30, 2021 were as follows (in thousands). The present value of the future minimum lease payments represent our operating lease liabilities as of June 30, 2021 and are included in "Other Liabilities" on the condensed consolidated balance sheets.
| | | | | | | | |
| | June 30, 2021 |
| Remainder of 2021 | | $ | 2,816 | |
| 2022 | | 5,831 | |
| 2023 | | 2,142 | |
| 2024 | | 1,360 | |
| 2025 | | 1,395 | |
| Thereafter | | 1,218 | |
| Total future minimum lease payments | | $ | 14,762 | |
| Less imputed interest | | (1,222) | |
| Present value of future minimum lease payments | | $ | 13,540 | |
Because the rate implicit in each lease is not readily determinable, we use our incremental borrowing rate to determine the present value of the lease payments. Other information related to leases was as follows (dollars in thousands):
| | | | | | | | |
| | June 30, 2021 |
| Cash paid for operating leases year-to-date | | $ | 2,614 | |
| ROU assets obtained in exchange for new operating lease obligations year-to-date | | $ | 1,773 | |
| Weighted average remaining lease term (in years) | | 3.38 years |
| Weighted average discount rate | | 5.48 | % |
16. Commitments and Contingencies
In the normal course of its operations, Prosper becomes involved in various legal actions. Prosper maintains provisions it considers to be adequate for such actions. Prosper does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper's financial condition, results of operations or cash flows.
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. On June 25, 2021, PMI, along with its wholly-owned subsidiary Prosper Funding LLC, and WebBank entered into: (i) a Fifth Amendment (the “Sale Agreement Amendment”) to the Asset Sale Agreement, dated July 1, 2016, between Prosper Funding LLC and WebBank (the “Sale Agreement”); (ii) a Sixth Amendment (the “Marketing Agreement Amendment”) to the Marketing Agreement, dated July 1, 2016, between PMI and WebBank (the “Marketing Agreement”); and (iii) a Third Amendment (the “Purchase Agreement Amendment”) to the Stand By Purchase Agreement, dated July 1, 2016, between PMI and WebBank (the “Purchase Agreement” and, collectively with the Sale Agreement and the Marketing Agreement, the “Origination and Sale Agreements”). The Sale Agreement Amendment, the Marketing Agreement Amendment, and the Purchase Agreement Amendment, collectively, are hereinafter referred to as the “Amendments.”
The Sale Agreement Amendment, among other things, extends the term of the Sale Agreement to February 1, 2025 and amends certain collateral requirements under the Sale Agreement. The Marketing Agreement Amendment, among other things, extends the term of the Marketing Agreement to February 1, 2025 and sets forth the amended terms and conditions of certain fees owed by the Registrants to WebBank under the Marketing Agreement. The Purchase Agreement Amendment amends certain collateral requirements of PMI under the Purchase Agreement.
Pursuant to the Marketing Agreement Amendment, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500 through February 1, 2022, and $100,000 thereafter through February 1, 2025, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining six months of 2021 is $0.9 million. The minimum fee is then $1.2 million for each year from 2022 through 2024, and $0.1 million in 2025.
Additionally, under the agreement with WebBank, Prosper is required to maintain minimum net liquidity of $15.0 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. As of June 30, 2021, Prosper was in compliance with the covenant.
Loan Purchase Commitments
Prosper entered into an agreement with WebBank to purchase $19.7 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended June 30, 2021. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending September 30, 2021.
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, 2021 is $2.6 billion. Prosper has accrued $0.3 million and $0.2 million as of June 30, 2021 and December 31, 2020, 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.
West Virginia Matter
In January 2018, the Attorney General of the State of West Virginia (the “Attorney General”) initiated discussions regarding certain acts and practices of PMI and PFL that the Attorney General asserts may have violated the West Virginia Consumer Credit and Protection Act (the “Consumer Act”), to which Prosper responded with such information as was requested by the Attorney General. Following a period of more than a year with limited to no communication, in February 2020, Prosper received a proposed Assurance of Discontinuance (an “AOD”) from the Attorney General requesting that, without in any way admitting that any of its prior practices were in violation of the Consumer Act, Prosper agree to certain terms and conditions regarding its past and potential future conduct of its business with respect to customers in West Virginia, including a release by the Attorney General of any claims it may have related to the matters identified in the AOD. Prosper is evaluating and intends to discuss the proposed terms in the AOD with the Attorney General.
We cannot predict the outcome of the matter and any potential fines or penalties, if any, that may arise from the matter. Further, we are unable to estimate a range of outcomes and as a result no accrual has been made.
No loans have been originated through the Prosper platform to West Virginians since June 2016.
17. Related Parties
Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers, and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers, and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers, and certain affiliates participate in its marketplace by placing bids and purchasing Notes. The aggregate amount of the Notes purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the three and six months ended June 30, 2021 and June 30, 2020, as well as the Notes outstanding as of June 30, 2021 and December 31, 2020 are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aggregate Amount of
Notes Purchased the Three Months
Ended June 30, | | Interest Earned on Notes
the Three Months
Ended June 30, | | |
| Related Party | | 2021 | | 2020 | | 2021 | | 2020 | | | | |
| Executive officers and management | | $ | 9 | | | $ | 6 | | | $ | 2 | | | $ | 1 | | | | | |
| Directors (excluding executive officers and management) | | 20 | | | 110 | | | 0 | | | 14 | | | | | |
| Total | | $ | 29 | | | $ | 116 | | | $ | 2 | | | $ | 15 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aggregate Amount of
Notes Purchased the Six Months
Ended June 30, | | Interest Earned on Notes
the Six Months
Ended June 30, |
| Related Party | | 2021 | | 2020 | | 2021 | | 2020 |
| Executive officers and management | | $ | 17 | | | $ | 12 | | | $ | 3 | | | $ | 3 | |
| Directors (excluding executive officers and management) | | 20 | | | 231 | | | 0 | | | 29 | |
| Total | | $ | 37 | | | $ | 243 | | | $ | 3 | | | $ | 32 | |
| | | | | | | | | | | | | | | | | | |
| | Notes Balance as of | | |
| Related Party | | June 30, 2021 | | December 31,
2020 | | | | |
| Executive officers and management | | $ | 43 | | | $ | 41 | | | | | |
| Directors (excluding executive officers and management) | | 18 | | | 0 | | | | | |
| Total | | $ | 61 | | | $ | 41 | | | | | |
18. Significant Concentrations
Prosper is dependent on third party funding sources such as banks, asset managers, investment funds and Warehouse Lines to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the three months ended June 30, 2021, one individual party purchased 27.7% of such loans, and the Company’s Warehouse VIEs purchased 10.7% of such loans. For the three months ended June 30, 2020, three individual parties purchased 12.8%, 17.9% and 19.0% of all Borrower Loans originated, and the Company’s Warehouse VIEs purchased 38.8% of such loans. Of all Borrower Loans originated in the six months ended June 30, 2021, one individual party purchased 28.2% of such loans, and the Company’s Warehouse VIEs purchased 12.1% of such loans. For the six months ended June 30, 2020, three individual parties purchased 10.6%, 17.1% and 13.5%, respectively, of all Borrower Loans originated, and the Company’s Warehouse VIEs purchased 20.1% of such loans. These purchases reflect that a significant portion of Prosper’s business is dependent on funding through the Whole Loan Channel, through which 88% and 91% of Borrower Loans were originated in the six months ended June 30, 2021 and June 30, 2020, 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.
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 | |
| | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| Assets: | | | | |
| Cash and Cash Equivalents | | $ | 6,854 | | | $ | 8,592 | |
| Restricted Cash | | 181,598 | | | 132,332 | |
| Borrower Loans, at Fair Value | | 236,844 | | | 209,670 | |
| | | | |
| Property and Equipment, Net | | 8,788 | | | 6,928 | |
| Servicing Assets | | 10,389 | | | 11,088 | |
| Other Assets | | 312 | | | 217 | |
| Total Assets | | $ | 444,785 | | | $ | 368,827 | |
| Liabilities and Member’s Equity: | | | | |
| Accounts Payable and Accrued Liabilities | | $ | 2,913 | | | $ | 2,361 | |
| Payable to Related Party | | 1,884 | | | 4,120 | |
| Payable to Investors | | 176,520 | | | 126,266 | |
| Notes, at Fair Value | | 236,041 | | | 208,379 | |
| Other Liabilities | | 2,439 | | | 2,613 | |
| Total Liabilities | | 419,797 | | | 343,739 | |
| Member's Equity: | | | | |
| Member's Equity | | 11,404 | | | 11,404 | |
| Retained Earnings | | 13,584 | | | 13,684 | |
| Total Member's Equity | | $ | 24,988 | | | $ | 25,088 | |
| Total Liabilities and Member's Equity | | $ | 444,785 | | | $ | 368,827 | |
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 FlowsOperations (Unaudited)
(amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Revenues: | | | | | | | | |
| Operating Revenues: | | | | | | | | |
| Administration Fee Revenue - Related Party | | $ | 8,395 | | | $ | 3,740 | | | $ | 15,181 | | | $ | 9,575 | |
| Servicing Fees, Net | | 3,928 | | | 5,257 | | | 7,529 | | | 11,716 | |
| Gain on Sale of Borrower Loans | | 1,663 | | | 1,182 | | | 3,674 | | | 3,182 | |
| Other Revenue | | 306 | | | 165 | | | 357 | | | 345 | |
| Total Operating Revenues | | 14,292 | | | 10,344 | | | 26,741 | | | 24,818 | |
| Interest Income on Borrower Loans | | 8,999 | | | 9,309 | | | 17,556 | | | 19,147 | |
| Interest Expense on Notes | | (8,418) | | | (8,728) | | | (16,431) | | | (17,944) | |
| Total Interest Income, Net | | 581 | | | 581 | | | 1,125 | | | 1,203 | |
| Change in Fair Value of Financial Instruments, Net | | 384 | | | 194 | | | 156 | | | 257 | |
| Total Net Revenues | | 15,257 | | | 11,119 | | | 28,022 | | | 26,278 | |
| Expenses: | | | | | | | | |
| Administration Fee - Related Party | | 12,535 | | | 9,494 | | | 24,967 | | | 21,858 | |
| Servicing | | 1,486 | | | 1,137 | | | 2,899 | | | 2,330 | |
| General and Administrative | | 132 | | | 113 | | | 256 | | | 167 | |
| Total Expenses | | 14,153 | | | 10,744 | | | 28,122 | | | 24,355 | |
| Net Income (Loss) | | $ | 1,104 | | | $ | 375 | | | $ | (100) | | | $ | 1,923 | |
| | | | | | | | | | | |
| 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 of Member’s Equity (Unaudited)
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Member’s Equity | | Retained Earnings | | Total |
| Balance at January 1, 2021 | | $ | 11,404 | | | $ | 13,684 | | | $ | 25,088 | |
| Net Loss | | — | | | (100) | | | (100) | |
| | | | | | |
| Balance as of June 30, 2021 | | $ | 11,404 | | | $ | 13,584 | | | $ | 24,988 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | Member’s Equity | | Retained Earnings | | Total |
| Balance at January 1, 2020 | | $ | 15,904 | | | $ | 12,283 | | | $ | 28,187 | |
| Distribution to Parent | | (4,500) | | | — | | | (4,500) | |
| Net Income | | — | | | 1,923 | | | 1,923 | |
| Balance as of June 30, 2020 | | $ | 11,404 | | | $ | 14,206 | | | $ | 25,610 | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Member’s Equity | | Retained Earnings | | Total |
| Balance at January 1, 2021 | | $ | 11,404 | | | $ | 13,684 | | | $ | 25,088 | |
| Net Loss | | — | | | (1,204) | | | (1,204) | |
| Balance at March 31, 2021 | | $ | 11,404 | | | $ | 12,480 | | | $ | 23,884 | |
| | | | | | |
| Net Income | | — | | | 1,104 | | | 1,104 | |
| Balance as of June 30, 2021 | | $ | 11,404 | | | $ | 13,584 | | | $ | 24,988 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | Member’s Equity | | Retained Earnings | | Total |
| Balance at January 1, 2020 | | $ | 15,904 | | | $ | 12,283 | | | $ | 28,187 | |
| Net Income | | — | | | 1,548 | | | 1,548 | |
| Balance at 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 | |
| | | | | | |
| | | | | | |
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, |
| | 2021 | | 2020 |
| Cash Flows from Operating Activities: | | | | |
| Net (Loss) Income | | $ | (100) | | | $ | 1,923 | |
| Adjustments to Reconcile Net (Loss) Income to Net Cash Used in Operating Activities: | | | | |
| Change in Fair Value of Financial Instruments, Net | | (156) | | | (258) | |
| Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes | | (11) | | | 4 | |
| Gain on Sale of Borrower Loans | | (4,375) | | | (3,402) | |
| Change in Fair Value of Servicing Rights | | 5,074 | | | 6,227 | |
| Depreciation and Amortization | | 2,265 | | | 2,051 | |
| Changes in Operating Assets and Liabilities: | | | | |
| Purchase of Loans Held for Sale at Fair Value | | (792,674) | | | (622,122) | |
| Proceeds from Sales and Principal Payments of Loans Held for Sale, at Fair Value | | 792,674 | | | 622,122 | |
| Other Assets | | (95) | | | 102 | |
| Accounts Payable and Accrued Liabilities | | 552 | | | 387 | |
| Payable to Investors | | 50,254 | | | 304 | |
| Net Related Party Receivable/Payable | | (2,212) | | | 3,419 | |
| Other Liabilities | | (174) | | | (820) | |
| Net Cash Provided by Operating Activities | | 51,022 | | | 9,937 | |
| Cash Flows from Investing Activities: | | | | |
| Purchase of Borrower Loans Held at Fair Value | | (107,609) | | | (65,664) | |
| Proceeds from Sales and Principal Payments of Borrower Loans, at Fair Value | | 81,103 | | | 77,160 | |
| Purchases of Property and Equipment | | (4,149) | | | (1,269) | |
| Net Cash (Used in) Provided by Investing Activities | | (30,655) | | | 10,227 | |
| Cash Flows from Financing Activities: | | | | |
| Proceeds from Issuance of Notes Held at Fair Value | | 108,203 | | | 65,043 | |
| Payments of Notes, at Fair Value | | (81,042) | | | (77,108) | |
| | | | |
| Net Cash Provided by (Used in) Financing Activities | | 27,161 | | | (16,565) | |
| Net Increase in Cash, Cash Equivalents and Restricted Cash | | 47,528 | | | 3,599 | |
| Cash, Cash Equivalents and Restricted Cash at Beginning of the Period | | 140,924 | | | 117,861 | |
| Cash, Cash Equivalents and Restricted Cash at End of the Period | | $ | 188,452 | | | $ | 121,460 | |
| | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | |
| Cash Paid for Interest | | $ | 16,650 | | | $ | 17,700 | |
| Non-Cash Investing Activity - Accrual for Property and Equipment, Net | | $ | 480 | | | $ | 1,331 | |
| | | | |
| Reconciliation to Amounts on Consolidated Balance Sheets: | | | | |
| Cash and Cash Equivalents | | $ | 6,854 | | | $ | 7,813 | |
| Restricted Cash | | 181,598 | | | 113,647 | |
| Total Cash, Cash Equivalents and Restricted Cash | | $ | 188,452 | | | $ | 121,460 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
PROSPER FUNDING LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Prosper Funding LLC (“PFL”) was formed in the state of Delaware in February 2012 as a limited liability company with 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, “ProsperProsper Funding” “we,” “us,” LLC, “PFL”, and “our”the “Company” refers to PFLProsper Funding LLC and its wholly owned subsidiary, Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019.2020. The balance sheet at December 31, 20192020 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 FundingPFL 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, 20202021 and June 30, 2019.2020.
The preparation of Prosper Funding'sPFL's condensed consolidated financial statements and related disclosures in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.
2. Summary of Significant Accounting Policies
Prosper Funding'sPFL's significant accounting policies are included in Note 2, Summary of Significant Accounting Policies, in Prosper Funding’sPFL’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. There have been no changes to these accounting policies during the first six months of 2020.2021.
Fair Value Measurements
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short termshort-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 termshort-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 FundingPFL 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’sPFL’s condensed consolidated balance sheets as assets and liabilities, respectively.
Prosper PFLFunding 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, ProsperPFL stops accruing interest and reverses all accrued but unpaid interest as of such date. Additionally, ProsperPFL 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 Statementscondensed consolidated statements of Operations.operations.
Prosper FundingPFL 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 disclosuresNo accounting standards were adopted in the notes to the consolidated financial statements and has no effect on Prosper Funding’s balance sheet or statements of operations.current period for PFL.
Accounting Standards Issued, To Be Adopted By Prosper FundingPFL In Future Periods
No issued and pending accounting standards were identified that are expected to have an impact on Prosper Funding.PFL.
3. Property and Equipment, Net
Property and equipment consist of the following as of the dates presented (in thousands):
| | | June 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Internal-use software and web site development costs | Internal-use software and web site development costs | $ | 26,885 | | | $ | 24,930 | | Internal-use software and web site development costs | | $ | 30,986 | | | $ | 26,953 | |
| Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | (19,033) | | | (17,381) | | Less accumulated depreciation and amortization | | (22,198) | | | (20,025) | |
| Total property and equipment, net | Total property and equipment, net | $ | 7,852 | | | $ | 7,549 | | Total property and equipment, net | | $ | 8,788 | | | $ | 6,928 | |
Depreciation expense for the three months ended June 30, 2021 and 2020 was $1.2 million and 2019 was $1.0 million, and $1.1 million, respectively. Depreciation expense for the six months ended June 30, 2021 and 2020 was $2.3 million 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, 20202021 and December 31, 2019,2020, are presented in the following table (in thousands):
| | | Borrower Loans | | | Notes | | | Borrower Loans | | Notes |
| | June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 | | June 30, 2021 | | December 31, 2020 |
| Aggregate principal balance outstanding | Aggregate principal balance outstanding | $ | 226,599 | | | $ | 248,702 | | | $ | (227,674) | | | $ | (250,281) | | Aggregate principal balance outstanding | | $ | 236,728 | | | $ | 215,373 | | | $ | 239,126 | | | $ | 217,110 | |
| Fair value adjustments | Fair value adjustments | (14,824) | | | (3,565) | | | 17,688 | | | 6,110 | | Fair value adjustments | | 116 | | | (5,703) | | | (3,085) | | | (8,731) | |
| Fair value | Fair value | $ | 211,775 | | | $ | 245,137 | | | $ | (209,986) | | | $ | (244,171) | | Fair value | | $ | 236,844 | | | $ | 209,670 | | | $ | 236,041 | | | $ | 208,379 | |
At June 30, 2020,2021, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.92%31.82% and had various original maturity dates through June 2025. 2026. At
December 31, 2019,2020, 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%31.82%, and had various original maturity dates through December 2024.2025. Since COVID-19 relief was first offered in March 2020 and through June 30, 2021, approximately 11% of the total outstanding balances of all loans originated on our platform on a cumulative basis have enrolled in at least one of these COVID-19 relief programs. Approximately 2% of the total outstanding balances of all loans originated on our platform are actively enrolled in at least one relief program as of June 30, 2021.
As of June 30, 2021, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $0.7 million and a fair value of $0.1 million. As of December 31, 2020, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $1.4$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 FundingPFL places loans on non-accrual status when they are over 120 days past due. As of June 30, 20202021 and December 31, 2019,2020, Borrower Loans in non-accrual status had a fair value of $0.2$0.1 million and $0.3and $0.2 million, respectively.
5. Loan Servicing Assets
Prosper FundingPFL 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 FundingPFL 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 BorrowerBorrower Loans was a$1.7 million and $1.2 million gain and a $4.1 million loss for the three months ended June 30, 2021 and June 30, 2020, respectively, and 2019, respectively. The total recognized gains$3.7 million and losses on the sale of such Borrower Loans was a $3.2 million gain and a $10.9 million loss for the six monthsmonths ended June 30, 20202021 and 2019June 30, 2020, respectively.
As of June 30, 2020,2021, 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 FundingPFL retained servicing rights, had a total outstanding principal balance of $3.7$2.6 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.82%, and various original maturity dates through June 2026. At December 31, 2020, Borrower Loans that were sold, but for which PFL retained servicing rights, had a total outstanding principal balance of $2.4 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%31.82%, and various original maturity dates through December 2024.2025.
Contractually-specified servicing fees and ancillary fees totaled $10.5totaled $9.0 million and $10.2$10.5 million for the three months ended June 30, 2021 and June 30, 2020, and 2019, respectively, and $23.0$18.3 million and $20.223.0 million for the six months ended June 30, 20202021 and 2019,June 30, 2020, respectively, and are included on the condensed consolidated statements of operations in Servicing Fees, Net.
Fair Value Valuation Method
Prosper FundingPFL 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 FundingPFL 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 FundingPFL 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 FundingPFL 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 FundingPFL 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’sPFL’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 FundingPFL expects to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6. Income Taxes
Prosper FundingPFL incurred 0 income tax provision for the six months ended June 30, 20202021 and June 30, 2019. Prosper Funding2020. PFL is a U.S. disregarded entity and its income and loss are included in the income tax reporting of its parent, PMI. Since PMI is in a cumulativetaxable 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 FundingPFL is 0%.
7. Fair Value of Assets and Liabilities
Prosper FundingPFL has elected to record certain financial instruments at fair value on the balance sheet. Prosper FundingPFL 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.
AtAs of June 30, 20202021 and December 31, 2019,2020, 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 FundingPFL did not transfer any assets or liabilities in or out of Level 3 for the sixmonths ended June 30, 20202021 or 2019.2020.
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 | |
| June 30, 2021 | | June 30, 2021 | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | Assets: | | | | | | | | Assets: | | | | | | | | |
| Borrower Loans | $ | — | | | $ | — | | | $ | 211,775 | | | $ | 211,775 | | |
| Borrower Loans, at Fair Value | | Borrower Loans, at Fair Value | | $ | 0 | | | $ | 0 | | | $ | 236,844 | | | $ | 236,844 | |
| Servicing Assets | Servicing Assets | — | | | — | | | 12,063 | | | 12,063 | | Servicing Assets | | 0 | | | 0 | | | 10,389 | | | 10,389 | |
| Total Assets | Total Assets | $ | — | | | $ | — | | | $ | 223,838 | | | $ | 223,838 | | Total Assets | | $ | 0 | | | $ | 0 | | | $ | 247,233 | | | $ | 247,233 | |
| Liabilities: | Liabilities: | | | | | | | | Liabilities: | | | | | | | | |
| Notes | $ | — | | | $ | — | | | $ | 209,986 | | | $ | 209,986 | | |
| Notes, at Fair Value | | Notes, at Fair Value | | $ | 0 | | | $ | 0 | | | $ | 236,041 | | | $ | 236,041 | |
| | Loan Trailing Fee Liability | Loan Trailing Fee Liability | — | | | — | | | 2,403 | | | 2,403 | | Loan Trailing Fee Liability | | 0 | | | 0 | | | 2,145 | | | 2,145 | |
| Total Liabilities | Total Liabilities | $ | — | | | $ | — | | | $ | 212,389 | | | $ | 212,389 | | Total Liabilities | | $ | 0 | | | $ | 0 | | | $ | 238,186 | | | $ | 238,186 | |
| | December 31, 2019 | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total | |
| December 31, 2020 | | December 31, 2020 | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
| Assets: | Assets: | | | | | | | | Assets: | | | | | | | | |
| Borrower Loans | $ | — | | | $ | — | | | $ | 245,137 | | | $ | 245,137 | | |
| Borrower Loans, at Fair Value | | Borrower Loans, at Fair Value | | $ | 0 | | | $ | 0 | | | $ | 209,670 | | | $ | 209,670 | |
| Servicing Assets | Servicing Assets | — | | | — | | | 14,888 | | | 14,888 | | Servicing Assets | | 0 | | | 0 | | | 11,088 | | | 11,088 | |
| Total Assets | Total Assets | $ | — | | | $ | — | | | $ | 260,025 | | | $ | 260,025 | | Total Assets | | $ | 0 | | | $ | 0 | | | $ | 220,758 | | | $ | 220,758 | |
| Liabilities: | Liabilities: | | | | | | | | Liabilities: | | | | | | | | |
| Notes | $ | — | | | $ | — | | | $ | 244,171 | | | $ | 244,171 | | |
| Notes, at Fair Value | | Notes, at Fair Value | | $ | 0 | | | $ | 0 | | | $ | 208,379 | | | $ | 208,379 | |
| | Loan Trailing Fee Liability | Loan Trailing Fee Liability | — | | | — | | | 2,997 | | | 2,997 | | Loan Trailing Fee Liability | | 0 | | | 0 | | | 2,233 | | | 2,233 | |
| Total Liabilities | Total Liabilities | $ | — | | | $ | — | | | $ | 247,168 | | | $ | 247,168 | | Total Liabilities | | $ | 0 | | | $ | 0 | | | $ | 210,612 | | | $ | 210,612 | |
As Prosper Funding’sPFL’s Borrower Loans, Notes, Servicing Assets and loan trailing fee liability do not trade in an active market with readily observable prices, Prosper FundingPFL 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’sPFL’s Level 3 fair value measurements at the dates presented:
| | | | | | | | | | | | | | |
| | Range | | |
| Borrower Loans and Notes | | June 30, 20202021 | | December 31, 20192020 |
| Discount rate | | 8.2%4.6% - 15.9%12.7% | | 4.4%5.3% - 12.1%16.1% |
| Default rate | | 2.7%2.4% - 17.7%15.2% | | 2.4%2.6% - 17.7%16.2% |
| | | | | | | | | | | | | | |
| | Range | | |
| Servicing Assets | | June 30, 20202021 | | December 31, 20192020 |
| Discount rate | | 15.0% - 25.0% | | 15.0% - 25.0% |
| Default rate | | 1.9% - 19.4%16.8% | | 1.7%1.9% - 18.8%17.7% |
| Prepayment rate | | 15.3%11.6% - 28.5%28.6% | | 16.5%12.4% - 28.1%28.9% |
Market servicing rate (1) (2) | | 0.625% - 0.818% | | 0.625 | %0.625% - 0.818% |
(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, 2021 and December 31, 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, 20202021 and December 31, 2019,2020, the market rate for collection fees and non-sufficient fund fees was assumed to be 46 basis points and 67 basis points, respectively, for a total market servicing rate range of 66.568.5 - 85.887.8 basis points and a total market servicing rate of 68.569.5 - 88.8 basis points, respectively.
| | | | | | | | | | | | | | |
| | Range | | |
| Loan Trailing Fee Liability | | June 30, 20202021 | | December 31, 20192020 |
| Discount rate | | 15.0% - 25.0% | | 15.0% - 25.0% |
| Default rate | | 1.9% - 19.4%16.8% | | 1.7%1.9% - 18.8%17.7% |
| Prepayment rate | | 15.3%11.6% - 28.5%28.6% | | 16.5%12.4% - 28.1%28.9% |
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, 20202021 and 20192020 (in thousands):
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Assets | | | Liabilities | | | Assets | | Liabilities | |
| | Borrower Loans | | Loans Held for Sale | | Notes | | Total | | Borrower Loans | | Loans Held for Sale | | Notes | | Total |
| Balance at January 1, 2020 | $ | 245,137 | | | $ | — | | | $ | (244,171) | | | $ | 966 | | |
| Balance at January 1, 2021 | | Balance at January 1, 2021 | | $ | 209,670 | | | $ | 0 | | | $ | (208,379) | | | $ | 1,291 | |
| Originations | Originations | 65,664 | | | 622,122 | | | (65,043) | | | 622,743 | | Originations | | 107,609 | | | 792,674 | | | (108,203) | | | 792,080 | |
| Principal repayments | Principal repayments | (75,596) | | | — | | | 77,108 | | | 1,512 | | Principal repayments | | (80,334) | | | 0 | | | 81,042 | | | 708 | |
| Borrower Loans sold to third parties | Borrower Loans sold to third parties | (1,564) | | | (622,122) | | | — | | | (623,686) | | Borrower Loans sold to third parties | | (769) | | | (792,674) | | | 0 | | | (793,443) | |
| Other changes | Other changes | 253 | | | — | | | (257) | | | (4) | | Other changes | | (208) | | | 0 | | | 219 | | | 11 | |
| Change in fair value | Change in fair value | (22,119) | | | — | | | 22,377 | | | 258 | | Change in fair value | | 876 | | | 0 | | | (720) | | | 156 | |
| Balance at June 30, 2020 | $ | 211,775 | | | $ | — | | | $ | (209,986) | | | $ | 1,789 | | |
| Balance at June 30, 2021 | | Balance at June 30, 2021 | | $ | 236,844 | | | $ | 0 | | | $ | (236,041) | | | $ | 803 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | $ | 0 | | | $ | (244,171) | | | $ | 966 | |
| Originations | | 65,664 | | | 622,122 | | | (65,043) | | | 622,743 | |
| Principal repayments | | (75,596) | | | 0 | | | 77,108 | | | 1,512 | |
| Borrower Loans sold to third parties | | (1,564) | | | (622,122) | | | 0 | | | (623,686) | |
| Other changes | | 253 | | | 0 | | | (257) | | | (4) | |
| Change in fair value | | (22,119) | | | 0 | | | 22,377 | | | 258 | |
| Balance at June 30, 2020 | | $ | 211,775 | | | $ | 0 | | | $ | (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, 2021 | | $ | 219,012 | | | $ | 0 | | | $ | (218,494) | | | $ | 518 | |
| Originations | | 58,651 | | | 386,440 | | | (58,342) | | | 386,749 | |
| Principal repayments | | (41,259) | | | 0 | | | 41,254 | | | (5) | |
| Borrower Loans sold to third parties | | (326) | | | (386,440) | | | 0 | | | (386,766) | |
| Other changes | | (109) | | | 0 | | | 32 | | | (77) | |
| Change in fair value | | 875 | | | 0 | | | (491) | | | 384 | |
| Balance at June 30, 2021 | | $ | 236,844 | | | $ | 0 | | | $ | (236,041) | | | $ | 803 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | Borrower Loans | | Loans Held for Sale | | Notes | | Total |
| Balance at April 1, 2019 | $ | 259,899 | | | $ | — | | | $ | (258,722) | | | $ | 1,177 | | |
| Balance at April 1, 2020 | | Balance at April 1, 2020 | | $ | 227,659 | | | $ | 0 | | | $ | (225,491) | | | $ | 2,168 | |
| Originations | Originations | 41,839 | | | 670,382 | | | (41,774) | | | 670,447 | | Originations | | 24,363 | | | 222,572 | | | (24,468) | | | 222,467 | |
| Principal repayments | Principal repayments | (41,215) | | | — | | | 41,611 | | | 396 | | Principal repayments | | (36,256) | | | 0 | | | 36,520 | | | 264 | |
| Borrower Loans sold to third parties | Borrower Loans sold to third parties | (749) | | | (670,382) | | | — | | | (671,131) | | Borrower Loans sold to third parties | | (682) | | | (222,572) | | | 0 | | | (223,254) | |
| Other changes | Other changes | (115) | | | — | | | 2 | | | (113) | | Other changes | | 344 | | | 0 | | | (395) | | | (51) | |
| Change in fair value | Change in fair value | (5,589) | | | — | | | 5,458 | | | (131) | | Change in fair value | | (3,653) | | | 0 | | | 3,848 | | | 195 | |
| Balance at June 30, 2019 | $ | 254,070 | | | $ | — | | | $ | (253,425) | | | $ | 645 | | |
| Balance at June 30, 2020 | | Balance at June 30, 2020 | | $ | 211,775 | | | $ | 0 | | | $ | (209,986) | | | $ | 1,789 | |
The following tables present additional information about Level 3 Servicing Assets recorded at fair value (in thousands):
| | | | | | | | |
| | Servicing Assets |
| Fair Value at January 1, 2021 | | $ | 11,088 | |
| Additions | | 4,376 | |
| Less: Changes in fair value | | (5,075) | |
| Fair Value at June 30, 2021 | | $ | 10,389 | |
| | | | | | | | |
| | 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 JanuaryApril 1, 20192021 | | $ | 15,55010,770 | |
| Additions | | 6,7962,022 | |
| Less: Changes in fair value | | (6,885)(2,403) | |
Fair Value at June 30, 20192021 | | $ | 15,46110,389 | |
| | | | | | | | |
| | 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, 20202021 | | $ | 2,9972,233 | |
| Issuances | | 625817 | |
| Cash payment of Loan Trailing Fee | | (1,271)(1,066) | |
| Change in fair value | | 52161 | |
Fair Value at June 30, 20202021 | | $ | 2,4032,145 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
Fair Value at January 1, 20192020 | | $ | 3,1182,997 | |
| Issuances | | 1,297625 | |
| Cash payment of Loan Trailing Fee | | (1,298)(1,271) | |
| Change in fair value | | 13252 | |
Fair Value at June 30, 20192020 | | $ | 3,2492,403 | |
| | | | | | | | |
| | Loan Trailing Fee Liability |
| Fair Value at April 1, 2021 | | $ | 2,189 | |
| Issuances | | 407 | |
| Cash payment of Loan Trailing Fee | | (522) | |
| Change in fair value | | 71 | |
| Fair Value at June 30, 2021 | | $ | 2,145 | |
| | | | | | | | |
| | 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, 20202021 and December 31, 20192020 for Borrower Loans are presented in the following table (in thousands, except percentages).
| | Borrower Loans | June 30, 2020 | | December 31, 2019 | |
| Borrower Loans: | | Borrower Loans: | | June 30, 2021 | | December 31, 2020 |
| Fair value, using the following assumptions: | Fair value, using the following assumptions: | $ | 211,775 | | | $ | 245,137 | | Fair value, using the following assumptions: | | $ | 236,844 | | | $ | 209,670 | |
| Weighted-average discount rate | Weighted-average discount rate | 11.23 | % | | 6.43 | % | Weighted-average discount rate | | 6.74 | % | | 8.93 | % |
| Weighted-average default rate | Weighted-average default rate | 13.60 | % | | 13.68 | % | Weighted-average default rate | | 11.20 | % | | 12.26 | % |
| | Fair value resulting from: | Fair value resulting from: | | Fair value resulting from: | |
| 100 basis point increase in discount rate | 100 basis point increase in discount rate | $ | 209,970 | | | $ | 242,888 | | 100 basis point increase in discount rate | | $ | 234,555 | | | $ | 207,810 | |
| 200 basis point increase in discount rate | 200 basis point increase in discount rate | 208,205 | | | 240,691 | | 200 basis point increase in discount rate | | $ | 232,322 | | | $ | 205,994 | |
| Fair value resulting from: | Fair value resulting from: | | Fair value resulting from: | |
| 100 basis point decrease in discount rate | 100 basis point decrease in discount rate | $ | 213,623 | | | $ | 247,442 | | 100 basis point decrease in discount rate | | $ | 239,192 | | | $ | 211,575 | |
| 200 basis point decrease in discount rate | 200 basis point decrease in discount rate | 215,514 | | | 249,805 | | 200 basis point decrease in discount rate | | $ | 241,601 | | | $ | 213,527 | |
| | Fair value resulting from: | Fair value resulting from: | | Fair value resulting from: | |
| 10 percent increase in default rate | 10 percent increase in default rate | $ | 209,420 | | | $ | 241,930 | | 10 percent increase in default rate | | $ | 234,582 | | | $ | 207,594 | |
| 20 percent increase in default rate | 20 percent increase in default rate | 207,073 | | | 238,807 | | 20 percent increase in default rate | | $ | 232,335 | | | $ | 205,528 | |
| Fair value resulting from: | Fair value resulting from: | | Fair value resulting from: | |
| 10 percent decrease in default rate | 10 percent decrease in default rate | $ | 214,140 | | | $ | 248,453 | | 10 percent decrease in default rate | | $ | 239,119 | | | $ | 211,755 | |
| 20 percent decrease in default rate | 20 percent decrease in default rate | 216,517 | | | 251,777 | | 20 percent decrease in default rate | | $ | 241,408 | | | $ | 213,851 | |
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, 20202021 and December 31, 20192020 for Notes funded through the Note Channel are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | | | | |
| Notes | | June 30, 2021 | | December 31, 2020 |
| Fair value, using the following assumptions: | | $ | 236,041 | | | $ | 208,379 | |
| Weighted-average discount rate | | 6.74 | % | | 8.93 | % |
| Weighted-average default rate | | 11.20 | % | | 12.26 | % |
| | | | |
| Fair value resulting from: | | | | |
| 100 basis point increase in discount rate | | $ | 233,756 | | | $ | 206,528 | |
| 200 basis point increase in discount rate | | $ | 231,528 | | | $ | 204,720 | |
| Fair value resulting from: | | | | |
| 100 basis point decrease in discount rate | | $ | 238,385 | | | $ | 210,274 | |
| 200 basis point decrease in discount rate | | $ | 240,789 | | | $ | 212,217 | |
| | | | |
| Fair value resulting from: | | | | |
| 10 percent increase in default rate | | $ | 233,774 | | | $ | 206,304 | |
| 20 percent increase in default rate | | $ | 231,521 | | | $ | 204,238 | |
| Fair value resulting from: | | | | |
| 10 percent decrease in default rate | | $ | 238,322 | | | $ | 210,463 | |
| 20 percent decrease in default rate | | $ | 240,617 | | | $ | 212,558 | |
| | | | | | | | | | | |
| 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, 20202021 and December 31, 20192020 for Servicing Assets are presented in the following table (in thousands, except percentages).
| | | | | | | | | | | | | | |
| Servicing Assets | | June 30, 2021 | | December 31, 2020 |
| Fair value, using the following assumptions: | | $ | 10,389 | | | $ | 11,088 | |
| Weighted-average market servicing rate | | 0.628 | % | | 0.631 | % |
| Weighted-average prepayment rate | | 19.77 | % | | 19.84 | % |
| Weighted-average default rate | | 12.99 | % | | 12.78 | % |
| | | | |
| Fair value resulting from: | | | | |
| Market servicing rate increase of 0.025% | | $ | 9,762 | | | $ | 10,424 | |
| Market servicing rate decrease of 0.025% | | $ | 11,015 | | | $ | 11,752 | |
| | | | |
| Fair value resulting from: | | | | |
| Applying a 1.1 multiplier to prepayment rate | | $ | 10,185 | | | $ | 10,874 | |
| Applying a 0.9 multiplier to prepayment rate | | $ | 10,595 | | | $ | 11,304 | |
| | | | |
| Fair value resulting from: | | | | |
| Applying a 1.1 multiplier to default rate | | $ | 10,241 | | | $ | 10,936 | |
| Applying a 0.9 multiplier to default rate | | $ | 10,537 | | | $ | 11,239 | |
| | | | | | | | | | | |
| 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 has entered into an agreement with WebBank, under which all Borrower Loans originated through theteh marketplace are made by WebBank under its bank charter. On June 25, 2021, PMI, along with PFL, and WebBank entered into: (i) a Fifth Amendment (the “Sale Agreement Amendment”) to the Asset Sale Agreement, dated July 1, 2016, between PFL and WebBank (the “Sale Agreement”); (ii) a Sixth Amendment (the “Marketing Agreement Amendment”) to the Marketing Agreement, dated July 1, 2016, between PMI and WebBank (the “Marketing Agreement”); and (iii) a Third Amendment (the “Purchase Agreement Amendment”) to the Stand By Purchase Agreement, dated July 1, 2016, between PMI and WebBank (the “Purchase Agreement” and, collectively with the Sale Agreement and the Marketing Agreement, the “Origination and Sale Agreements”). The Sale Agreement Amendment, the Marketing Agreement Amendment, and the Purchase Agreement Amendment, collectively, are hereinafter referred to as the “Amendments.”
The Sale Agreement Amendment, among other things, extends the term of the Sale Agreement to February 1, 2025 and amends certain collateral requirements under the Sale Agreement. The Marketing Agreement Amendment, among other things, extends the term of the Marketing Agreement to February 1, 2025 and sets forth the amended terms and conditions of certain fees owed by the Registrants to WebBank under the Marketing Agreement. The Purchase Agreement Amendment amends certain collateral requirements of Prosper under the Purchase Agreement.
Pursuant to the agreement,Marketing Agreement Amendment, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500 through February 1, 2022, and $100,000 thereafter through February 1, 2025, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining six months of 20202021 is $0.9 million. The minimum fees are $1.7fee is then $1.2 million for each year from 2022 through 2024, and $0.1 million for the years 2021 and 2022, respectively.in 2025.
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 were2021, the Company was in compliance with the covenant.
Loan Purchase Commitments
Under the terms of Prosper Funding’sPFL’s agreement with WebBank, Prosper FundingPFL is committed to purchase $8.6$19.7 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended June 30, 2020. Prosper Funding2021. PFL will purchase these Borrower Loans within the first three business days of the quarter ending September 30, 2020.2021.
Repurchase Obligation
Under the terms of the loan purchase agreements between Prosper FundingPFL and investors that participate in the Whole Loan Channel, Prosper FundingPFL 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 FundingPFL recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which as of June 30, 2020 2021 is $3.1$2.6 billion. Prosper FundingPFL has accrued $0.3$0.3 million and $0.4$0.2 million as of June 30, 20202021 and December 31, 2019,2020, respectively, in regard to this obligation.
Regulatory Contingencies
ProsperPFL 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, ProsperPFL reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If ProsperPFL determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, ProsperPFL does not accrue for a potential litigation loss. If an unfavorable outcome is probable and ProsperPFL can estimate a range of outcomes, wePFL record the amount we considermanagement considers to be the best estimate within the range of potential losses that are both probable and estimable; however, if wemanagement cannot quantify the amount of the estimated loss, then we recordPFL records 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 ProsperPMI 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, ProsperPMI 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 agreePMI agreed to certain terms and conditions regarding its past and potential future conduct of its business with respect to customers in West Virginia, including a release by the Attorney General of any claims it may have related to the matters identified in the AOD. ProsperPMI 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 ProsperPFL platform to West Virginians since June 2016.
9. Related Parties
Since inception, Prosper FundingPFL has engaged in various transactions with its directors, executive officers, sole member,PMI, and immediate family members and other affiliates of its directors, executive officers, and sole member. Prosper FundingPMI. PFL believes that all of the transactions described below were made on terms no less favorable to Prosper FundingPFL than could have been obtained from unaffiliated third parties.
PFL’s executive officers and directors who are not executive officers participate in its marketplace by placing bids and purchasing Notes and Borrower Loans.Notes. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be related parties of Prosper FundingPFL for the three and six months ended June 30, 20202021 and 20192020 are summarized below (in thousands):
| | | Aggregate Purchases | | | Interest Earned | | | Aggregate Amount of Notes Purchased | | Interest Earned on Notes |
| | Three Months Ended June 30, | | | Three Months Ended June 30, | | | Three Months Ended June 30, | | Three Months Ended June 30, |
| Related Party | Related Party | | 2020 | | 2019 | | 2020 | | 2019 | Related Party | | 2021 | | 2020 | | 2021 | | 2020 |
| Executive officers and management | Executive officers and management | | $ | 6 | | | $ | 5 | | | $ | 1 | | | $ | 1 | | Executive officers and management | | $ | 9 | | | $ | 6 | | | $ | 2 | | | $ | 1 | |
| Directors (excluding executive officers and management) | Directors (excluding executive officers and management) | | — | | | — | | | — | | | — | | Directors (excluding executive officers and management) | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | Total | | $ | 6 | | | $ | 5 | | | $ | 1 | | | $ | 1 | | Total | | $ | 9 | | | $ | 6 | | | $ | 2 | | | $ | 1 | |
| | | Aggregate Purchases | | | Interest Earned | | | Aggregate Amount of Notes Purchased | | Interest Earned on Notes |
| | Six Months Ended June 30, | | | Six Months Ended June 30, | | | Six Months Ended June 30, | | Six Months Ended June 30, |
| Related Party | Related Party | | 2020 | | 2019 | | 2020 | | 2019 | Related Party | | 2021 | | 2020 | | 2021 | | 2020 |
| Executive officers and management | Executive officers and management | | $ | 12 | | | $ | 11 | | | $ | 3 | | | $ | 2 | | Executive officers and management | | $ | 17 | | | $ | 12 | | | $ | 3 | | | $ | 3 | |
| Directors (excluding executive officers and management) | Directors (excluding executive officers and management) | | — | | | — | | | — | | | — | | Directors (excluding executive officers and management) | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | Total | | $ | 12 | | | $ | 11 | | | $ | 3 | | | $ | 2 | | Total | | $ | 17 | | | $ | 12 | | | $ | 3 | | | $ | 3 | |
The balance of Notes held by officers and directors who are not executive officers are as follows (in thousands):
| | | | | | | | | | | | | | | | | Notes Balance as of |
| Related Party | Related Party | | June 30, 2020 | | December 31, 2019 | Related Party | | June 30, 2021 | | December 31, 2020 |
| Executive officers and management | Executive officers and management | | $ | 36 | | | $ | 35 | | Executive officers and management | | $ | 43 | | | $ | 41 | |
| Directors (excluding executive officers and management) | Directors (excluding executive officers and management) | | — | | | — | | Directors (excluding executive officers and management) | | 0 | | | 0 | |
| $ | 36 | | | $ | 35 | | |
| Total | | Total | | $ | 43 | | | $ | 41 | |
ItemITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2019.2020.
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-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 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, 2019,2020, our marketplace facilitated $2.7$1.5 billion in Borrower Loan originations, of which $2.5$1.4 billion were funded through our Whole Loan Channel, representing 94%91% of the total Borrower Loans originated through our marketplace during this period. From inception through June 30, 2020,2021, our marketplace facilitated$17.4 billion19.1 billion in Borrower Loan originations, of which $$15.617.1 billion were funded through our Whole Loan Channel, representingrepresenting 90% of the total BorrowerBorrower Loans originated through our marketplace during this period. InFor the three months ended June 30, 2020,2021, our marketplace facilitatedfacilitated $251450.1 million in Borrower Loan originations, a decreasean increase of 67%80% from the same period in 2019.2020. The percentagepercentage of loans funded through the Whole Loan Channel for the three months ended June 30, 20202021 was 90%87%.
As a credit marketplace, we believe our customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors and, consequently, could negatively affect our business and results of operations.
Recent Developments
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 governmentsAlthough COVID-19 vaccines are in the process of being distributed 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’ plansor COVID-19 variants may lead 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.further restrictions.
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 hasof our accompanying condensed consolidated financial statements, we obtained a PPP loan in the amount of $8.4 million in April 2020, 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 six12 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 and through June 30, 2021, approximately 13%11% of our outstanding loan balances on a cumulative basis have enrolled in at least one of these COVID-19 relief programs. Approximately four percent2% 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.June 30, 2021. 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.financial hardship for borrowers.
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 June 30, | | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Loan Originations | Loan Originations | $ | 250,638 | | | $ | 759,858 | | | $ | 700,017 | | | $ | 1,358,055 | | Loan Originations | | $ | 450,120 | | | $ | 250,638 | | | $ | 908,671 | | | $ | 700,017 | |
| Transaction Fees, Net | Transaction Fees, Net | 11,401 | | | 33,876 | | | 31,814 | | | 60,171 | | Transaction Fees, Net | | 20,941 | | | 11,401 | | | 41,771 | | | 31,814 | |
Whole Loans Outstanding (1) | Whole Loans Outstanding (1) | 3,110,157 | | | 3,728,247 | | | 3,110,157 | | | 3,728,247 | | Whole Loans Outstanding (1) | | 2,602,847 | | | 3,110,157 | | | 2,602,847 | | | 3,110,157 | |
| Servicing Fees, Net | Servicing Fees, Net | 4,660 | | | 5,172 | | | 10,717 | | | 11,375 | | Servicing Fees, Net | | 3,553 | | | 4,660 | | | 6,967 | | | 10,717 | |
| Total Net Revenue | Total Net Revenue | 26,257 | | | 42,930 | | | 29,502 | | | 73,008 | | Total Net Revenue | | 34,734 | | | 26,257 | | | 67,850 | | | 29,502 | |
Core Revenue (2) | Core Revenue (2) | 26,257 | | | 50,735 | | | 29,502 | | | 90,561 | | Core Revenue (2) | | 34,734 | | | 26,257 | | | 67,850 | | | 29,502 | |
| Net Income (Loss) | 17,641 | | | (569) | | | 38,771 | | | (23,283) | | |
| Net (Loss) Income | | Net (Loss) Income | | (5,805) | | | 17,641 | | | (50,694) | | | 38,771 | |
Adjusted EBITDA (2) | Adjusted EBITDA (2) | 770 | | | 5,331 | | | (31,172) | | | 5,688 | | Adjusted EBITDA (2) | | 2,564 | | | 770 | | | 4,690 | | | (31,172) | |
(1) Balance as of June 30.
(2) Core Revenue and Adjusted EBITDA are non-GAAP Financial measures. For more information regarding these measures and a reconciliation of these measures to the most comparable US GAAP measure, see “Non-GAAP Financial Measures.”
Loan Originations
From inception through June 30, 2020,2021, a total of 1,343,2271,493,228 Borrower Loans totaling $17.4$19.1 billion were originated through Prosper’s marketplace.
DuringFor the three months ended June 30, 2020, 19,0922021, 42,006 Borrower Loans totaling $250.6$450.1 million were originated through Prosper’s marketplace,marketplace, compared to 19,092 Borrower to 55,260 Borrower Loans totaling $759.9$250.6 million during the three months ended June 30, 2019.2020. This represents a decreasean increase of 65%120% in terms of the number of loans and a 67% decreasean increase of 80% in the dollar amount of loans. The originations decreaseincrease for the quarter ended June 30, 20202021 versus the quarter ended June 30, 20192020 was due primarily to reducedincreased investor demand, tighter underwriting and higher borrower rates starting in March 2020 to addressis reflective of the negativegeneral economic impactrecovery since the start of the COVID-19 outbreak.
Loan origination volume by Prosper Rating was as follows for the periods presented (in millions)millions, except percentage):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| AA | | $ | 61.9 | | | 14 | % | | $ | 52.7 | | | 21 | % | | $ | 139.9 | | | 15 | % | | $ | 111.2 | | | 16 | % |
| A | | 97.9 | | | 22 | % | | 94.2 | | | 38 | % | | 199.6 | | | 22 | % | | 198.8 | | | 28 | % |
| B | | 66.9 | | | 15 | % | | 65.6 | | | 26 | % | | 131.8 | | | 15 | % | | 175.4 | | | 25 | % |
| C | | 48.9 | | | 11 | % | | 21.6 | | | 9 | % | | 90.5 | | | 10 | % | | 129.1 | | | 18 | % |
| D | | 16.1 | | | 3 | % | | 5.0 | | | 2 | % | | 27.8 | | | 3 | % | | 40.0 | | | 6 | % |
| E | | 4.1 | | | 1 | % | | 1.0 | | | — | % | | 6.2 | | | 1 | % | | 11.7 | | | 2 | % |
| HR | | 0.3 | | | — | % | | 0.2 | | | — | % | | 0.6 | | | — | % | | 1.8 | | | — | % |
Other (1) | | 154.0 | | | 34 | % | | 10.3 | | | 4 | % | | 312.2 | | | 34 | % | | 32.1 | | | 5 | % |
| Total | | $ | 450.1 | | | | | $ | 250.6 | | | | | $ | 908.6 | | | | | $ | 700.1 | | | |
(1) Represents loans originatedoriginated through the Prosper platform via the Whole Loan Channel but not assigned Prosper Ratings. These loans are sold only to institutional investors and based on specific underwriting criteria and custom risk models developed by these investors.
For the three and six months ended June 30, 2021 and June 30, 2020, the mix of originations on the Prosper platform was generally reflective of tighter underwriting as compared to the corresponding periodsstandards implemented in 2019,March 2020, as the Company sought to reduce borrower defaults across its platform in response to COVID-19. There has also been a significant increase in the number and dollar amount of loans not assigned Prosper ratings as the Company continues to sell higher risk loans through the Whole Loan Channel to institutional investors that rely on their own custom risk models to underwrite these loans.
Results of Operations
Overview
The following tables summarize Prosper’s net (loss) income (loss) for the three and six months ended June 30, 20202021 and 20192020 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2021 | | 2020 | | Change | | % Change |
| Total Net Revenues | | $ | 34,734 | | | $ | 26,257 | | | $ | 8,477 | | | 32 | % |
| Total Expenses | | 40,518 | | | 8,582 | | | 31,936 | | | n/m |
| Net (Loss) Income Before Taxes | | (5,784) | | | 17,675 | | | (23,459) | | | (133) | % |
| Income Tax Expense | | (21) | | | (34) | | | 13 | | | (38) | % |
| Net (Loss) Income | | $ | (5,805) | | | $ | 17,641 | | | $ | (23,472) | | | (133) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2021 | | 2020 | | Change | | % Change |
| Total Net Revenues | | $ | 67,850 | | | $ | 29,502 | | | $ | 38,348 | | | 130 | % |
| Total Expenses | | 118,502 | | | (9,337) | | | 127,839 | | | n/m |
| Net (Loss) Income Before Taxes | | (50,652) | | | 38,839 | | | (89,491) | | | (230) | % |
| Income Tax Expense | | (42) | | | (68) | | | 26 | | | (38) | % |
| Net (Loss) Income | | $ | (50,694) | | | $ | 38,771 | | | $ | (89,465) | | | (231) | % |
n/m: not meaningful
Total net revenues for the three months ended June 30, 2020 decreased $16.7 million, or 39%, when compared to the three months ended June 30, 2019.2021 increased $8.5 million as compared to the same period in 2020. The decreaseincrease was primarily attributable to a $22.5$9.5 million decreaseincrease in Transaction Fees, Net, and a $2.9 million decrease in Gain on Sale of Borrower Loans, due to the decreaseincrease in originations during this time, which was in turn driven by reduced investor demand tighter underwriting and higher borrower rates in responsethe prior year due to the economic impact of COVID-19. These decreases were partially offset by theCOVID-19 pandemic. There was also a $2.2 million increase from Change in Fair Value of Warrants Vested on Sale of Borrower Loans, which previously hadFinancial Instruments, Net, from a $7.8$2.4 million negative revenue impact duringloss in the three months ended June 30, 2019, but no2020 to a $0.2 million loss in the three months ended June 30, 2021. The larger loss in the prior year was largely due to the economic impact of the COVID-19 pandemic, which negatively impacted the fair value of our Borrower Loans and Loans Held for Sale. These increases were partially offset by a $3.3 million decrease in Total Interest Income (Expense), Net, due primarily to the lower outstanding principal balances on securitized Borrower Loans.
Total expenses for the three months ended June 30, 20202021 increased $31.9 million 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 primarilycompared 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 2019.
Total expenses for the three months ended June 30, 2020 decreased $34.9 million from the same period in 2019,2020, primarily due to a $16.4$5.7 million decrease in Sales and Marketing expenses, due to a decline in originations and improved marketing efficiencies, and a $19.5 million gainloss from Change in Fair Value of Convertible Preferred Stock Warrants, duewhich compared to a decrease$19.5 million gain for the three months ended June 30, 2020. The loss in 2021 was driven by an increase in the fair value of the underlying Convertible Preferred Stock, duringwhich decreased in 2020. Additionally, Origination and Servicing, Sales and Marketing and General and Administrative expenses increased a combined $6.8 million from the period. Forprior year, primarily due to increased costs supporting higher originations in 2021 and various cost reductions achieved in 2020 in response to the three months ended June 30, 2019,COVID-19 pandemic, including lower compensation and professional services costs. Accordingly, the gain from Change in Fair Value of Convertible Preferred Stock Warrants was $4.7 million. Accordingly, net incomeloss for the three months ended June 30, 20202021 increased $18.2$23.5 million when compared to the net loss incurredincome generated for the three months ended June 30, 2019.2020.
Total net revenues for the six months ended June 30, 2020 decreased $43.52021 increased $38.3 million, or 60%130%, as compared to the same period in 2019.2020. The decreaseincrease was primarily attributable to a $39.3 million loss from the Change in Fair Value of Financial Instruments, Net, which was a $2.4 million loss for the six months ended June 30, 2020 which2021, as compared to a $3.7$39.3 million loss for the corresponding periodthree months ended June 30, 2020, a $36.9 million change. The loss in the prior year aswas largely due to the economic impact brought on byof the COVID-19 outbreakpandemic, which 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 toBorrower Loans and Loans Held for Sale. Additionally, there was a $28.4$10.0 million decreaseincrease in Transaction Fees, Net.Net, due to the increase in originations during this time. These decreasesincreases were partially offset by the Fair Value of Warrants Vesteda $5.3 million decrease in Total Interest Income (Expense), Net, due primarily to lower outstanding principal balances on Sale ofsecuritized Borrower Loans, which previously hadand a $17.6$3.8 million negative revenue impactdecrease in Servicing Fees, Net, as the servicing book of whole loans declined.
Total expenses for the six months ended June 30, 2019, but no impact for the six months ended June 30, 20202021 increased $127.8 million 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 primarilycompared 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 2019,2020, primarily due to a $75.0$50.1 million gainloss from the Change in Fair Value of Convertible Preferred Stock Warrants, aswhich compared to a $5.3$75.0 million gain for the six months ended June 30, 2020. The loss in 2021 was driven by an increase in the fair value of the underlying Convertible Preferred Stock, which decreased in 2020. Additionally, General and Administrative expenses increased $2.1 million from the prior year, primarily due to increased compensation expense, and Origination and Servicing expenses increased $1.2 million, primarily by driven by higher servicing costs due to the increase in originations. Accordingly, the net loss for the six months ended June 30, 2019. Additionally, there was a $21.52021 increased $89.5 million decrease in Sales and Marketing expenses duewhen compared to a decline in originations improved marketing efficiencies. Accordingly,the net income generated 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, 2019.2020.
Revenues
The following tables summarize our revenues for the three and six months ended June 30, 20202021 and 2019June 30, 2020 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2021 | | 2020 | | $ Change | | % Change |
| Operating Revenues: | | | | | | | | |
| Transaction Fees, Net | | $ | 20,941 | | | $ | 11,401 | | | $ | 9,540 | | | 84 | % |
| Servicing Fees, Net | | 3,553 | | | 4,660 | | | (1,107) | | | (24) | % |
| Gain on Sale of Borrower Loans | | 1,366 | | | 617 | | | 749 | | | 121 | % |
| Other Revenues | | 938 | | | 566 | | | 372 | | | 66 | % |
| Total Operating Revenues | | 26,798 | | | 17,244 | | | 9,554 | | | 55 | % |
| | | | | | | | |
| Interest Income (Expenses): | | | | | | | | |
| Interest Income on Borrower Loans and Loans Held for Sale | | 21,048 | | | 26,645 | | | (5,597) | | | (21) | % |
| Interest Expense on Financial Instruments | | (12,953) | | | (15,270) | | | 2,317 | | | (15) | % |
| Total Interest Income (Expense), Net | | 8,095 | | | 11,375 | | | (3,280) | | | (29) | % |
| Change in Fair Value of Financial Instruments, Net | | (159) | | | (2,362) | | | 2,203 | | | (93) | % |
| Total Net Revenues | | $ | 34,734 | | | $ | 26,257 | | | $ | 8,477 | | | 32 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, | | | | | | |
| 2020 | | 2019 | | $ Change | | % Change |
| Operating Revenues: | | | | | | | |
| Transaction Fees, Net | $ | 31,814 | | | $ | 60,171 | | | $ | (28,357) | | | (47) | % |
| Servicing Fees, Net | 10,717 | | | 11,375 | | | (658) | | | (6) | % |
| Gain on Sale of Borrower Loans | 2,361 | | | 6,256 | | | (3,895) | | | (62) | % |
| Fair Value of Warrants Vested on the Sale of Borrower Loans | — | | | (17,553) | | | 17,553 | | | (100) | % |
| Other Revenues | 1,578 | | | 3,223 | | | (1,645) | | | (51) | % |
| Total Operating Revenues | 46,470 | | | 63,472 | | | (17,002) | | | (27) | % |
| | | | | | | |
| Interest Income: | | | | | | | |
| Interest Income on Borrower Loans and Loans Held for Sale | 54,289 | | | 41,972 | | | 12,317 | | | 29 | % |
| Interest Expense on Financial Instruments | (31,953) | | | (28,765) | | | (3,188) | | | 11 | % |
| Net Interest Income | 22,336 | | | 13,207 | | | 9,129 | | | 69 | % |
| Change in Fair Value of Financial Instruments, Net | (39,304) | | | (3,671) | | | (35,633) | | | n/m |
| Total Net Revenues | $ | 29,502 | | | $ | 73,008 | | | $ | (43,506) | | | (60) | % |
n/m: not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2021 | | 2020 | | $ Change | | % Change |
| Operating Revenues: | | | | | | | | |
| Transaction Fees, Net | | $ | 41,771 | | | $ | 31,814 | | | $ | 9,957 | | | 31 | % |
| Servicing Fees, Net | | 6,967 | | | 10,717 | | | (3,750) | | | (35) | % |
| Gain on Sale of Borrower Loans | | 2,989 | | | 2,361 | | | 628 | | | 27 | % |
| Other Revenues | | 1,465 | | | 1,578 | | | (113) | | | (7) | % |
| Total Operating Revenues | | 53,192 | | | 46,470 | | | 6,722 | | | 14 | % |
| | | | | | | | |
| Interest Income (Expenses): | | | | | | | | |
| Interest Income on Borrower Loans and Loans Held for Sale | | 42,946 | | | 54,289 | | | (11,343) | | | (21) | % |
| Interest Expense on Financial Instruments | | (25,878) | | | (31,953) | | | 6,075 | | | (19) | % |
| Total Interest Income (Expense), Net | | 17,068 | | | 22,336 | | | (5,268) | | | (24) | % |
| Change in Fair Value of Financial Instruments, Net | | (2,410) | | | (39,304) | | | 36,894 | | | (94) | % |
| Total Net Revenues | | $ | 67,850 | | | $ | 29,502 | | | $ | 38,348 | | | 130 | % |
Transaction Fees, Net
We earn a transaction fee upon the successful origination of all Borrower Loans facilitated through our marketplace. Prosper receives payments from WebBank as compensation for the activities we perform on behalf of WebBank. Our fee is determined by the term and credit grade of the Borrower Loans that 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 $9.5 million, or 84%, for the three months ended June 30, 2020 decreased $22.5 million, or 66%,2021, as compared to the corresponding period in 2019. 2020. This increase was consistent with the higher origination volume discussed above.
Transaction fees increased $10.0 million, or 31%, for the six months ended June 30, 2020 decreased $28.4 million, or 47%,2021, as
compared to the corresponding period in 2019. These decreases were2020. This increase was consistent with the lowerhigher origination volumesvolume discussed above.
Servicing Fees, Net
Investors who purchase Borrower Loans from Prosper through the Whole Loan Channel typically pay Prosperus a servicing fee which is currentlygenerally set at 1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. The servicing fee compensates Prosperus for the costs incurred in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. We record Servicing Fees from investors as a component of operating revenue when received. The decreases in Servicing Fees for both the three and six months ended June 30, 2020,2021, as compared to the corresponding periods in 20192020, were primarily due to a lower average principal balance of whole loans serviced.serviced, which was in turn due primarily to (a) the reduced originations in the prior year as a result of the COVID-19 pandemic, and (b) an increase in the principal balance of loans held in consolidated warehouse trusts. Additionally, net collections fees income decreased approximately $0.5 million and $2.0 million for the three and six months ended June 30, 2021, as the Company has increased its usage of collection agencies since the start of the COVID-19 pandemic without a corresponding increase in collection fees.
Gain on Sale of Borrower Loans
Gain on Sale of Borrower Loans consists of net gains on Borrower Loans sold through the Whole Loan Channel. The decreases for each of the three and six months ended June 30, 2020 was primarily due to a decreaseincreases in the volume of whole loans sold due to lower origination volume, as 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 vested when the Consortium purchased whole loans under the Consortium Purchase Agreement, which ended in May 2019. Since that date, no further warrants have been issued.
Other Revenues
Other Revenues 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 platform. Securitization fees represent fees Prosper earns to facilitate securitizations for purchasers of Borrower Loans. The $1.6 million decrease in Other RevenuesServicing Fees for both the three and six months ended June 30, 2020,2021, as compared to the corresponding periods in 2020, were primarily due to increases in the prior year,volume of whole loans sold due to higher originations, as discussed above.
Other Revenues
Other Revenues consist primarily of credit referral and incentive fees. Credit referral fees are earned from partner companies for the referral of customers on our platform, while incentive fees are earned from partner companies through our incentive programs. The $0.4 million, or 66%, increase in Other Revenues for the three months ended June 30, 2021, as compared to the corresponding period in 2020, was due primarily to reducedincreased application volume referred to our credit referral partners, and additional incentive fees earned for these periods,this period.
The change in Other Revenues for the six months ended June 30, 2021, as well as certain one-time services that were ongoingcompared to the corresponding period in 2019 but were2020, was not repeated in 2020.significant.
Interest Income on Borrower Loans and Loans Held for Sale and Interest Expense on Financial Instruments
We recognize Interest Income on Borrower Loans and Loans Held for Sale using the accrual method based on the stated interest rate to the extent we believe it to be collectible. We record interest expense on the corresponding Notes, Notes Issued by Securitization Trust, Certificates Issued by Securitization Trust, and Warehouse Lines based on the contractual interest rates. The interest rate on Notes is generally 1% lower than the interest rate on the corresponding Borrower Loans to compensate us for servicing the underlying Borrower Loans.
The increasesdecrease of $3.5$3.3 million, and $9.1 millionor 29%, in NetTotal Interest Income (Expense), Net 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, 2019,2021, as compared to the corresponding period in 2020 was primarily due to lower outstanding principal balances on securitized Borrower Loans, as there have been no new securitizations since 2019. Net interest income from the securitizations decreased approximately $4.1 million as compared to the prior year. This was partially offset by a $0.6 million increase in net interest income from Loans Held for Sale, as we increased the usage of our Warehouse Lines and one additionalthe principal balance on those loans increased. Additionally, there was a $0.3 million increase in net interest income due to a decrease in the amortization of warehouse line and securitization setup costs due to the timing of when these costs were incurred in 2019.
The decrease of $5.3 million, or 24%, in Total Interest Income (Expense), Net for the six months ended June 30, 2021, as compared to the corresponding period in 2020was completed after that date.also primarily due to lower outstanding principal balances on securitized Borrower Loans. Net interest income from securitizations decreased approximately $9.1 million as compared to the prior year. This was partially offset by a $3.4 million increase in net interest income from Loans Held for Sale, as we increased the usage of our Warehouse Lines and the principal balance on those loans increased. Additionally, there was a $0.7 million increase in net interest income due to a decrease in the amortization of warehouse line and securitization setup costs due to the timing of when these costs were incurred in 2019.
Change in Fair Value of Financial Instruments, Net
Prosper recordsWe record Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust at fair value. Changes in the fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of the Notes due to their borrower payment-dependent structure. Prosper'sOur 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
We use Warehouse Lines to finance the purchase of Loans Held for Sale for the purpose of earning Net Interest Income and contributing to securitization transactions. Loans Held for Sale consist primarily of loans held in warehouse trusts. Changes in the fair value of Loans Held for Sale are not offset by changes in fair value of Warehouse Lines because Warehouse Lines are carried at amortized cost. See Note 10 of the accompanying notes to PMI’s condensed consolidated financial statements for more details on Warehouse Lines. DuringIn 2019, Prosperwe co-sponsored and consolidated three securitization transactions, one of which was consolidated after June 30, 2019.transactions. 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, prepayment rates 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, | | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Loans Held for Sale(1): | Loans Held for Sale(1): | | | | Loans Held for Sale(1): | | | | |
| AA | AA | 13 | % | | 11 | % | AA | | 22 | % | | 13 | % |
| A | A | 33 | % | | 38 | % | A | | 34 | % | | 33 | % |
| B | B | 38 | % | | 37 | % | B | | 30 | % | | 38 | % |
| C | C | 12 | % | | 9 | % | C | | 12 | % | | 12 | % |
| D | D | 3 | % | | 4 | % | D | | 2 | % | | 3 | % |
| E | E | 1 | % | | 1 | % | E | | — | % | | 1 | % |
| HR | HR | — | % | | — | % | HR | | — | % | | — | % |
| Total | Total | 100 | % | | 100 | % | Total | | 100 | % | | 100 | % |
| Borrower Loans - Securitizations(2): | Borrower Loans - Securitizations(2): | | Borrower Loans - Securitizations(2): | |
| AA | AA | 7 | % | | 8 | % | AA | | 4 | % | | 7 | % |
| A | A | 19 | % | | 13 | % | A | | 17 | % | | 19 | % |
| B | B | 24 | % | | 25 | % | B | | 24 | % | | 24 | % |
| C | C | 33 | % | | 32 | % | C | | 36 | % | | 33 | % |
| D | D | 13 | % | | 16 | % | D | | 15 | % | | 13 | % |
| E | E | 3 | % | | 5 | % | E | | 3 | % | | 3 | % |
| HR | HR | 1 | % | | 1 | % | HR | | 1 | % | | 1 | % |
| Total | Total | 100 | % | | 100 | % | 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. | (1) The percentages are calculated using the weighted average of month-end principal balances of Loans Held for Sale by Prosper Rating. | | (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. | (2)The percentages are calculated using the weighted-average of month-end principal balances of Borrower Loans 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 Certificates Issued by Securitization Trust are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The key assumptions used 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 other financial instruments with similar characteristics. The loss inFor the three months ended June 30, 2021 and June 30, 2020, the Change in Fair Value of Financial Instruments, NetNet was a loss of $0.2 million and $2.4 million, respectively. For the six months ended June 30, 2021 and June 30, 2020, the Change in Fair Value of Financial Instruments, Net was a loss of $2.4 million and $39.3 million, respectively. The decrease in the loss for the three and six months ended June 30, 2021 was largely due to improvements in the economic landscape since the start of the COVID-19 pandemic in the prior year, which negatively impacted the fair value of the financial instruments due to changes in valuation assumptions, including increased discount and default rates. There has also been a decrease in charge-offs due to government stimulus, COVID-19 payment relief programs and tighter underwriting standards implemented by Prosper starting in March 2020.
For Loans Held for Sale, the gain from changes in fair value was $0.4 million for the three months ended June 30, 2020, as2021, which is reflective of the high credit quality of these loans. For the six months ended June 30, 2021, the loss from changes in fair value for Loans Held for Sale was $0.3 million, a decrease of $13.5 million from the prior year. This decrease is attributable in part to a decrease in charge-offs of $0.4 million, but was primarily reflective of decreases in the estimated future default rates and observable market discount rates.
For Borrower Loans, the gain from changes in fair value was $1.0 million for the three months ended June 30, 2021, which compared to a loss from changes in fair value of $2.0$5.0 million for the corresponding period in 2019. The loss forthe prior year. This change was attributable to a decrease in net charge-offs of $10.0 million, partially offset by a decrease in fair value adjustments of $3.9 million during this period. These changes are reflective of the continued seasoning of the securitized Borrower Loans, as well as the fair value recovery of Borrower Loans in the second quarter of 2020 following the large negative fair value adjustments incurred in the first quarter of 2020. For the six months ended June 30, 20202021, the gain from changes in the fair value of Borrower Loans was $39.3$2.0 million, as compared to a $58.2 million loss of $3.7 million for the corresponding period in 2019. In response to the negative economic impact due to COVID-19, we adjusted certainprior year. This change consisted primarily of a $39.0 million increase in fair value adjustments, driven by more favorable fair value assumptions and borrower payments on previously discounted loans, as well as decreased net charge-offs of $21.2 million, due to the continued seasoning of securitized Borrower Loans.
The fair value adjustment gains related to securitized Borrower Loans also contributed to the $1.0 million and $3.3 million losses from the change in the first quarter of 2020 to reflect available market information and market feedback, which resulted in the large increase in the lossfair value associated with Certificates Issued by Securitization Trust for the three and six months ended June 30, 2021 and 2020, as compared torespectively. Finally, the prior year. Forlosses on changes in fair value from Notes of $0.5 million and $0.7 million for the three and six months ended June 30, 2020, due primarily to improved market conditions and the gradual economic recovery since the start of the COVID-19 pandemic along with principal repayments on loans, the loss in the Change in Fair Value of Financial Instruments, Net decreased and was more2021, respectively, were generally consistent with the corresponding period in 2019. Refer to Note 7 of the accompanying condensed consolidated financial statements for additional information onpositive fair value assumptions.adjustments and reduced charge-offs related to loans funded through the Note Channel.
The following table details the changes in our fair value of our financial instruments for the three and sixmonths ended June 30, 20202021 and 2019,2020, respectively (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Assets: | | | | | | | |
| Borrower Loans | $ | (5,036) | | | $ | (10,376) | | | $ | (58,232) | | | $ | (17,299) | |
| Loans Held for Sale | 426 | | | (1,233) | | | (13,826) | | | (2,542) | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Notes | 3,848 | | | 5,458 | | | 22,377 | | | 10,960 | |
| Certificates Issued by Securitization Trust | (1,600) | | | 3,320 | | | 10,381 | | | 3,836 | |
| $ | (2,362) | | | $ | (2,831) | | | $ | (39,300) | | | $ | (5,045) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Assets: | | | | | | | | |
| Borrower Loans | | $ | 1,017 | | | $ | (5,036) | | | $ | 1,965 | | | $ | (58,232) | |
| Loans Held for Sale | | 357 | | | 426 | | | (285) | | | (13,826) | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| Notes | | (491) | | | 3,848 | | | (720) | | | 22,377 | |
| Certificates Issued by Securitization Trust | | (1,016) | | | (1,600) | | | (3,343) | | | 10,381 | |
| Total | | $ | (133) | | | $ | (2,362) | | | $ | (2,383) | | | $ | (39,300) | |
Expenses
The following tables summarize Prosper’s expenses for the three and six months ended June 30, 20202021 and 20192020 (in thousands):
| | | Three Months Ended June 30, | | | | Three Months Ended June 30, | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | Change | | % Change |
| Expenses | Expenses | | | | | | | | Expenses | | | | | | | | |
| Origination and Servicing | Origination and Servicing | $ | 7,365 | | | $ | 9,427 | | | $ | (2,062) | | | (22) | % | Origination and Servicing | | $ | 8,681 | | | $ | 7,365 | | | $ | 1,316 | | | 18 | % |
| Sales and Marketing | Sales and Marketing | 5,022 | | | 21,450 | | | (16,428) | | | (77) | % | Sales and Marketing | | 7,904 | | | 5,022 | | | 2,882 | | | 57 | % |
| General and Administrative - Research and Development | General and Administrative - Research and Development | 3,652 | | | 4,450 | | | (798) | | | (18) | % | General and Administrative - Research and Development | | 4,532 | | | 3,652 | | | 880 | | | 24 | % |
| General and Administrative - Other | General and Administrative - Other | 12,068 | | | 13,458 | | | (1,390) | | | (10) | % | General and Administrative - Other | | 13,797 | | | 12,068 | | | 1,729 | | | 14 | % |
| Change in Fair Value of Convertible Preferred Stock Warrants | Change in Fair Value of Convertible Preferred Stock Warrants | (19,549) | | | (4,729) | | | (14,820) | | | n/m | Change in Fair Value of Convertible Preferred Stock Warrants | | 5,686 | | | (19,549) | | | 25,235 | | | (129) | % |
| Impairment Expense | Impairment Expense | 228 | | | — | | | 228 | | | 100 | % | Impairment Expense | | — | | | 228 | | | (228) | | | (100) | % |
| Restructuring Charges | — | | | 5 | | | (5) | | | (100) | % | |
| Other Income, Net | Other Income, Net | (204) | | | (591) | | | 387 | | | (65) | % | Other Income, Net | | (82) | | | (204) | | | 122 | | | (60) | % |
| Total Expenses | Total Expenses | $ | 8,582 | | | $ | 43,470 | | | $ | (34,888) | | | (80) | % | Total Expenses | | $ | 40,518 | | | $ | 8,582 | | | $ | 31,936 | | | 372 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2021 | | 2020 | | Change | | % Change |
| Expenses | | | | | | | | |
| Origination and Servicing | | $ | 17,055 | | | $ | 15,811 | | | $ | 1,244 | | | 8 | % |
| Sales and Marketing | | 15,626 | | | 16,264 | | | (638) | | | (4) | % |
| General and Administrative - Research and Development | | 8,780 | | | 8,175 | | | 605 | | | 7 | % |
| General and Administrative - Other | | 27,193 | | | 25,707 | | | 1,486 | | | 6 | % |
| Change in Fair Value of Convertible Preferred Stock Warrants | | 50,117 | | | (74,998) | | | 125,115 | | | (167) | % |
| Impairment Expense | | — | | | 228 | | | (228) | | | (100) | % |
| Other Income, Net | | (269) | | | (524) | | | 255 | | | (49) | % |
| Total Expenses | | $ | 118,502 | | | $ | (9,337) | | | $ | 127,839 | | | (1,369) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) | % |
n/m: not meaningful
As of June 30, 2020, Prosper had 386 full-time employees compared to 403 full-time employees as of June 30, 2019. The following table reflects full-time employees as of June 30, 20202021 and 20192020 by functional area:
| | | June 30, 2020 | | June 30, 2019 | | June 30, 2021 | | June 30, 2020 |
| Origination and Servicing | Origination and Servicing | 145 | | 156 | Origination and Servicing | | 133 | | 145 |
| Sales and Marketing | Sales and Marketing | 16 | | 16 | Sales and Marketing | | 16 | | 16 |
| General and Administrative - Research and Development | General and Administrative - Research and Development | 95 | | 94 | General and Administrative - Research and Development | | 106 | | 95 |
| General and Administrative - Other | General and Administrative - Other | 130 | | 137 | General and Administrative - Other | | 132 | | 130 |
| Total Headcount | Total Headcount | 386 | | 403 | Total Headcount | | 387 | | 386 |
Origination and Servicing
Origination and Servicing costs consist primarily of salaries, benefits and stock-based compensation expense related to our capital markets, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans.loans. The decreaseincrease for the three months ended June 30, 20202021 of $2.1$1.3 million, or 18%, as compared to the corresponding period in the prior year, was primarily due to a $1.4$0.9 million decreasecombined increase in internal and outsourced services, aloan servicing costs, consistent with the increase in originations discussed above. Additionally, internal-use software amortization increased $0.3 million decrease in professional services and a $0.4 million decrease in compensation costs, driven by lower headcount andyear-over-year due to the salary reduction we instituted indeployment of various marketplace features over the second quarter of 2020.past year.
The decreaseincrease in Origination and Servicing costs for the six months ended June 30, 20202021 of $1.8$1.2 million, or 8%, as compared to the corresponding period in the prior year, was primarily due primarily to a $1.0 million decrease in outsourced services and a $0.6 million decreaseincrease in compensationinternal loan servicing costs, driven by lower headcount.consistent with the increase in originations discussed above. Additionally, internal-use software amortization increased $0.6 million year-over-year due to the deployment of various marketplace features over the past year.
Sales and Marketing
Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations and direct mail marketing, as well as compensation expenses such as wages, benefits and stock based compensation for the employees who support these activities. For the three months ended June 30, 2020,2021, the increase of $2.9 million was due primarily to a $2.4 million increase in marketing partnership costs, as well as a $0.2 million increase in direct mail costs. Additionally, compensation expense increased $0.2 million, due primarily to amounts accrued under our long-term incentive plan, which was implemented in November 2020.
For the six months ended June 30, 2021, the decrease in Sales and Marketing of $16.4$0.6 million was due primarily to an overall decrease in marketing and advertising including partnership costsas part of $6.6 million, direct mail costs of $7.4 million and digital advertising costs of $1.4 million. There were also decreases of $0.4 million in compensation costs, driven primarily by the salary reduction we instituted in the second quarter of 2020, as well as $0.2 million in outsourced services and $0.1 million in professional services.
For the six months ended June 30, 2020, the decrease of $21.5 million was due primarily to an overall decrease in marketing and advertising, including partnership costs of $8.6 million, direct mail costs of $9.8 million, digital advertising costs of $2.2 million and direct to site advertising costs of $0.1 million. There were also decreases of $0.3 million in compensation costs, driven primarily by the salary reduction we instituted in the second quarter of 2020, as well 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 programs to improve efficiencies, combined with declinesefficiencies. This included a $2.1 million decrease in originations during the period, as discussed above. We plan to continue to optimizedirect mail costs and manage spend for the foreseeable future, especiallya $0.8 million decrease in light of the current environment.digital advertising, partially offset by a $2.2 million increase in marketing partnership costs.
General and Administrative - Research and Development
General and Administrative – Research and Development costs consist primarily of salaries, benefits and stock-based compensation expense related to our engineering and product development employees, andas well as related vendor costs. The decreaseincrease in General and Administrative – Research and Development for the three months ended June 30, 20202021 of $0.8$0.9 million was due primarily to a $0.5 million decreaseincrease in compensation costs,expense, driven primarily by the elimination of temporary salary reduction we institutedand benefits reductions implemented in the second quarter of 2020 in response to the COVID-19 pandemic. There was also a
$0.1 million increase from outsourced services, and a $0.3$0.1 million decrease in outsourced services.increase from executive search costs. We capitalized internal-use software and website development costs in the amount of $2.1$2.5 million and $2.3$2.1 million for the three months ended June 30, 20202021 and 2019,2020, respectively.
The decrease in General and Administrative – Research and Development forFor the six months ended June 30, 20202021, the increase in General and Administrative - Research and Development of $0.7$0.6 million was due primarily to a $0.5$0.2 million decreaseincrease in software licenses and subscription costs, a $0.1 million increase in outsourced services and a $0.1 million increase in compensation costs, driven by the salary reductionexpense, as we institutedcontinue to invest in the second quarter of 2020, and a $0.3our marketplace technology. We also incurred $0.2 million decrease in outsourced services.executive search costs. We capitalized internal-use software and website development costs in the amount of $4.8$4.5 million and $4.3$4.8 million for the six months ended June 30, 20202021 and 2019,2020, respectively.
General and Administrative - Other
General and Administrative – Other expenses consist primarily of salaries, benefits and stock-based compensation expense related to our accounting and finance, risk, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expenses. The decreaseincrease in General and Administrative - Other for the three months ended June 30, 20202021 of $1.4$1.7 million was due primarily to a $0.8$1.5 million decrease in professional services, as we completed a
securitization in the second quarter of 2019 but none in 2020, and a $0.6 million decreaseincrease in compensation costs,expense, driven primarily by lowerincreased headcount and the salary reduction we institutedamounts accrued under our long-term incentive plan, which was implemented in the second quarter ofNovember 2020.
The decreaseincrease in General and Administrative - Other for the six months ended June 30, 20202021 of $2.1$1.5 million was due primarily to (a) a $0.9$1.7 million decreaseincrease in compensation costs,expense, driven by lowerincreased headcount and the salary reduction we institutedamounts accrued under our long-term incentive plan, which was implemented in the second quarter of 2020; (b)November 2020. There was also a $0.7$0.2 million decreaseincrease in professional services, as we completed two securitizationsnegotiated new agreements in the first half of 2019 but nonesix months ended June 30, 2021, including the WebBank extension signed in 2020; and (c)June 2021. These increases were partially offset by a $0.5 million decrease in software licensesfacilities and supportdata center costs.
Change in Fair Value of Convertible Preferred Stock Warrants
Change in Fair Value of Convertible Preferred Stock Warrants was a loss of $5.7 million and a loss of $50.1 million for the three and six months ended June 30, 2021, respectively, due to an increase in the fair value of the underlying Convertible Preferred Stock for the those periods. Change in Fair Value of Convertible Preferred Stock Warrants was a gain of $19.5 million and a gain of $75.0 million for the three and six months ended June 30, 2020, respectively, due to a decrease in the fair value of the underlying Convertible Preferred Stock during thesefor those periods. Change in Fair Value of Convertible Preferred Stock Warrants was 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 $5.3 million, due 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. No impairment was recorded in 2021.
Other Income, Net
Other Income, Net was $0.1 million for the three and six months ended June 30, 20202021 and primarily consists of sublease income, interest income on cash and cash equivalents as well as sublease income.and other miscellaneous items. The decrease in Other Income, Net for the three and six months ended June 30, 2020,2021, as compared to the corresponding period in 2019,2020, of $0.1 million was primarily due to declinesa decrease in interestsublease income as interest rates declined in 2020 and our outstanding cash, cash equivalents and availableof $0.1 million during that period.
Other Income, Net was $0.3 million for sale investments (which matured in 2019) all decreased from the prior year. For the three and six months ended June 30, 20202021 and primarily consists of sublease income, interest income decreased $0.3 millionon cash and $0.5 millioncash equivalents and other miscellaneous items. The decrease in Other Income, Net for the six months ended June 30, 2021, as compared to the corresponding periodsperiod in 2019.2020, of $0.3 million was primarily due to a decrease in interest income of $0.2 million, as interest rates declined throughout 2020 and into the first quarter of 2021, and a decrease in sublease income of $0.2 million. These decreases were partially offset by a $0.1 million gain recognized as part of the dissolution of our Billguard Ltd. entity in January 2021.
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Total Net Revenues | | $ | 34,734 | | | $ | 26,257 | | | $ | 67,850 | | | $ | 29,502 | |
| Less: Fair Value of Warrants Vested on Sale of Borrower Loans | | — | | | — | | | — | | | — | |
| Core Revenue | | $ | 34,734 | | | $ | 26,257 | | | $ | 67,850 | | | $ | 29,502 | |
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as Net (Loss) Income (Loss) adjusted for interest income on Available for Sale Investments and Cash and Cash Equivalents, SEC Settlement Costs, Income Tax Expense, depreciation and amortization, impairment of long-lived assets and Goodwill, stock-based compensation expense Fair Value of Warrants Vested on the Sale of Borrower Loans, Restructuring Charges, and 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 U.S. GAAP. Some of these limitations are:
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not consider the potentially dilutive impact of equity-based charges;
•Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
•Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
The major non-GAAP adjustments, and our basis for excluding them, are outlined below:
•Fair value of warrants vested on the sale of Borrower Loans and changechanges in the fair value of convertible preferred stock warrants liability. liability: We exclude these charges primarily because they are non-cash charges and the fair value varies based on the fair value of the underlying preferred stock, varying valuation
methodologies and subjective assumptions. Their inclusion makes the comparison of our current financial results to previous and future periods difficult to evaluate.
•Stock-based compensation expense.: This consists of expenses for equity awards under our equity incentive plans. Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to evaluate; therefore, we believe it is useful to exclude stock-based compensation. We also excluded these expenses because they are non-cash.
•Amortization or impairment of acquired intangible assets and impairment of goodwill.: We incur amortization or impairment of acquired Intangible Assets and Goodwill in connection with acquisitions and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.
The following table presents a reconciliation of Net (Loss) Income (Loss) to Adjusted EBITDA for each of the periods indicated (in thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Net Income (Loss) | $ | 17,641 | | | $ | (569) | | | $ | 38,771 | | | $ | (23,283) | | |
| Fair Value of Warrants Vested on Sale of Borrower Loans | — | | | 7,805 | | | — | | | 17,553 | | |
| Net (Loss) Income | | Net (Loss) Income | | $ | (5,805) | | | $ | 17,641 | | | $ | (50,694) | | | $ | 38,771 | |
| Depreciation expense: | Depreciation expense: | | Depreciation expense: | |
| Servicing and Origination | Servicing and Origination | 1,413 | | | 1,276 | | | 2,782 | | | 2,422 | | Servicing and Origination | | 1,731 | | | 1,413 | | | 3,356 | | | 2,782 | |
| General and Administration - Other | General and Administration - Other | 567 | | | 527 | | | 1,149 | | | 1,181 | | General and Administration - Other | | 622 | | | 567 | | | 1,200 | | | 1,149 | |
| Amortization of Intangibles | Amortization of Intangibles | 55 | | | 70 | | | 110 | | | 140 | | Amortization of Intangibles | | 43 | | | 55 | | | 86 | | | 110 | |
| Impairment of Operating Lease Right-of-Use Assets | Impairment of Operating Lease Right-of-Use Assets | 228 | | | — | | | 228 | | | — | | Impairment of Operating Lease Right-of-Use Assets | | — | | | 228 | | | — | | | 228 | |
| Stock-Based Compensation | Stock-Based Compensation | 392 | | | 1,235 | | | 897 | | | 2,850 | | Stock-Based Compensation | | 268 | | | 392 | | | 587 | | | 897 | |
| Restructuring Charges | — | | | 4 | | | — | | | 86 | | |
| Change in the Fair Value of Warrants | Change in the Fair Value of Warrants | (19,549) | | | (4,729) | | | (74,998) | | | 5,327 | | Change in the Fair Value of Warrants | | 5,686 | | | (19,549) | | | 50,117 | | | (74,998) | |
| Interest Income on Available for Sale Securities, Cash and Cash Equivalents | (11) | | | (317) | | | (179) | | | (646) | | |
| Interest Income on Cash and Cash Equivalents | | Interest Income on Cash and Cash Equivalents | | (2) | | | (11) | | | (4) | | | (179) | |
| Income Tax Expense | Income Tax Expense | 34 | | | 29 | | | 68 | | | 58 | | Income Tax Expense | | 21 | | | 34 | | | 42 | | | 68 | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 770 | | | $ | 5,331 | | | $ | (31,172) | | | $ | 5,688 | | Adjusted EBITDA | | $ | 2,564 | | | $ | 770 | | | $ | 4,690 | | | $ | (31,172) | |
|
Expenses on the condensed consolidated statements of operations include the following amounts of stock-based compensation expense for the periods presented (in thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Origination and Servicing | Origination and Servicing | $ | 34 | | | $ | 108 | | | $ | 72 | | | $ | 304 | | Origination and Servicing | | $ | 30 | | | $ | 34 | | | $ | 62 | | | $ | 72 | |
| Sales and Marketing | Sales and Marketing | 15 | | | 63 | | | 26 | | | 145 | | Sales and Marketing | | 16 | | | 15 | | | 32 | | | 26 | |
| General and Administrative | General and Administrative | 343 | | | 1,064 | | | 799 | | | 2,401 | | General and Administrative | | 222 | | | 343 | | | 493 | | | 799 | |
| Total Stock-Based Compensation | $ | 392 | | | $ | 1,235 | | | $ | 897 | | | $ | 2,850 | | |
| Total Stock-Based Compensation Expense | | Total Stock-Based Compensation Expense | | $ | 268 | | | $ | 392 | | | $ | 587 | | | $ | 897 | |
Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES
We anticipate that our available funds, Warehouse Lines, 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. 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 costs and limiting discretionary expenses where possible. We have applied the PPP loan proceeds towards payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.
The following table summarizes Prosper’sour cash flow activities for the three months ended June 30, 20202021 and 20192020 (in thousands):
| | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2021 | | 2020 |
| Net (Loss) Income | | $ | (5,805) | | | $ | 17,641 | |
| | | | |
| Net Cash Provided by (Used in) Operating Activities | | 50,724 | | | (31,936) | |
| Net Cash Provided by Investing Activities | | 1,946 | | | 43,047 | |
| Net Cash Used in Financing Activities | | (12,545) | | | (15,551) | |
| Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | | 40,125 | | | (4,440) | |
| Cash, cash equivalents and restricted cash at the beginning of the period | | 221,270 | | | 194,333 | |
| Cash, cash equivalents and restricted cash at the end of the period | | $ | 261,395 | | | $ | 189,893 | |
Cash, Cash Equivalents and Restricted Cash increased by $40.1 million for the three months ended June 30, 2021, based on the following components:
Investing Activities: $1.9 million in cash was provided by investing activities due to (a) $63.0 million from sales and principal payments of Borrower Loans, offset by (b) $58.7 million in purchases of Borrower Loans and (c) $2.4 million in purchases of property and equipment, primarily consisting of internal-use software.
Financing Activities: $12.5 million in cash was used in financing activities, due primarily to (a) $35.4 million in payments on Notes and Certificates Issued by Securitization Trusts, offset by (b) $17.1 million in proceeds, net of payments, from Notes, at Fair Value and (c) $6.2 million in proceeds from the Warehouse Lines. We also incurred $0.5 million in debt issuance costs related to the extension of the PWIT Warehouse Line in May 2021 (Note 10).
Cash, Cash Equivalents and Restricted Cash decreased by $4.4 million for the three months ended June 30, 2020 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 Purchasespurchases of Loans Held for Sale, offset by (b) $9.7 million in cash from working capital, primarily due to the timing of payments to investors and third-party vendors and (c) $4.8 million in net income,loss, net of non-cash items.
Investing Activities: $43.0 million in cash was provided by investing activities, due to (a) $69.3 million in principal payments on Borrower Loans, offset by (b) $24.4 million in purchases of Borrower Loans and (c) $1.9 million in purchases of property and equipment, primarily consisting of internal-use software.
Financing Activities: $15.6 million in cash was used in financing activities, due primarily 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 and (b) $12.1 million in payments, net of proceeds, on Notes, at Fair Value, offset by (c) $44.6 million in proceeds, net proceedsof payments, from the Warehouse Lines and (d) $8.4 million in proceeds from thea PPP loan.
The following table summarizes our cash flow activities for the six months ended June 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
| Net (Loss) Income | | $ | (50,694) | | | $ | 38,771 | |
| | | | |
| Net Cash Provided by (Used in) Operating Activities | | 103,264 | | | (50,212) | |
| Net Cash Provided by Investing Activities | | 15,097 | | | 79,312 | |
| Net Cash Used in Financing Activities | | (70,834) | | | (59,615) | |
| Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | | 47,527 | | | (30,515) | |
| Cash, cash equivalents and restricted cash at the beginning of the period | | 213,868 | | | 220,408 | |
| Cash, cash equivalents and restricted cash at the end of the period | | $ | 261,395 | | | $ | 189,893 | |
Cash, Cash Equivalents and Restricted Cash increased $16.1by $47.5 million for the threesix months ended June 30, 20192021, based on the following components:
Operating Activities: $17.7$103.3 million in cash was used inprovided by operating activities, driven by (a) $26.2$43.6 million in net Purchases ofproceeds from Loans Held for Sale, and (b) $2.0$48.9 million in cash used forprovided by working capital, primarily due to the timing of payments to investors offset byand third-party vendors, and (c) $8.9$10.8 million in net income,loss, net of non-cash items.
Investing Activities: $20.5$15.1 million in cash was provided by investing activities due to (a) $61.8$128.2 million infrom principal payments on Borrower Loans, and (b) $4.3 million in maturities on Available for Sale Securities, offset by (c) $41.8(b) $107.6 million in purchases of Borrower Loans (d) $1.4 million in purchases of Available for Sale Securities and (e) $2.2(c) $5.5 million in purchases of property and equipment, primarily consisting of internal-use software.
Financing Activities: $13.3$70.8 million in cash was provided byused in financing activities, due primarily driven by $37.7to (a) $73.3 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(b) $23.0 million in net payments on Warehouse Lines, offset by (c) $27.2 million in proceeds, net of payments, from Notes, at Fair Value. We also incurred $1.7 million in debt issuance costs.
The following table summarizes Prosper’s cash flow activities forcosts related to the six months ended June 30, 2020extension of the PWIIT Warehouse Line in March 2021 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 PPP 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 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.
Investing 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, offset by (c) $86.1 million in purchases of Borrower Loans, (d) $1.5 million in purchases of Available for Sale Securities and (e) $5.0 million in purchases of property and equipment, primarily consisting of internal-use software.
Financing Activities: $34.8 million in cash was provided 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 financial markets brought on by the COVID-19 outbreak, we may not be able to access the securitization market in the near future. Despite this, weWe believe our liquidity needs are met through transaction fees, servicing fees, net interest income, proceeds from sales of loans and interests in existing securitization transactions, draws on Warehouse Lines, proceeds from the PPP 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 on favorable terms or at all.
Income Taxes
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets. Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, we have provided a full valuation allowance against our net deferred tax assets.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are required to make subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.
Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, we are an interest holder in certain special purpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as we are not the primary beneficiary. Other than these special purpose entities, as of June 30, 2020,2021, 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 PoliciesCRITICAL ACCOUNTING POLICIES
Certain of Prosper's accounting policies that involve a higher degree of judgment and complexity are discussed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. There have been no significant changes to these critical accounting estimates during the first six months of 2020.2021.
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, 2019.Overview
Prosper Funding was formed in the state of Delaware in February 2012 as a limited liability company with PMI as its sole equity member. Prosper Funding was formed by PMI to hold Borrower Loans originated through the Note Channel and issue related Notes. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and by implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI.
As a credit marketplace, we believe our customers are more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate in our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
Recent Developments
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 governmentsAlthough COVID-19 vaccines are in the process of being distributed 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’ plansor COVID-19 variants may lead 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.further restrictions.
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 hasof PMI’s accompanying condensed consolidated financial statements, PMI obtained a PPP loan in the amount of $8.4 million in April 2020, 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 six12 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 and through June 30, 2021, approximately 13%11% of our outstanding loan balances on a cumulative basis have enrolled
in at least one of these COVID-19 relief programs. Approximately four percent2% 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.June 30, 2021. 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 returnsfinancial hardship 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.borrowers.
Results of Operations
Overview
The following tables summarize Prosper Funding’s net (loss) income for the three and six months ended June 30, 2021 and 2020 and 2019 (in thousands, except percentages)thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) | % |
| | | Six Months Ended June 30, | | | | Three Months Ended June 30, | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
| Total Net Revenues | Total Net Revenues | $ | 26,278 | | | $ | 36,787 | | | $ | (10,509) | | | (29) | % | Total Net Revenues | | $ | 15,257 | | | $ | 11,119 | | | $ | 4,138 | | | 37 | % |
| Total Expenses | Total Expenses | 24,355 | | | 34,266 | | | (9,911) | | | (29) | % | Total Expenses | | 14,153 | | | 10,744 | | | 3,409 | | | 32 | % |
| Net Income | Net Income | $ | 1,923 | | | $ | 2,521 | | | $ | (598) | | | (24) | % | Net Income | | $ | 1,104 | | | $ | 375 | | | $ | 729 | | | 194 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2021 | | 2020 | | $ Change | | % Change |
| Total Net Revenues | | $ | 28,022 | | | $ | 26,278 | | | $ | 1,744 | | | 7 | % |
| Total Expenses | | 28,122 | | | 24,355 | | | 3,767 | | | 15 | % |
| Net Income (Loss) | | $ | (100) | | | $ | 1,923 | | | $ | (2,023) | | | (105) | % |
Total net revenues for the three months ended June 30, 2020 decreased $8.22021 increased $4.1 million, a 43% decreaseor 37%, from the three months ended June 30, 2019,2020, primarily due to the decreasedan increased number of loan listings on the marketplace during the period, which resulted in decreasedincreased administration fee revenue for the listing-driven portion of such fee. This increase was partially offset by decreased servicing fees, due to a lower outstanding Borrower Loan balance in the servicing portfolio. Total expenses for the three months ended June 30, 2020 decreased $7.42021 increased $3.4 million, a 41% decreaseor 32%, from the three months ended June 30, 2019,2020, primarily due to decreased origination volumean increase in the number of Borrower Loansloans funded during the period. The decreasesperiod, which resulted 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.increased administration fee expense.
Total net revenues for the six months ended June 30, 2020 decreased $10.52021 increased $1.7 million, a 29% decreaseor 7%, from the six months ended June 30, 2019,2020, primarily due to the decreasedan increased number of loan listinglistings on the marketplace during the period, which resulted in decreasedincreased administration fee revenue for the listing-driven portion of such fee. This increase was partially offset by decreased servicing fees, due to a lower outstanding Borrower Loan balance in the servicing portfolio. Total expenses for the six months ended June 30, 2020 decreased $9.92021 increased $3.8 million, a 29% decreaseor 15%, from the six months ended June 30, 2019,2020, primarily due to decreased origination volumean increase in the number of Borrower Loansloans funded during the period.period, which resulted in increased administration fee expense. The decreasesincreases in loan listings and originations are due to increased competition in early 2020 followed by reduced investor demand, tighter underwriting and higher borrower rates startingparticularly since the start of COVID-19 pandemic in March 2020 to address the negative economic impactfirst quarter of the COVID-19 outbreak.
Revenues
The following tables summarizes Prosper Funding’s revenue for the three and six months ended June 30, 20202021 and 20192020 (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) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2021 | | 2020 | | $ Change | | % Change |
| Revenues: | | | | | | | | |
| Operating Revenues: | | | | | | | | |
| Administration Fee Revenue - Related Party | | $ | 8,395 | | | $ | 3,740 | | | $ | 4,655 | | | 124 | % |
| Servicing Fees, Net | | 3,928 | | | 5,257 | | | (1,329) | | | (25) | % |
| Gain on Sale of Borrower Loans | | 1,663 | | | 1,182 | | | 481 | | | 41 | % |
| Other Revenues | | 306 | | | 165 | | | 141 | | | 85 | % |
| Total Operating Revenues | | 14,292 | | | 10,344 | | | 3,948 | | | 38 | % |
| Interest Income on Borrower Loans | | 8,999 | | | 9,309 | | | (310) | | | (3) | % |
| Interest Expense on Notes | | (8,418) | | | (8,728) | | | 310 | | | (4) | % |
| Net Interest Income | | 581 | | | 581 | | | — | | | — | % |
| Change in Fair Value of Financial Instruments, Net | | 384 | | | 194 | | | 190 | | | 98 | % |
| Total Net Revenue | | $ | 15,257 | | | $ | 11,119 | | | $ | 4,138 | | | 37 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2021 | | 2020 | | $ Change | | % Change |
| Revenues: | | | | | | | | |
| Operating Revenues: | | | | | | | | |
| Administration Fee Revenue - Related Party | | $ | 15,181 | | | $ | 9,575 | | | $ | 5,606 | | | 59 | % |
| Servicing Fees, Net | | 7,529 | | | 11,716 | | | (4,187) | | | (36) | % |
| Gain on Sale of Borrower Loans | | 3,674 | | | 3,182 | | | 492 | | | 15 | % |
| Other Revenues | | 357 | | | 345 | | | 12 | | | 3 | % |
| Total Operating Revenues | | 26,741 | | | 24,818 | | | 1,923 | | | 8 | % |
| Interest Income on Borrower Loans | | 17,556 | | | 19,147 | | | (1,591) | | | (8) | % |
| Interest Expense on Notes | | (16,431) | | | (17,944) | | | 1,513 | | | (8) | % |
| Net Interest Income | | 1,125 | | | 1,203 | | | (78) | | | (6) | % |
| Change in Fair Value of Financial Instruments, Net | | 156 | | | 257 | | | (101) | | | (39) | % |
| Total Net Revenue | | $ | 28,022 | | | $ | 26,278 | | | $ | 1,744 | | | 7 | % |
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 PFL to PMI that entitles PMI to use the marketplace for, and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement. The Administration Agreement requires PMI to pay PFL a monthly license fee that is partially based on the number of loan listings posted on the marketplace in that month, as well as a rebate fee based on rebates given to investors as an incentive to purchase Borrower Loans from PFL. The decreaseincreases in Administrative Fee Revenue of $12.9$4.7 million and $5.6 million for the three and six months ended June 30, 2020,2021, respectively, as compared to the corresponding periodperiods in 2019, was2020, were primarily due to (a) a decreasean increase in license fees owing to fewer loan listings generated on the marketplace during the period, and (b) a decrease in the rebate 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 $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 owing to fewer loan listings generated on the marketplace during the period, and (b) a decrease in the rebate fee to zero due to the fact that no additional rebates were provided under the Consortium Purchase Agreement after it ended in May 2019.periods.
Servicing Fees, Net
Investors who purchase Borrower Loans from Prosper Funding through the Whole Loan Channel typically pay Prosper Funding a servicing fee which is currently set at 1.075% per annum of the outstanding principal balance of the Borrower LoansLoan prior to applying the current payment. The servicing fee compensates Prosper Funding for the costs incurred in servicing the Borrower Loans,Loan, 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$1.3 million and $1.2$4.2 million for the three and six months ended June 30, 2020,2021, respectively, as compared to the corresponding periodperiods in 2019,2020, were primarily due to lower outstanding balances of Borrower Loans in the servicing pool.
Gain (Loss) on Sale of Borrower Loans
Gain (Loss) on Sale of Borrower Loans consists of net gains and losses(losses) on Borrower Loans sold through the Whole Loan Channel. This account went from a lossThe increases in Gain on Sale of $4.1Borrower Loans of $0.5 million for both the three months ended June 30, 2019 to a $1.2 million gain for the three months ended June 30, 2020. This $5.2 million increase was primarily due to the fact that no rebates were issued related to Consortium warrants for the three months ended June 30, 2020, as the related Consortium Purchase Agreement ended in May 2019. These rebates totaled $7.8 million for the three months ended June 30, 2019. 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 primarily due to the fact that no rebates were issued related to Consortium warrants for theand six months ended June 30, 2020, as compared to the related Consortium Purchase Agreement endedsame periods in May 2019. These rebates totaled $17.6 million for the six months ended June 30, 2019.2020, were due to increased whole loan originations during those periods.
Other Revenues
Other Revenues consists primarily of fees earned from facilitating securitizations for whole loan purchasers, which are recognized over the term of the underlying securitization, as well as the impact of changes in the reserve for loan repurchases and other miscellaneous items..items. The increases in Other Revenues for the three and six months ended June 30, 2021, as compared to the corresponding periods in 2020, were not significant.
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper Funding recognizes interest incomeInterest Income on Borrower Loans originated through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes themit to be collectable.collectible. 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 the Borrower LoansNotes is generally 1% higherlower than the interest rate paid on the corresponding Notes in orderBorrower Loans to compensate Prosper Funding for servicing the underlying Borrower Loans.
Overall, the decreases in net interest income for the three and six months ended June 30, 2020,2021, as compared to the same periods in 2019,2020, were not significant.
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes,of Financial Instruments, Net
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes,Financial Instruments, Net captures changesgains (losses) in fair value estimates using discounted cash flow methodologies that are based upon a set of valuation assumptions. The key assumptions used in
these valuations valuation include default and prepayment rates derived primarily from historical performance and discount rates based onthat reflect estimates of the rates of return that investors would require when investing in other financial instruments with similar characteristics. Changes in fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of the corresponding Notes due to the borrower payment dependentpayment-dependent structure. Loans Held for Sale are primarily comprised of Borrower Loans held for short durations and their valuation uses the same approach as the Borrower Loans.
The following table summarizes the fair value adjustments for the three and six month periods ended June 30, 20202021 and 20192020 (in thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Borrower Loans | Borrower Loans | $ | (3,653) | | | $ | (5,589) | | | $ | (22,119) | | | $ | (11,177) | | Borrower Loans | | $ | 875 | | | $ | (3,653) | | | $ | 876 | | | $ | (22,119) | |
| Notes | Notes | 3,848 | | | 5,458 | | | 22,377 | | | 10,960 | | Notes | | (491) | | | 3,848 | | | (720) | | | 22,377 | |
| $ | 195 | | | $ | (131) | | | $ | 258 | | | $ | (217) | | |
| Total | | Total | | $ | 384 | | | $ | 195 | | | $ | 156 | | | $ | 258 | |
Expenses
The following tables summarize Prosper Funding’s expenses for the three and six month periods ended June 30, 20202021 and 20192020 (in thousands, except percentages):
| | | Three Months Ended June 30, | | | | Three Months Ended June 30, | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | Change | | % Change |
| Expenses | | | | | | | | |
| Administration Fee Expense – Related Party | $ | 9,494 | | | $ | 16,773 | | | $ | (7,279) | | | (43) | % | |
| Expenses: | | Expenses: | | | | | | | | |
| Administration Fee - Related Party | | Administration Fee - Related Party | | $ | 12,535 | | | $ | 9,494 | | | $ | 3,041 | | | 32 | % |
| Servicing | Servicing | 1,137 | | | 1,304 | | | (167) | | | (13) | % | Servicing | | 1,486 | | | 1,137 | | | 349 | | | 31 | % |
| General and Administrative | General and Administrative | 113 | | | 34 | | | 79 | | | 232 | % | General and Administrative | | 132 | | | 113 | | | 19 | | | 17 | % |
| Total Expenses | Total Expenses | $ | 10,744 | | | $ | 18,111 | | | $ | (7,367) | | | (41) | % | Total Expenses | | $ | 14,153 | | | $ | 10,744 | | | $ | 3,409 | | | 32 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2021 | | 2020 | | Change | | % Change |
| Expenses: | | | | | | | | |
| Administration Fee - Related Party | | $ | 24,967 | | | $ | 21,858 | | | $ | 3,109 | | | 14 | % |
| Servicing | | 2,899 | | | 2,330 | | | 569 | | | 24 | % |
| General and Administrative | | 256 | | | 167 | | | 89 | | | 53 | % |
| Total Expenses | | $ | 28,122 | | | $ | 24,355 | | | $ | 3,767 | | | 15 | % |
Administration Fee Expense - Related Party
Pursuant to the 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 of $500,000 per month, (b) a fee for each Borrower Loan originated through the marketplace, (c) 62.5% of all Servicing Fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of Prosper Funding. The decreasesincreases in Administration Fee expense of $7.3 million and $9.9 million for the three and six months ended June 30, 2020,2021, as compared to the same periods in 2019,2020, were primarily due to the decreasedincreased origination volume of Borrower Loans for the current periods. In general, the Administration Fee - Related Party will not fluctuate directly in line with the Administration Fee Revenue - Related Party due to both the flat corporate administrative fee, as well as the fact that Prosper Funding pays fees for three different services, but receives a fee based only the number of loans listed on the platform.
Servicing
Servicing costs consist primarily of vendor and borrower costs, andas well as depreciation of internal-use software associated with servicing Borrower Loans.Loans. The decreasesincreases in Servicing costs for the three and six months ended June 30, 2020,2021, as compared to the corresponding periods in 2019,2020, were not significant.primarily driven by the increase in originations and the depreciation of internal-use software during this time.
General and Administrative
General and Administrative costs consist primarily of bank service charges and professional fees. General and Administrative costs were not significant for the three and six months ended June 30, 20202021 and 2019.2020.
Liquidity and Capital ResourcesLIQUIDITY 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 six months ended June 30, 20202021 and 20192020 (in thousands):
| | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
| Net (Loss) Income | | $ | (100) | | | $ | 1,923 | |
| | | | |
| Net Cash Provided by Operating Activities | | 51,022 | | | 9,937 | |
| Net Cash (Used in) Provided by Investing Activities | | (30,655) | | | 10,227 | |
| Net Cash Provided by (Used in) Financing Activities | | 27,161 | | | (16,565) | |
| Net Increase in Cash, Cash Equivalents and Restricted Cash | | 47,528 | | | 3,599 | |
| Cash, cash equivalents and restricted cash at the beginning of the period | | 140,924 | | | 117,861 | |
| Cash, cash equivalents and restricted cash at the end of the period | | $ | 188,452 | | | $ | 121,460 | |
Cash, Cash Equivalents and Restricted Cash increased $47.5 million for the six months ended June 30, 2021, based on the following components:
Operating Activities: $51.0 million was provided by operating activities, driven by cash from working capital of $48.3 million, primarily due to the timing of payments to PMI and investors, and $2.7 million from net loss, net of non-cash adjustments.
Investing Activities: $30.7 million was used in investing activities, due to $107.6 million in purchases of Borrower Loans and $4.1 million in purchases of property and equipment, partially offset by $81.1 million of principal payments under Borrower Loans.
Financing Activities: $27.2 million was provided by financing activities, due to $108.2 million in proceeds from the issuance of Notes, at Fair Value, partially offset by $81.0 million in payments for Notes, at Fair Value.
Cash, Cash Equivalents and Restricted Cash increased $3.6 million for the six months ended June 30, 2020, 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 non-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 property and equipment of $1.3 million.
Financing Activities: $16.6 million was used byin 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 $9.6 million less cash held on the platform that is classified as restricted cash.
Investing Activities: $4.3 million was used in investing activities, due to purchases of Borrower Loans of $86.1 million and property and equipment of $2.3 million, partially offset by $84.1 million in principal payments under Borrower Loans.
Financing Activities: $0.9 million was provided by financing activities due 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 six months ended June 30, 20202021 and 2019.2020. 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 operatingtaxable losses, it is difficult to accurately forecast how Prosper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.
Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, Prosper Funding is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special interest entities are consolidated as Prosper Funding is not the primary beneficiary. Otherwise as of June 30, 2020,2021, Prosper Funding has not engaged in any off-balance sheet financing activities.
ItemITEM 3. Quantitative and Qualitative Disclosures about Market Risk and Interest Rate RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST RATE RISK
Prosper Marketplace, Inc.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 whichthat 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.loss assumptions or overall market conditions. 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$250.0 million and $142.0$274.6 million as of June 30, 20202021 and December 31, 2019,2020, respectively.
The fair values of Borrower Loans, Loans Held for Sale, Notes and 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$219.5 million and $131.6$242.5 million as of June 30, 20202021 and December 31, 2019,2020, 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.
ProsperPMI had cash and cash equivalents of $46.6$56.0 million and $64.6$50.1 million as of June 30, 20202021 and December 31, 2019,2020, 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$588.9 million as of June 30, 2020,2021, determined using a weighted-average discount rate of 11.59%6.81%. The combined fair
value of Borrower Loans and Loans Held for Sale was $776.0$652.9 million as of December 31, 2019,2020, determined using a weighted-average discount rate of 7.00%8.26%. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $5.7 million and $7.1$5.8 million in the fair value of Prosper’s investment in Borrower Loans and Loans Held for Sale as of June 30, 20202021 and December 31, 2019,2020, respectively. A hypothetical 100 basis point decrease in interest rates would
result in an increase of approximately $5.9$5.8 million and $7.3$5.9 million in the fair value of Prosper’s investment in Borrower Loans and Loans Held for Sale as of June 30, 20202021 and December 31, 2019,2020, 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 FundingA portion of the interest rate charged on our Warehouse Lines is currently based on LIBOR. LIBOR has been the subject of reform and was expected to phase out by the end of fiscal 2021; however, on November 30, 2020, the ICE Benchmark Administration Limited (“ICE”) announced plans to delay the phase out of LIBOR to June 30, 2023. The consequences of the discontinuation of LIBOR cannot be entirely predicted but could impact the interest expense incurred on these debt instruments. We have negotiated alternatives to LIBOR on the PWIT and PWIIT Warehouse Lines, which we may renegotiate before LIBOR ceases to be a widely available reference rate.
PROSPER FUNDING LLC
Market Risk
Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.
Because balances, interest rates, and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net of our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.
The fair values of Borrower Loans and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
Prosper Funding had cash and cash equivalentsequivalents of $7.8$6.9 million as of June 30, 2020,2021, and $7.5$8.6 million as of December 31, 2019.2020. These amounts were held in various unrestricted deposits with highly rated financial institutions and short term, highly liquid marketable securities which may include money market funds, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, Prosper Funding believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will moderately reduce interest income on these cash and cash equivalents, while increases in short-term interest rates will moderately increase the interest income earned on these cash and cash equivalent balances.
ItemITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Registrants’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including to each Registrant’s Principal Executive Officer (PEO) and Principal Financial Officer (PFO), to allow timely decisions regarding required disclosures. The management of each Registrant, with the participation of such Registrant’s PEO and PFO, has evaluated the effectiveness of such Registrant’s disclosure controls and procedures as of June 30, 2020.2021. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of June 30, 2020.2021.
Changes in Internal Control Over Financial Reporting
There were no changes in either Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended June 30, 2020,2021, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.
PART II. OTHER INFORMATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 2021, PMI and PFL accepted service of a complaint via email. PMI, PFL and Velocity Investments, LLC, an accounts receivable management company (“Velocity”), were each named in a purported class action lawsuit brought by two individual plaintiffs in the Circuit Court for Montgomery County, Maryland, filed on February 3, 2021 (the “Maryland Litigation”). The complaint asserts, on behalf of the plaintiffs and the class members, claims for violation of certain Maryland state laws and seeks damages. The plaintiffs also seek a declaration of requirement for Maryland licensure and that PMI, PFL, and Velocity did not have the right to collect money from the plaintiffs and the class members on the loan accounts. On April 8, 2021, the lawsuit was moved to the United States District Court for the District of Maryland. On July 15, 2021, plaintiff dismissed its related petition to stay arbitration and demand declaratory judgment in the Circuit Court for Montgomery County, Maryland, but joined PMI, PFL, and Velocity to another petition, Khan v. Crown Asset Management, LLC, Case No. 485569V, which was also filed in the Circuit Court for Montgomery County, Maryland on March 22, 2021 and restated the claims described above. PMI and PFL plan to vigorously contest these claims. At this time, we cannot predict the outcome of this matter or estimate the amount of damages, if any, that may be awarded.
This Item should be read in conjunction with the disclosures contained in Part I, Item 1,3, “Legal Proceedings” of our QuarterlyAnnual Report on Form 10-Q10-K for the quarteryear ended MarchDecember 31, 2020.
Item 1A. Risk Factors
You should carefully consider all information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and related notes, and the risks described in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 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
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 adversely impact our customers’ ability or desire to participate in our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations. 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 2020, we obtained 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 August 2021 or the SBA’s remittance of the forgiveness amount to the lender. The loan carries a two-year term and accrues 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 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
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Exhibit Number | | Exhibit Description |
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| | 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, 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) |
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| | 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 Amendment No. 1 dated February 15, 2016 and Amendment No. 2 dated May 19, 2020 (1)(incorporated by reference to Exhibit 3.4 of PMI and PFL's Quarterly Report on Form 10-Q, filed on August 14, 2020) |
| | |
| | Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.2) |
| | | | | | | | |
| | |
| | Amended and Restated Indenture, dated January 22, 2013, between PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013) |
| | |
| | First Supplemental Indenture, dated May 10, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL's Quarterly Report on Form 10-Q, filed on August 14, 2013) |
| | |
| | Promissory Note, dated April 24, 2020, by and between Broadway National Bank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI’s Current Report on Form 8-K, filed on April 30, 2020) |
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| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (1)2021 |
| | |
| | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (1)2021 |
| | |
| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (1)2021 |
| | |
| | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (1)2021 |
| | |
| | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (1)2021 |
| | |
| | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (1)2021 |
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| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | Taxonomy Extension Calculation Linkbase Document |
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| 101.LAB | | Taxonomy Extension Label Linkbase Document |
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| 101.PRE | | Taxonomy Extension Presentation Linkbase Document |
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| 101.DEF | | Taxonomy Extension Definition Linkbase Document |
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| (1) | | | Filed herewith. |
| (2) | | | 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 |
| |
August 14, 202012, 2021 | /s/ David Kimball |
| David Kimball |
| Chief Executive Officer of Prosper Marketplace, Inc. |
| Chief Executive Officer and President of
|
| (Principal Executive Officer) |
| |
August 14, 202012, 2021 | /s/ Usama Ashraf |
| Usama Ashraf |
| President and Chief Financial Officer of Prosper Marketplace, Inc. |
| President, Chief Financial Officer and Treasurer of
Prosper Funding LLC |
| (Principal Financial Officer) |
| |