PROSPER MARKETPLACE, INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - PROSPER MARKETPLACE, INC	prosper10q9302016ex322.htm
EX-32.1 - EXHIBIT 32.1 - PROSPER MARKETPLACE, INC	prosper10q9302016ex321.htm
EX-31.4 - EXHIBIT 31.4 - PROSPER MARKETPLACE, INC	prosper10q9302016ex314.htm
EX-31.3 - EXHIBIT 31.3 - PROSPER MARKETPLACE, INC	prosper10q9302016ex313.htm
EX-31.2 - EXHIBIT 31.2 - PROSPER MARKETPLACE, INC	prosper10q9302016ex312.htm
EX-31.1 - EXHIBIT 31.1 - PROSPER MARKETPLACE, INC	prosper10q9302016ex311.htm
EX-10.7 - EXHIBIT 10.7 - PROSPER MARKETPLACE, INC	prosper10q93016ex107.htm
EX-10.1 - EXHIBIT 10.1 - PROSPER MARKETPLACE, INC	propser10q93016ex101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016



Commission File Number	Exact Name of Registrant as Specified in its Charter	I.R.S. Employer Identification Number
333-147019 333-179941-01 333-204880	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	PROSPER FUNDING LLC a Delaware limited liability company 221 Main Street, 3rd Floor San Francisco, CA 94105 Telephone: (415) 593-5479	45-4526070

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 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



	Large Accelerated Filer	Accelerated Filer	Non- Accelerated Filer	Smaller Reporting Company
Prosper Marketplace, Inc.	o	o	x	o
Prosper Funding LLC	o	o	o	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



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

Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

As of November 7, 2016, there were 69,783,206 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.

THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PROSPER MARKETPLACE, INC. AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.

TABLE OF CONTENTS



		Page No.
	Forward-Looking Statements	3
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	5
	Prosper Marketplace Inc.	5
	Condensed Consolidated Balance Sheets (Unaudited)	5
	Condensed Consolidated Statements of Operations (Unaudited)	6
	Condensed Consolidated Statements of Other Comprehensive Income (Loss) (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
	Prosper Funding LLC	29
	Condensed Consolidated Balance Sheets (Unaudited)	29
	Condensed Consolidated Statements of Operations (Unaudited)	30
	Condensed Consolidated Statements of Cash Flows (Unaudited)	31
	Notes to Condensed Consolidated Financial Statements (Unaudited)	32
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54
PART II.	OTHER INFORMATION	55
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	55
Item 3.	Defaults upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
Signatures		56
Exhibit Index		57

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, and Prosper Capital Management LLC, a Delaware limited liability company, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), 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.” Further, 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. Finally, although historically we have referred to investors as “lender members,” we call them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace. All share and per share numbers presented in this Form 10-Q have been adjusted to reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

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;


•	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, including the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes, and the effectiveness of our credit rating systems;


•	our limited operational history and lack of significant historical performance data about borrower performance;


•	potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;


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


•	potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through our marketplace;


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


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


•	the 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 our marketplace 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, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of our Annual Report on Form 10-K 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. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public at the SEC’s Internet site at http://www.sec.gov.

Item 1. Condensed Consolidated Financial Statements

Prosper Marketplace, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

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



	September 30, 2016			December 31, 2015
Assets
Cash and Cash Equivalents	$	31,853		$	66,295
Restricted Cash	120,648			151,223
Available for Sale Investments, at Fair Value	42,783			73,187
Accounts Receivable	918			2,434
Loans Held for Sale, at Fair Value	136			32
Borrower Loans, at Fair Value	314,671			297,273
Property and Equipment, Net	26,678			24,965
Prepaid and Other Assets	7,420			6,433
Servicing Assets	12,664			14,363
Goodwill	36,368			36,368
Intangibles Assets, Net	10,069			13,051
Total Assets	$	604,208		$	685,624
Liabilities, Convertible Preferred Stock and Stockholders' Deficit
Accounts Payable and Accrued Liabilities	$	11,639		$	22,409
Payable to Investors	101,162			136,507
Notes at Fair Value	313,920			297,405
Other Liabilities	20,954			20,735
Total Liabilities	447,675			477,056
Commitments and Contingencies (see Note 16)
Convertible Preferred Stock – $0.01 par value; 177,388,425 shares authorized, issued and outstanding as of September 30, 2016 and December 31, 2015. Aggregate liquidation preference of $325,952 as of September 30, 2016 and December 31, 2015.	275,938			275,938
Stockholders' Deficit
Common Stock ($0.01 par value; 298,222,103 shares authorized, 70,708,055 issued and 69,772,120 outstanding as of September 30, 2016; and 270,326,075 shares authorized, 70,367,425 shares issued and 69,431,490 outstanding as of December 31, 2015)	194			127
Additional Paid-In Capital	121,206			102,971
Less: Treasury Stock (5,177,235 common shares at cost, September 30, 2016 and December 31, 2015)	(23,417		)	(23,417		)
Accumulated Deficit	(217,413		)	(146,907		)
Accumulated Other Comprehensive Income/(Loss)	25			(144		)
Total Stockholders' Deficit	(119,405		)	(67,370		)
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit	$	604,208		$	685,624

All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues
Operating Revenues
Transaction Fees, Net	$	14,086		$	46,842		$	75,186		$	111,984
Servicing Fees, Net	7,079			4,652			21,898			10,796
Gain on Sale of Borrower Loans	761			4,263			3,865			9,881
Other Revenue	973			2,229			4,562			4,935
Total Operating Revenues	22,899			57,986			105,511			137,596
Interest Income
Interest Income on Borrower Loans	11,735			10,280			33,710			30,892
Interest Expense on Notes	(10,636		)	(9,550		)	(30,456		)	(28,561		)
Net Interest Income	1,099			730			3,254			2,331
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net	(47		)	(87		)	(126		)	(66		)
Total Net Revenue	23,951			58,629			108,639			139,861
Expenses
Origination and Servicing	7,633			8,357			26,850			22,335
Sales and Marketing	9,391			31,844			54,303			76,996
General and Administrative	24,740			22,236			83,498			57,570
Restructuring Charges, Net	(470		)	—			14,153			—
Total Expenses	41,294			62,437			178,804			156,901
Net Loss Before Taxes	(17,343		)	(3,808		)	(70,165		)	(17,040		)
Income Tax Expense	74			35			344			284
Net Loss Applicable to Common Stockholders	$	(17,417	)	$	(3,843	)	$	(70,509	)	$	(17,324	)
Net Loss Per Share – Basic and Diluted	$	(0.27	)	$	(0.07	)	$	(1.12	)	$	(0.32	)
Weighted-Average Shares - Basic and Diluted	65,393,175			55,907,765			63,015,616			54,746,980

All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net Loss	$	(17,417	)	$	(3,843	)	$	(70,509	)	$	(17,324	)
Other Comprehensive Income (Loss), Before Tax
Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value	(54		)	4			161			4
Realized Gain (Loss) on Sale of Available for Sale Investments, at Fair Value	1			—			7			—
Other Comprehensive Income (Loss), Before Tax	(53		)	4			168			4
Income tax effect	—			—			—			—
Other Comprehensive Income (Loss), Net of Tax	(53		)	4			168			4
Comprehensive Income (Loss)	(17,470		)	(3,839		)	(70,341		)	(17,320		)

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

Prosper Marketplace, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



	Nine Months Ended September 30,
	2016			2015
Cash flows from Operating Activities:
Net Loss	$	(70,509	)	$	(17,324	)
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities:
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes	126			66
Depreciation and Amortization	9,892			4,967
Gain on Sales of Borrower Loans	(7,030		)	(9,958		)
Change in Fair Value of Servicing Rights	8,550			3,322
Stock-Based Compensation Expense	17,181			7,439
Restructuring Liability	5,107			—
Other, Net	968			94
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value	(1,619,866		)	(2,426,963		)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value	1,619,757			2,435,253
Restricted Cash Except for those Related to Investing Activities	37,044			(69,651		)
Accounts Receivable	1,516			1,800
Prepaid and Other Assets	(989		)	(4,168		)
Accounts Payable and Accrued Liabilities	(6,677		)	7,483
Payable to Investors	(35,345		)	72,263
Other Liabilities	(7,247		)	(2,000		)
Net Cash (Used in) Provided by Operating Activities	(47,522		)	2,623
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value	(164,436		)	(142,103		)
Principal Payments of Borrower Loans Held at Fair Value	127,308			111,864
Purchases of Property and Equipment	(10,049		)	(9,518		)
Maturities of Short Term Investments	1,279			1,274
Purchases of Short Term Investments	(1,277		)	(1,275		)
Purchases of Available for Sale Investments, at Fair Value	(11,725		)	(47,100		)
Proceeds from Sale of Available for Sale Investments	10,444			—
Maturities of Available for Sale Investments	31,645			—
Acquisition of Businesses, Net of Cash Acquired	—			(19,000		)
Changes in Restricted Cash Related to Investing Activities	(6,469		)	(1,446		)
Net Cash Used in Investing Activities	(23,280		)	(107,304		)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value	165,727			142,246
Payments of Notes Held at Fair Value	(129,603		)	(111,711		)
Proceeds from Issuance of Convertible Preferred Stock, Net	—			164,793
Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock	526			4,950
Repurchase of Common Stock and Restricted Stock	(71		)	(23,245		)
Taxes Paid for Awards Vested Under Equity Incentive Plans	(219		)	(2,387		)
Net Cash Provided by Financing Activities	36,360			174,646
Net (Decrease) Increase in Cash and Cash Equivalents	(34,442		)	69,965
Cash and Cash Equivalents at Beginning of the Period	66,295			50,557
Cash and Cash Equivalents at End of the Period	$	31,853		$	120,522
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	30,228		$	28,698
Non-Cash Investing Activity- Accrual for Property and Equipment, Net	$	241		$	5
Non-Cash Investing Activity- Amount Payable for the Acquisition of Business	$	—		$	840

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

Prosper Marketplace, Inc.

Notes to Condensed 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 Prosper Marketplace, Inc., “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 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, 2015. The balance sheet at December 31, 2015 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 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 and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.

On January 23, 2015, PMI acquired all of the outstanding limited liability company units of American HealthCare Lending, LLC (“American HealthCare Lending”), a company that operated a patient financing platform, and merged American HealthCare Lending with and into Prosper Healthcare Lending LLC (“PHL”), a newly established entity surviving the merger. Prosper’s condensed consolidated financial statements include PHL’s results of operations and financial position from the date of acquisition forward.

On October 9, 2015, PMI acquired all of the outstanding stock of BillGuard, Inc. (“BillGuard”), a company incorporated in Delaware in 2010 that developed applications that help consumers manage their identity, finances and credit. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. Prosper’s condensed consolidated financial statements include BillGuard’s results of operations and financial position from the date of acquisition forward.

Reclassifications

Due to the early adoption of ASU 2016-09 on January 1, 2016, reclassifications were made to the financing section of the condensed consolidated statements of cash flows to reflect taxes paid for awards vested under equity incentive plans. Prior period amounts have been reclassified to conform to the current presentation.

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, 2015. There have been no changes to these accounting policies during the first nine months of 2016.

Fair Value Measurements

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments at Fair Value, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.

Restructuring Charges

Restructuring charges consist of severance and contract termination related costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals.

Borrower Loans, Loans Held for Sale and Notes

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. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.

Loan Trailing Fee

On July 1, 2016, Prosper signed a series of agreements with WebBank to include an additional program fee (Loan Trailing Fee). These agreements are effective August 1, 2016. The Loan Trailing Fee is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans, irrespective of whether the loans are sold by Prosper, and gives the issuing bank an ongoing financial interest in the performance of the loans it originates. This fee is paid by Prosper to the issuing bank partner over the term of the respective loans and is a function of the principal and interest payments. In the event that principal and interest payments are not made, Prosper is not required to make this Loan Trailing Fee payment. The obligation to pay the Loan Trailing Fee is recorded at fair value at the time of the origination of the loan with Other Liabilities and recorded as a reduction of Transaction Fees, net. Any changes in the fair value of this liability are recorded in changes in fair value of Borrower Loans, Loans Held for Sale and Notes, Net on the statements of operations. The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which considers assumptions of expected prepayment rates and defaults rates.

Recent Accounting Pronouncements

In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper may adopt the standard in either Prosper’s fiscal year ending December 31, 2017 or 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In March 2016, April 2016 and May 2016, the FASB further amended the guidance to clarify the implementation on principal versus agent considerations, the identification of performance obligation and the licensing implementation guidance, and to provide narrow-scope improvements and practical expedients. Prosper has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity to eliminate the use of different methods in practice and thereby reduce existing diversity in the accounting for hybrid financial instruments issued in

the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument. The existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which became effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The new guidance simplifies the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper will be required to recognize and measure leases at the beginning off the earliest period presented using a modified retrospective approach. Prosper anticipates that this standard will have a material impact on our consolidated financial statements. While Prosper is continuing to assess all potential impacts of the standard, Prosper currently believes the most significant impact relates to our accounting for office operating leases.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This guidance makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This guidance will be effective for us in the first quarter of our fiscal year 2017, and early adoption is permitted. Prosper has decided to early adopt this guidance effective January 1, 2016, the adoption of this standard did not have a material impact on Prosper’s condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper is currently evaluating the impacts the adoption of this accounting standard will have on Prosper's cash flows.

3. Property and Equipment, Net

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



	September 30, 2016			December 31, 2015
Property and equipment:
Computer equipment	$	14,241		$	10,522
Internal-use software and website development costs	15,144			10,990
Office equipment and furniture	3,064			2,442
Leasehold improvements	7,071			5,719
Assets not yet placed in service	2,121			3,242
Property and equipment	41,641			32,915
Less accumulated depreciation and amortization	(14,963		)	(7,950		)
Total property and equipment, net	$	26,678		$	24,965

Depreciation and amortization expense for property and equipment for the three months ended September 30, 2016 and 2015 was $2.5 million and $1.3 million, respectively. Depreciation and amortization expense for property and equipment for the nine months ended September 30, 2016 and 2015 was $6.9 million and $4.4 million, respectively. Prosper capitalized internal-use software and website development costs in the amount of $1.3 million and $2.0 million for the three months ended September 30, 2016 and 2015, respectively. Prosper capitalized internal-use software and website development costs in the amount of $5.2 million and $5.9 million for the nine months ended September 30, 2016 and 2015, respectively. Prosper recorded internal-use software and website development impairment charges of $672 thousand and $0 for the nine months ended September 30, 2016 and 2015, respectively, as a result of its decision to discontinue several software and website development projects. These charges are included in general and administration expenses on the condensed consolidated statements of operations.

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

The aggregate principal balances outstanding and fair values of Borrower Loans, Loans Held for Sale and Notes as of September 30, 2016 and December 31, 2015, are presented in the following table (in thousands):



	Borrower Loans					Notes						Loans Held for Sale
	September 30, 2016			December 31, 2015		September 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015
Aggregate principal balance outstanding	$	319,210		$	296,945	$	(322,003	)	$	(294,331	)	$	148		$	42
Fair value adjustments	(4,539		)	328		8,083			(3,074		)	(12		)	(10		)
Fair value	$	314,671		$	297,273	$	(313,920	)	$	(297,405	)	$	136		$	32

At September 30, 2016, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through September 2021. At December 31, 2015, outstanding Borrower Loans had original maturities of either 36 or 60 months; had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2020.

Approximately $0.4 million and $2.4 million represents the loss that is attributable to changes in the instrument specific credit risks related to Borrower Loans that were recorded in the change in fair value during the three and nine months ending September 30, 2016.

As of September 30, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.7 million and a fair value of $0.8 million. As of December 31, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.3 million and a fair value of $0.9 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of September 30, 2016 and December 31, 2015, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.1 million, respectively.

5. Loan Servicing Assets and Liabilities

Prosper accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains recognized on the sale of such Borrower Loans were $0.8 million and $4.3 million

for the three months ended September 30, 2016 and 2015, respectively. The total gains recognized on the sale of such Borrower Loans were $3.9 million and $9.9 million for the nine months ended September 30, 2016 and 2015, respectively.

As of September 30, 2016, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through September 2021. At December 31, 2015, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.8 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and various maturity dates through December 2020.

$9.7 million and $6.3 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended September 30, 2016 and 2015 respectively. $29.8 million and $14.1 million of contractually specified servicing fees and ancillary fees are included on our condensed statements of operations in Servicing Fees, Net for the nine months ended September 30, 2016 and 2015 respectively.

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 and liabilities. 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 a backup service provider.

Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’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. Available for Sale Investments, at Fair Value

Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired (OTTI).

The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of September 30, 2016 and December 31, 2015, are as follows (in thousands):



September 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed maturity securities:
Corporate debt securities	$	29,733	$	16	$	(8	)	$	29,741
US Treasury securities	10,525		14		(2		)	10,537
Agency bonds	2,499		6		—			2,505
Total Available for Sale Investments	$	42,757	$	36	$	(10	)	$	42,783



December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed maturity securities:
Corporate debt securities	$	50,327	$	1	$	(94	)	$	50,234
Commercial paper	9,493		—		—			9,493
US Treasury securities	8,512		—		(41		)	8,471
Agency bonds	2,499		—		(8		)	2,491
Total fixed maturity securities	70,831		1		(143		)	70,689
Short term bond funds	2,500		—		(2		)	2,498
Total Available for Sale Investments	$	73,331	$	1	$	(145	)	$	73,187

A summary of available for sale investments with unrealized losses as of September 30, 2016, and December 31, 2015, aggregated by category and period of continuous unrealized loss, is as follows (in thousands):



	Less than 12 months					12 months or longer				Total
September 30, 2016	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturity securities:
Corporate debt securities	$	12,075	$	(8	)	$	—	$	—	$	12,075	$	(8	)
U.S. treasury securities	4,503		(2		)	—		—		4,503		(2		)
Total Investments with Unrealized Losses	$	16,578	$	(10	)	$	—	$	—	$	16,578	$	(10	)



	Less than 12 months					12 months or longer				Total
December 31, 2015	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturity securities:
Corporate debt securities	$	45,375	$	(94	)	$	—	$	—	$	45,375	$	(94	)
U.S. treasury securities	8,471		(41		)	—		—		8,471		(41		)
Agency bonds	2,491		(8		)	—		—		2,491		(8		)
Total fixed maturity securities	56,337		(143		)	—		—		56,337		(143		)
Short term bond funds	2,498		(2		)	—		—		2,498		(2		)
Total Investments with Unrealized Losses	$	58,835	$	(145	)	$	—	$	—	$	58,835	$	(145	)

There were no impairment charges recognized during the nine months ended September 30, 2016.

The maturities of available for sale investments at September 30, 2016, and December 31, 2015, are as follows (in thousands):



September 30, 2016	Within 1 year		After 1 year through 5 years		After 5 years to 10 years		After 10 years		Total
Corporate debt securities	$	25,235	$	4,506	$	—	$	—	$	29,741
US Treasury securities	6,532		4,005		—		—		10,537
Agency bonds	—		2,505		—		—		2,505
Total Fair Value	$	31,767	$	11,016	$	—	$	—	$	42,783
Total Amortized Cost	$	31,763	$	10,994	$	—	$	—	$	42,757



December 31, 2015	Within 1 year		After 1 year through 5 years		After 5 years to 10 years		After 10 years		Total
Corporate debt securities	$	26,289	$	23,945	$	—	$	—	$	50,234
Commercial paper	9,493		—		—		—		9,493
US Treasury securities	—		8,471		—		—		8,471
Agency bonds	—		2,491		—		—		2,491
Total Fair Value	$	35,782	$	34,907	$	—	$	—	$	70,689
Total Amortized Cost	$	35,831	$	35,000	$	—	$	—	$	70,831

During the nine months ended September 30, 2016, Prosper sold $10.4 million of investments which resulted in a realized gain of $7 thousand.

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. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.

Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.

Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.

Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. Servicing Assets and Liabilities are also subject to fair value measurement within the financial statements of Prosper. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.

Financial Instruments Recorded at Fair Value

Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.

Investments held at fair value consist of available for sale investments. The available for sale investments consist of corporate debt securities, commercial paper, U.S. treasury securities, agency bonds and short term bond funds. When available, Prosper uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.

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



September 30, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	314,671	$	314,671
Loans Held for Sale	—		—		136		136
Available for Sale Investments, at Fair Value	—		42,783		—		42,783
Servicing Assets	—		—		12,664		12,664
Total Assets	—		42,783		327,471		370,254
Liabilities:
Notes	$	—	$	—	$	313,920	$	313,920
Servicing Liabilities	—		—		254		254
Contingent Consideration	—		—		4,994		4,994
Total Liabilities	$	—	$	—	$	319,168	$	319,168



December 31, 2015	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	297,273	$	297,273
Loans Held for Sale	—		—		32		32
Available for Sale Investments, at Fair Value	—		73,187		—		73,187
Servicing Assets	—		—		14,363		14,363
Total Assets	—		73,187		311,668		384,855
Liabilities:
Notes	$	—	$	—	$	297,405	$	297,405
Servicing Liabilities	—		—		484		484
Contingent Consideration	—		—		4,801		4,801
Total Liabilities	$	—	$	—	$	302,690	$	302,690

As Prosper’s Borrower Loans, Loans Held for Sale, Notes and loan servicing rights do not trade in an active market with readily observable prices, Prosper uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at September 30, 2016 and December 31, 2015:

Borrower Loans, Loans Held for Sale and Notes:



	Range
Unobservable Input	September 30, 2016	December 31, 2015
Discount rate	4.4% - 15.2%	4.3% - 14.5%
Default rate	1.6% - 14.8%	1.4% - 14.4%

Servicing Rights



	Range
Unobservable Input	September 30, 2016		December 31, 2015
Discount rate	15% - 25%		15% - 25%
Default rate	1.4% - 15.0%		1.2% - 14.7%
Prepayment rate	14.9% - 27.7%		14.3% - 25.6%
Market servicing rate	0.625	%	0.625	%

At September 30, 2016, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, 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.

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



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at January 1, 2016	$	297,273		$	(297,405	)	$	32		$	(100	)
Purchase of Borrower Loans/Issuance of Notes	164,436			(165,727		)	1,619,866			1,618,575
Principal repayments	(125,419		)	129,603			(269		)	3,915
Borrower Loans sold to third parties	(1,889		)	—			(1,619,488		)	(1,621,377		)
Other changes	232			(229		)	(3		)	—
Change in fair value	(19,962		)	19,838			(2		)	(126		)
Balance at September 30, 2016	$	314,671		$	(313,920	)	$	136		$	887



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at January 1, 2015	$	273,243		$	(273,783	)	$	8,463		$	7,923
Purchase of Borrower Loans/Issuance of Notes	142,103			(142,246		)	2,426,963			2,426,820
Principal repayments	(111,864		)	111,711			(546		)	(699		)
Borrower Loans sold to third parties	(447		)	425			(2,434,707		)	(2,434,729		)
Other changes	(108		)	119			(18		)	(7		)
Change in fair value	(16,465		)	16,520			(121		)	(66		)
Balance at September 30, 2015	$	286,462		$	(287,254	)	$	34		$	(758	)



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at July 1, 2016	$	310,034		$	(309,530	)	$	4,706		$	5,210
Purchase of Borrower Loans/Issuance of Notes	55,221			(56,580		)	261,855			260,496
Principal repayments	(43,043		)	45,403			(133		)	2,227
Borrower Loans sold to third parties	(751		)	—			(266,286		)	(267,037		)
Other changes	238			(196		)	(4		)	38
Change in fair value	(7,028		)	6,983			(2		)	(47		)
Balance at September 30, 2016	$	314,671		$	(313,920	)	$	136		$	887



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at July 1, 2015	$	284,200		$	(284,627	)	$	1,431		$	1,004
Purchase of Borrower Loans/Issuance of Notes	47,591			(47,670		)	1,024,464			1,024,385
Principal repayments	(38,407		)	38,202			(4		)	(209		)
Borrower Loans sold to third parties	(447		)	425			(1,025,824		)	(1,025,846		)
Other changes	21			(18		)	(8		)	(5		)
Change in fair value	(6,496		)	6,434			(25		)	(87		)
Balance at September 30, 2015	$	286,462		$	(287,254	)	$	34		$	(758	)

The following tables present additional information about level 3 servicing assets and liabilities measured at fair value on a recurring basis (in thousands):



	Servicing Assets		Servicing Liabilities
Fair Value at January 1, 2016	14,363		484
Additions	7,092		9
Less: Changes in fair value	(8,791	)	(239	)
Fair Value at September 30, 2016	12,664		254



	Servicing Assets		Servicing Liabilities
Amortized Cost at January 1, 2015	4,163		624
Adjustment to Adopt Fair Value Measurement	546		(29	)
Fair Value at January 1, 2015	4,709		595
Additions	10,204		246
Less: Changes in fair value	(3,613	)	(291	)
Fair Value at September 30, 2015	11,300		550



	Servicing Assets		Servicing Liabilities
Fair Value at July 1, 2016	14,297		324
Additions	1,342		—
Less: Changes in fair value	(2,975	)	(70	)
Fair Value at September 30, 2016	12,664		254



	Servicing Assets		Servicing Liabilities
Fair Value at July 1, 2015	8,682		606
Additions	4,370		53
Less: Changes in fair value	(1,752	)	(109	)
Fair Value at September 30, 2015	11,300		550

Contingent Consideration:

On October 9, 2015, PMI, purchased 100% of the outstanding shares of BillGuard. The contingent consideration was primarily performance-based and will be determined over a one-year period from the date of purchase. Total contingent consideration due in October 2016 is based on revenues generated and other criteria. We measured the fair value of the contingent consideration using a probability-weighted discounted cash flow approach. Some of the significant inputs used for the valuation are not observable in the market and are thus Level 3 inputs. Contingent consideration is recorded in the condensed consolidated balance sheets under "Other Liabilities." Significant increases or decreases in certain underlying assumptions used to value the contingent consideration could significantly increase or decrease the fair value estimates recorded in the condensed consolidated balance sheets. During the three and nine month periods ended September 30, 2016, there were fair value changes of $65 thousand and $192 thousand, respectively, resulting in a fair value of $5.0 million at September 30, 2016 from the opening fair value at January 1, 2016 of $4.8 million.

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at September 30, 2016 for Borrower Loans, Loans Held for Sale and Notes funded through the Note Channel are presented in the following table (in thousands, except percentages):



	Borrower Loans and Loans Held for Sale				Notes
Discount rate assumption:	7.59		%	*	7.59		%	*
Resulting fair value from:
100 basis point increase	$	311,509			$	310,760
200 basis point increase	308,426				307,680
Resulting fair value from:
100 basis point decrease	$	317,914			$	317,161
200 basis point decrease	321,244				320,488
Default rate assumption:	11.50		%	*	11.50		%	*
Resulting fair value from:
100 basis point increase	$	311,358			$	310,601
200 basis point increase	308,142				307,380
Resulting fair value from:
100 basis point decrease	$	318,009			$	317,264
200 basis point decrease	321,389				320,651

* Represents weighted average assumptions considering all credit grades.

The following table presents the estimated impact on Prosper’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of September 30, 2016 (in thousands, except percentages).



	Servicing Assets			Servicing Liabilities
Market servicing rate assumptions	0.625		%	0.625		%
Resulting fair value from:
Market servicing rate increase to 0.65%	$	11,744		$	279
Market servicing rate decrease to 0.60%	$	13,583		$	228
Weighted average prepayment assumptions	21.06		%	21.06		%
Resulting fair value from:
Applying a 1.1 multiplier to prepayment rate	$	12,426		$	249
Applying a 0.9 multiplier to prepayment rate	$	12,904		$	258
Weighted average default assumptions	11.64		%	11.64		%
Resulting fair value from:
Applying a 1.1 multiplier to default rate	$	12,451		$	253
Applying a 0.9 multiplier to default rate	$	12,880		$	254

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. Acquisitions

On January 23, 2015, PMI acquired all of the outstanding limited liability company interests of American HealthCare Lending, and merged American HealthCare Lending with and into PHL, with PHL surviving the merger. In January 2015, PMI completed the allocation of the purchase price of the acquisition of American HealthCare Lending to acquired assets and liabilities.

On October 9, 2015, PMI acquired all of the outstanding shares of BillGuard, Inc. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. The allocation of the purchase price is preliminary and subject to further adjustment as information relative to closing date balances and related tax balances are finalized.

9. Goodwill and Other Intangible Assets

Goodwill

Prosper’s goodwill balance of $36.4 million at September 30, 2016 did not change during the nine months ended September 30, 2016. We did not record any goodwill impairment expense for the nine months ended September 30, 2016.

Other Intangible Assets

The following table presents the detail of other intangible assets for the period presented (dollars in thousands):



	September 30, 2016
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Remaining Useful Life (In Years)
User base and customer relationships	$	6,250	$	(2,541	)	$	3,709	8.4
Developed technology	8,310		(1,950		)	$	6,360	4.0
Brand name	60		(60		)	—		—
Total intangible assets subject to amortization	$	14,620	$	(4,551	)	$	10,069

Prosper’s intangible asset balance was $10.1 million and $13.1 million at September 30, 2016 and December 31, 2015, respectively.

The user base and customer relationship intangible assets are being amortized on an accelerated basis over a three to ten year period. The technology and brand name intangible assets are being amortized on a straight line basis over three to five years and one year, respectively.

Amortization expense for the three months ended September 30, 2016 and 2015 was $1.0 million and $0.2 million, respectively. Amortization expense for the nine months ended September 30, 2016 and 2015 was $3.0 million and $0.5 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):



Year Ending December 31,
2016	$	855
2017	3,260
2018	2,329
2019	1,779
2020	1,344
Thereafter	502
Total	$	10,069

10. Other Liabilities

Other Liabilities includes the following:



	September 30, 2016		December 31, 2015
Class action settlement liability	$	2,984	$	5,949
Repurchase liability for unvested restricted stock awards	180		473
Contingent consideration	4,994		4,801
Deferred revenue	285		1,591
Servicing liabilities	254		484
Deferred rent	4,563		5,240
Restructuring liability	5,107		—
Other	2,587		2,197
Total Other Liabilities	$	20,954	$	20,735

11. Net Loss Per Share

The weighted average shares used in calculating basic and diluted net loss per share excludes certain shares that are disclosed as outstanding shares in the condensed consolidated balance sheets because such shares are restricted as they were associated with options that were early exercised and continue to remain unvested.

Basic and diluted net loss per share was calculated as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Numerator:
Net loss available to common stockholders for basic and diluted EPS	$	(17,417	)	$	(3,843	)	$	(70,509	)	$	(17,324	)
Denominator:
Weighted average shares used in computing basic and diluted net loss per share	65,393,175			55,907,765			63,015,616			54,746,980
Basic and diluted net loss per share	$	(0.27	)	$	(0.07	)	$	(1.12	)	$	(0.32	)

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



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
	(shares)	(shares)	(shares)	(shares)
Excluded securities:
Convertible preferred stock issued and outstanding	177,388,425	177,388,425	177,388,425	177,388,425
Stock options issued and outstanding	50,387,360	35,063,150	44,617,487	32,592,610
Unvested stock options exercised	3,209,345	11,906,925	3,209,345	11,906,925
Warrants issued and outstanding	1,203,344	602,355	910,945	602,355
Total common stock equivalents excluded from diluted net loss per common share computation	232,188,474	224,960,855	226,126,202	222,490,315

The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

12. Convertible Preferred Stock and Stockholders’ Deficit

Convertible Preferred Stock

The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of September 30, 2016 are disclosed in the table below (amounts in thousands except share and per share amounts):



Convertible Preferred Stock	Par Value		Authorized shares	Outstanding and Issued shares	Liquidation Preference
New Series A	$	0.01	68,558,220	68,558,220	$	19,774
Series A-1	0.01		24,760,915	24,760,915	49,522
New Series B	0.01		35,775,880	35,775,880	21,581
New Series C	0.01		24,404,770	24,404,770	70,075
New Series D	0.01		23,888,640	23,888,640	165,000
			177,388,425	177,388,425	$	325,952

The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.

Common Stock

PMI, through its amended and restated certificate of incorporation, as amended, is the sole issuer of common stock and related options, 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 May 31, 2016, 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 475,610,528, consisting of 298,222,103 shares of common stock, $0.01 par value per share, and 177,388,425 shares of preferred stock, $0.01 par value per share. As of September 30, 2016, 70,708,055 shares of common stock were issued and 69,772,120 shares of common stock were outstanding. As of December 31, 2015, 70,367,425 shares of common stock were issued and 69,431,490 shares of common stock were outstanding. 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

During the nine months ended September 30, 2016, PMI issued 386,720 shares of common stock upon the exercise of vested options for cash proceeds of $0.3 million. Certain options are eligible for exercise prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the same vesting schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the holder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At September 30, 2016 and December 31, 2015, there were 3,209,345 and 9,806,170 shares, respectively, of restricted stock outstanding that remain unvested and subject to Prosper’s right of repurchase.

For the nine months ended September 30, 2016, PMI repurchased 288,520 shares of restricted stock for $70 thousand upon termination of employment of various employees.

Common Stock Issued upon Exercise of Warrants

For the nine months ended September 30, 2016, PMI issued 51,915 shares of common stock upon the exercise of warrants for aggregate proceeds of $11 thousand.

13. Share Based Incentive Plan and Compensation

In 2005, PMI’s stockholders approved the adoption of the 2005 Stock Plan. On December 1, 2010, PMI’s stockholders approved the adoption of the Amended and Restated 2005 Stock Plan (the “2005 Plan”). The 2005 Plan expired during the year ending December 31, 2015 and PMI’s stockholders approved the adoption of the 2015 Equity Incentive Plan. On February 15, 2016, PMI’s stockholders approved the adoption of an Amendment No. 1 to the 2015 Equity Incentive Plan, and on May 31, 2016, PMI’s stockholders approved the adoption of an Amendment No. 2 to the 2015 Equity Incentive Plan (as amended to date, the “2015 Plan”). As of September 30, 2016 under the 2005 Plan, up to 56,902,925 shares of common stock are reserved and may be issued to employees, directors, and consultants by PMI’s board of directors and stockholders to promote the success of Prosper’s business. As of September 30, 2016 under the 2015 Plan, up to 54,336,473 shares of common stock are reserved and may be granted to employees, directors, and consultants by PMI’s board of directors and stockholders to promote the success of Prosper’s business. Options generally vest 25% one year from the vesting commencement date and 1/48th per month thereafter or vest 50% two years from the vesting commencement date and 1/48th per month thereafter or vest 1/36th per month from the vesting commencement date. In no event are options exercisable more than ten years after the date of grant.

At September 30, 2016, there were 20,684,495 shares available for grant under the 2015 Plan and zero shares available for grant under the 2005 Plan.

The number of options, restricted stock units and amounts per share reflects a 5-for-1 forward stock split effected by PMI on February 16, 2016.

Stock Option Reprice

On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “Reprice”) 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. Prosper believes the repricing of such stock options will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of this repricing. The financial statement impact of this repricing is $0.8 million in the three months ended September 30, 2016, $2.0 million in the nine months ended September 30, 2016 and $2.9 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 2.5 years.

Early Exercised Stock Options

The activity of options that were early exercised under the 2005 Plan for the nine months ended September 30, 2016 is below:



	Early exercised options, unvested		Weighted average exercise price
Balance as of January 1, 2016	9,806,170		$	0.05
Repurchase of restricted stock	(288,520	)	0.24
Restricted stock vested	(6,308,305	)	0.04
Balance as of September 30, 2016	3,209,345		$	0.06

Additional information regarding the unvested early exercised stock options outstanding as of September 30, 2016 is as follows:



	Options Outstanding
Range of Exercise Prices	Number Outstanding	Weighted –Avg. Remaining Life	Weighted –Avg. Exercise Price
0.02	2,910,435	0.4	$	0.02
0.11	212,710	1.3	0.11
1.13	86,200	1.9	1.13
$0.02 - $1.13	3,209,345	0.5	$	0.06

Stock Option Activity

Stock option activity under the 2005 Plan and 2015 Plan is summarized for the nine months ended September 30, 2016 below:



	Options Issued and Outstanding		Weighted- Average Exercise Price
Balance as of January 1, 2016	40,425,605		$	2.64
Options issued	19,655,338		2.14
Options exercised – vested	(386,720	)	0.75
Options forfeited	(12,886,025	)	1.60
Balance as of September 30, 2016	46,808,198		$	1.55

Options vested and/or exercisable at September 30, 2016	26,701,173		1.13

Due to the timing of the Reprice, the ending weighted average exercise price shown above reflects repriced options while the opening weighted average exercise price does not.

Other Information Regarding Stock Options

Additional information regarding common stock options outstanding as of September 30, 2016 is as follows:



		Options Outstanding				Options Vested and Exercisable
	Range of Exercise Prices	Number Outstanding	Weighted – Avg. Remaining Life	Weighted –Avg. Exercise Price		Number Vested	Weighted – Avg. Exercise Price
$	0.02 - 0.99	12,919,025	7.15	$	0.12	12,919,025	$	0.12
	1.00 - 2.99	33,208,863	9.09	2.04		13,101,838	1.97
	3.00 - 4.99	463,490	8.38	3.62		463,490	3.62
	5.00 - 5.52	216,820	8.67	5.46		216,820	5.46
$	0.02 - 5.52	46,808,198	8.54	$	1.55	26,701,173	$	1.13

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 publically 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 zero 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. No compensation cost is recorded for options that do not vest.

The fair value of PMI’s stock option awards granted during the three months ended September 30, 2016 and 2015 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2016	2015		2016		2015
Volatility of common stock	n/a	50.71	%	50.88	%	56.14	%
Risk-free interest rate	n/a	1.70	%	1.29	%	1.71	%
Expected life	n/a	6.0 years		5.8 years		6.0 years
Dividend yield	n/a	0	%	0	%	0	%

Restricted Stock Unit Activity

During the nine months ended September 30, 2016, PMI granted restricted stock units (“RSUs”) to certain employees that are subject to three-year vesting terms or four year vesting terms and the occurrence of a liquidity event.

The aggregate fair value of the RSUs granted was $10.7 million. The following table summarizes the activities for PMI’s RSUs during the nine months ending September 30, 2016:



	Number of Shares		Weighted-Average Grant Date Fair Value
Unvested - December 31, 2015	1,835,510		$	5.52
Granted	3,580,220		2.14
Vested	—		—
Forfeited	(2,255,350	)	2.97
Unvested - September 30, 2016	3,160,380		$	2.15

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 during the three months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Origination and servicing	$	518	$	369	$	1,536	$	805
Sales and marketing	639		669		2,271		1,734
General and administrative	4,513		2,209		13,329		4,900
Restructuring	—		—		45		—
Total stock based compensation	$	5,670	$	3,247	$	17,181	$	7,439

During the three months ended September 30, 2016 and 2015, Prosper capitalized $156 thousand and $202 thousand respectively, of stock-based compensation as internal use software and website development costs. During the nine months ended September 30, 2016 and 2015, Prosper capitalized $592 thousand and $499 thousand respectively, of stock-based compensation as internal use software and website development costs. As of September 30, 2016, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to Prosper’s employees’ unvested stock-based awards was approximately $43.8 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.52 years.

14. Restructuring

Summary of Restructuring Plan

On May 3, 2016, Prosper adopted a strategic restructuring of its business. This restructuring is intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location. As a result of this restructuring, Prosper terminated 167 employees across all locations. In connection with the restructuring, Prosper has recognized employee severance and benefits charges of approximately $396 thousand in the third quarter which were included in “Restructuring Charges” within the condensed consolidated statements of operations.

In addition to the employment costs associated with the restructuring, Prosper is also engaged in marketing for sublease, space in our existing office space that is no longer needed due to the reduction in headcount. During the quarter ended September 30, 2016 Prosper executed the termination of one lease. The termination penalties associated with this lease was less than the accrued lease exit liability. Additionally, during negotiations to terminate another lease, Prosper obtained additional information that resulted in Prosper revising its estimate of future sublease income for that lease. These events resulted in an aggregate reduction of the lease exit liability of $1.5 million. This reduction has been recognized within “Restructuring Charges, Net” within the condensed consolidated statements of operations. In connection with the lease termination, Prosper also wrote off $0.4 million in leasehold improvements and incurred $0.2 million of other restructuring charges.

The following table summarizes the activities related to Prosper's restructuring plan (in thousands):



	Severance Related			Facilities Related			Total
Balance July 1, 2016	$	2,038		$	8,492		$	10,530
Adjustments to expense	396			(1,314		)	(918		)
Less: Cash paid	(2,423		)	(2,071		)	(4,494		)
Balance September 30, 2016	$	11		$	5,107		$	5,118

15. Income Taxes

For the three months ended September 30, 2016 and 2015, Prosper recognized $74 thousand and $35 thousand of income tax expense, respectively. For the nine months ended September 30, 2016 and 2015, Prosper recognized $344 thousand and $284 thousand of income tax expense, respectively. The income tax expense relates to state income tax expense and the amortization of tax deductible goodwill which gives rise to an indefinite-lived deferred tax liability. No other income tax expense or benefit was recorded for the nine month periods ended September 30, 2016 and 2015 due to a full valuation allowance recorded against our 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.

16. Commitments and Contingencies

Future Minimum Lease Payments

Prosper has entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2022 and 2027.

Future minimum rental payments under these leases as of September 30, 2016 are as follows (in thousands):



Remaining three months of 2016	1,731
2017	7,721
2018	8,328
2019	8,620
2020	8,862
2021	8,916
Thereafter	18,178
Total future operating lease obligations	$	62,356

Rental expense under operating lease arrangements was $1.6 million and $1.0 million for the three months ended September 30, 2016 and 2015, respectively. Rental expense under operating lease arrangements was $5.3 million and $2.7 million for the nine months ended September 30, 2016 and 2015, respectively.

Operating Commitments

Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining three months ended December 31, 2016 is $0.4 million. The minimum fee is $1.7 million, $1.7 million and $1.0 million in each of the years 2017, 2018 and 2019, respectively.

Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At September 30, 2016 the Company was in compliance with the covenant.

Loan Purchase Commitments

Prosper has entered into an agreement with WebBank to purchase $16.5 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended September 30, 2016 and the first business day of the quarter ending December 31, 2016. Prosper will purchase these Borrower Loans within the first three business days of the quarter ended December 31, 2016.

Repurchase and Indemnification Contingency

Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at September 30, 2016 is $3,737 million. Prosper has accrued $487 thousand and $510 thousand as of September 30, 2016 and December 31, 2015, respectively, in regard to this obligation.

Securities Law Compliance

From inception through October 16, 2008, Prosper sold approximately $178.0 million of Borrower Loans to investors through its old platform structure, whereby Prosper assigned promissory notes directly to investors. Prosper did not register the offer and sale of the promissory notes corresponding to these Borrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws. Prosper believes that the question of whether or not the operation of the platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, Prosper would have failed to comply with the registration and qualification requirements of federal and state laws.

In 2008, plaintiffs filed a class action lawsuit against Prosper and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation agreed to enter into a settlement to resolve all claims related thereto (the “Settlement”). In connection with the Settlement, Prosper agreed to pay an aggregate amount of $10 million into a settlement fund, split into four annual installments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order and judgment entered by the Superior Court on April 16, 2014. Pursuant to the final order and judgment, the claims in the class action were dismissed, and the defendants were released by the plaintiffs from all claims that were or could have been asserted concerning the

issues alleged in the class action lawsuit. The first three annual installments have been made prior to September 30, 2016 and the reserve for the class action settlement liability is $3.0 million in the condensed consolidated balance sheet as of September 30, 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 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 nine months ended September 30, 2016 and 2015, as well as the Notes and Borrower Loans outstanding as of September 30, 2016 and December 31, 2015 are summarized below (in thousands):



	Aggregate Amount of Notes and Borrower Loans Purchased Nine Months Ended September 30,				Interest Earned on Notes and Borrower Loans Nine Months Ended September 30,
Related Party	2016		2015		2016		2015
Executive officers and management	$	1,039	$	1,232	$	170	$	152
Directors (excluding executive officers and management)	427		31		25		6
Total	$	1,466	$	1,263	$	195	$	158



	Aggregate Amount of Notes and Borrower Loans Purchased Three Months Ended September 30,				Interest Earned on Notes and Borrower Loans Three Months Ended September 30,
Related Party	2016		2015		2016		2015
Executive officers and management	$	245	$	386	$	62	$	53
Directors (excluding executive officers and management)	77		10		10		2
Total	$	322	$	396	$	72	$	55



	Notes and Borrower Loans Balance as of
Related Party	September 30, 2016		December 31, 2015
Executive officers and management	$	1,966	$	2,173
Directors (excluding executive officers and management)	535		99
	$	2,501	$	2,272

18. Subsequent Events

Prosper and Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which Prosper agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of the Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis.

On November 17, 2016, Prosper and Colchis entered into a Settlement and Release Agreement, pursuant to which Colchis has agreed to terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a $9 million cash payment by Prosper and an agreement by Prosper to issue a warrant to purchase shares of a new series of preferred stock representing 7% of Prosper’s capitalization on a fully diluted basis as of the date of the issuance of the warrant (the “New Series”) for $.01 per share (the “Equity Payment”). Prosper’s obligation to make the Equity Payment is subject to Prosper obtaining the requisite stockholder approval. This will be accounted for as a termination of a contract.

Prosper Funding LLC

Condensed Consolidated Balance Sheets (Unaudited)

(amounts in thousands)



	September 30, 2016		December 31, 2015
Assets
Cash and Cash Equivalents	$	14,276	$	15,026
Restricted Cash	104,544		139,937
Short Term Investments	1,279		1,277
Loans Held for Sale at Fair Value	136		32
Borrower Loans Receivable at Fair Value	314,671		297,273
Property and Equipment, Net	9,632		8,419
Servicing Assets	12,274		13,605
Other Assets	139		122
Total Assets	$	456,951	$	475,691
Liabilities and Member’s Equity
Accounts Payable and Accrued Liabilities	$	1,024	$	2,122
Payable to Related Party	1,703		2,989
Payable to Investors	99,992		135,661
Notes at Fair Value	313,920		297,405
Other Liabilities	1,412		1,209
Total Liabilities	418,051		439,386
Member's Equity
Retained Earnings	38,900		36,305
Total Member's Equity	$	38,900	$	36,305
Total Liabilities and Member's Equity	$	456,951	$	475,691

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

Prosper Funding LLC

Condensed Consolidated Statements of Operations (Unaudited)

(amounts in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues
Operating Revenues
Administration Fee Revenue - Related Party	$	5,530		$	16,544		$	27,878		$	40,430
Servicing Fees, Net	7,026			4,408			21,650			9,945
Gain on Sale of Borrower Loans	761			4,263			3,865			9,881
Other Revenues	30			561			448			557
Total Operating Revenues	13,347			25,776			53,841			60,813
Interest Income on Borrower Loans	11,566			10,258			33,062			30,960
Interest Expense on Notes	(10,636		)	(9,550		)	(30,456		)	(28,561		)
Net Interest Income	930			708			2,606			2,399
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net	(47		)	(87		)	(126		)	(66		)
Total Net Revenues	14,230			26,397			56,321			63,146
Expenses
Administration Fee - Related Party	12,243			18,236			48,500			41,615
Servicing	1,374			675			4,139			2,946
General and Administrative	342			358			1,082			903
Total Expenses	13,959			19,269			53,721			45,464
Total Net Income	$	271		$	7,128		$	2,600		$	17,682

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

Prosper Funding LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(amounts in thousands)



	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net Income	$	2,600		$	17,682
Adjustments to Reconcile Net Income to Net Cash (Used in) Provided by Operating Activities:
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes	126			66
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes	—			29
Gain on Sale of Borrower Loans	(7,030		)	(9,958		)
Change in Fair Value of Servicing Rights	8,182			2,758
Depreciation and Amortization	2,940			2,483
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value	(1,619,866		)	(2,426,963		)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value	1,619,757			2,435,253
Restricted Cash Except for those Related to Investing Activities	37,545			(69,242		)
Other Assets	(17		)	(18		)
Accounts Payable and Accrued Liabilities	(1,103		)	1,415
Payable to Investors	(35,669		)	71,773
Net Related Party Receivable/Payable	(2		)	1,603
Other Liabilities	382			—
Net Cash Provided by Operating Activities	7,845			26,881
Cash Flows From Investing Activities:
Purchase of Borrower Loans Held at Fair Value	(164,436		)	(142,103		)
Principal Payment of Borrower Loans Held at Fair Value	127,308			111,864
Maturities of Short Term Investments	1,277			1,274
Purchases of Short Term Investments	(1,279		)	(1,276		)
Purchases of Property and Equipment	(5,437		)	(6,850		)
Changes in Restricted Cash Related to Investing Activities	(2,152		)	1,471
Net Cash Used in Investing Activities	(44,719		)	(35,620		)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value	165,727			142,246
Payments of Notes Held at Fair Value	(129,603		)	(111,711		)
Cash Distributions to Parent	—			(35,505		)
Net Cash Provided by (Used in) Financing Activities	36,124			(4,970		)
Net Decrease in Cash and Cash Equivalents	(750		)	(13,709		)
Cash and Cash Equivalents at Beginning of the Year	15,026			23,777
Cash and Cash Equivalents at End of the Period	$	14,276		$	10,068
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	30,228		$	28,698
Non-Cash Investing Activity - Accrual for Property and Equipment, Net	$	152		—
Non-Cash Financing Activity, Distribution to Parent	—			$	249

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

Prosper Funding LLC

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

Prosper Funding LLC (“PFL”) was formed in the state of Delaware on February 17, 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”, "Parent"). Except as the context otherwise requires, as used in these Notes to the condensed consolidated financial statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis.

Prosper Funding did not have any items of other comprehensive income (loss) during any of the periods presented in the condensed consolidated financial statements as of and for the nine months ended September 30, 2016 and 2015.

The preparation of Prosper Funding's condensed consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.

2. Significant Accounting Policies

Prosper Funding's significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes to these accounting policies during the first nine months of 2016.

Fair Value Measurements

Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Short Term Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.

Borrower Loans, Loans Held for Sale and Notes

Through the Note Channel, Prosper Funding purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes funded through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes funded through the Note Channel are carried on Prosper Funding’s consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper Funding estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies that take into account expected prepayments, losses, recoveries and default rates. The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper Funding maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.

Loan Trailing Fee

On July 1, 2016, Prosper Funding signed a series of agreements with WebBank to include an additional program fee (Loan Trailing Fee). These agreements are effective August 1, 2016. The Loan Trailing Fee is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans, irrespective of whether the loans are sold by Propser and gives the issuing bank an ongoing financial interest in the performance of the loans it originates. This fee is paid by Prosper Funding to the issuing bank partner over the term of the respective loans and is a function of the principal and interest payments. In the event that principal and interest payments are not made, Prosper Funding is not required to make this Loan Trailing Fee payment. The obligation to pay the Loan Trailing Fee is recorded at fair value at the time of the origination of the loan within Other Liabilities and is recorded as a reduction in related party expenses on the statement of operations. Any changes in the fair value of this liability are recorded in changes in fair value of Borrower Loans, Loans Held for Sale and Notes, Net on the statements of operations. The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which considers assumptions of expected prepayment rates and defaults rates.

Recent Accounting Pronouncements

In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper Funding in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper Funding may adopt the standard in either Prosper Funding’s fiscal year ending December 31, 2017 or 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In March 2016, April 2016 and May 2016, the FASB further amended the guidance to clarify the implementation on principal versus agent considerations, the identification of performance obligation and the licensing implementation guidance, and to provide narrow-scope improvements and practical expedients. Prosper Funding has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU 2015-05 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which became effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper Funding adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper Funding’s condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper Funding in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper Funding is currently evaluating the impacts the adoption of this accounting standard will have on the Prosper Funding's cash flows.

3. Property and Equipment

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



	September 30, 2016			December 31, 2015
Property and equipment:
Internal-use software and web site development costs	$	15,143		$	10,990
Less accumulated depreciation and amortization	(5,511		)	(2,571		)
Total property and equipment, net	$	9,632		$	8,419

Depreciation expense for the three months ended September 30, 2016 and 2015 was $1,076 thousand and $587 thousand, respectively. Depreciation expense for the nine months ended September 30, 2016 and 2015 was $2,940 thousand and $2,483 thousand, respectively.

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



	Borrower Loans					Notes						Loans Held for Sale
	September 30, 2016			December 31, 2015		September 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015
Aggregate principal balance outstanding	$	319,210		$	296,945	$	(322,003	)	$	(294,331	)	$	148		$	42
Fair value adjustments	(4,539		)	328		8,083			(3,074		)	(12		)	(10		)
Fair value	$	314,671		$	297,273	$	(313,920	)	$	(297,405	)	$	136		$	32

As of September 30, 2016, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.7 million and a fair value of $0.8 million. As of December 31, 2015, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.3 million and a fair value of $0.9 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of September 30, 2016 and December 31, 2015, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.1 million, respectively.

5. Loan Servicing Assets and Liabilities

Prosper Funding accounts for servicing assets and liabilities at their estimated fair values with changes in fair values recorded in servicing fees. The initial asset or liability is recognized when Prosper Funding sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The servicing assets and liabilities are measured at fair value throughout the servicing period. The total gains recognized on the sale of such Borrower Loans were $0.8 million and $4.3 million for the three months ended September 30, 2016 and 2015, respectively. The total gain recognized on the sale of such Borrower Loans was $3.9 million and $9.9 million for the nine months ended September 30, 2016 and 2015, respectively.

At September 30, 2016, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.6 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and various maturity dates through September 2021. At December 31, 2015, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.6 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and various maturity dates through December 2020.

$9.6 million and $5.9 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the three months ended September 30, 2016 and 2015 respectively. $29.3 million and $12.7 million of contractually specified servicing fees and ancillary fees are included on our condensed consolidated statements of operations in Servicing Fees, Net for the nine months ended September 30, 2016 and 2015 respectively.

Fair value

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

Significant unobservable inputs presented in the table within Note 7 below are those that Prosper Funding considers significant to the estimated fair values of the Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.

Market servicing rate – Prosper Funding estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper Funding estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper Funding sells and services and information from a backup service provider.

6. Income Taxes

Prosper Funding incurred no income tax provision for the nine months ended September 30, 2016 and 2015. Prosper Funding is a US disregarded entity and its income and loss is included in the return of its parent, PMI. Since PMI is in a loss position, is not currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.

7. Fair Value of Assets and Liabilities

Prosper Funding measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.

Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.

Financial instruments consist principally of cash and cash equivalents, restricted cash, Borrower Loans, accounts payable and accrued liabilities, and Notes. Servicing assets and liabilities are also subject to fair value measurement within the financial statements of Prosper Funding. The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their carrying values because of their short term nature.

Financial Instruments Recorded at Fair Value

The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.

Investments held at fair value consist of available for sale investments. The available for sale investments consist of corporate and government bonds. When available, Prosper Funding uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper Funding uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper Funding uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper Funding generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper Funding's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper Funding compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper Funding does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.

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



September 30, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	314,671	$	314,671
Loans Held for Sale	—		—		136		136
Servicing Assets	—		—		12,274		12,274
Total Assets	—		—		327,081		327,081
Liabilities:
Notes	$	—	$	—	$	313,920	$	313,920
Servicing Liabilities	—		—		254		254
Total Liabilities	$	—	$	—	$	314,174	$	314,174



December 31, 2015	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Borrower Loans	$	—	$	—	$	297,273	$	297,273
Loans Held for Sale	—		—		32		32
Servicing Assets	—		—		13,605		13,605
Total Assets	—		—		310,910		310,910
Liabilities:
Notes	$	—	$	—	$	297,405	$	297,405
Servicing Liabilities	—		—		484		484
Total Liabilities	$	—	$	—	$	297,889	$	297,889

As Prosper Funding’s Borrower Loans, Loans Held for Sale, Notes and loan servicing rights do not trade in an active market with readily observable prices, Prosper Funding uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of

unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.

Significant Unobservable Inputs

The following tables present quantitative information about the significant unobservable inputs used for Prosper Funding’s level 3 fair value measurements at September 30, 2016 and December 31, 2015:

Borrower Loans, Loans Held for Sale and Notes:



	Range
Unobservable Input	September 30, 2016	December 31, 2015
Discount rate	4.4% - 15.2%	4.3% - 14.5%
Default rate	1.6% - 14.8%	1.4% - 14.4%

Servicing Rights



	Range
Unobservable Input	September 30, 2016		December 31, 2015
Discount rate	15% - 25%		15% - 25%
Default rate	1.4% - 15.0%		1.2% - 14.7%
Prepayment rate	14.9% - 27.7%		14.3% - 25.6%
Market servicing rate	0.625	%	0.625	%

The changes in the Borrower Loans, Loans Held for Sale and Notes, which are Level 3 assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at January 1, 2016	$	297,273		$	(297,405	)	$	32		$	(100	)
Originations	164,436			(165,727		)	1,619,866			1,618,575
Principal repayments	(125,419		)	129,603			(269		)	3,915
Borrower Loans sold to third parties	(1,889		)	—			(1,619,488		)	(1,621,377		)
Other changes	232			(229		)	(3		)	—
Change in fair value	(19,962		)	19,838			(2		)	(126		)
Balance at September 30, 2016	$	314,671		$	(313,920	)	$	136		$	887



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at January 1, 2015	$	273,243		$	(273,783	)	$	8,463		$	7,923
Originations	142,103			(142,246		)	2,426,963			2,426,820
Principal repayments	(111,864		)	111,711			(546		)	(699		)
Borrower Loans sold to third parties	(447		)	425			(2,434,707		)	(2,434,729		)
Other changes	(108		)	119			(18		)	(7		)
Change in fair value	(16,465		)	16,520			(121		)	(66		)
Balance at September 30, 2015	$	286,462		$	(287,254	)	$	34		$	(758	)



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at July 1, 2016	$	310,034		$	(309,530	)	$	4,706		$	5,210
Originations	55,221			(56,580		)	261,855			260,496
Principal repayments	(43,043		)	45,403			(133		)	2,227
Borrower Loans sold to third parties	(751		)	—			(266,286		)	(267,037		)
Other changes	238			(196		)	(4		)	38
Change in fair value	(7,028		)	6,983			(2		)	(47		)
Balance at September 30, 2016	$	314,671		$	(313,920	)	$	136		$	887



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Borrower Loans			Notes			Loans Held for Sale			Total
Balance at July 1, 2015	$	284,200		$	(284,627	)	$	1,431		$	1,004
Purchase of Borrower Loans/Issuance of Notes	47,591			(47,670		)	1,024,464			1,024,385
Principal repayments	(38,407		)	38,202			(4		)	(209		)
Borrower Loans sold to third parties	(447		)	425			(1,025,824		)	(1,025,846		)
Other changes	21			(18		)	(8		)	(5		)
Change in fair value	(6,496		)	6,434			(25		)	(87		)
Balance at September 30, 2015	$	286,462		$	(287,254	)	$	34		$	(758	)

The following table presents additional information about Level 3 servicing assets and liabilities recorded at fair value for the three months ended September 30, 2016 (in thousands).



	Servicing Assets		Servicing Liabilities
Fair Value at January 1, 2016	13,605		484
Additions	7,092		9
Less: Changes in fair value	(8,423	)	(239	)
Fair Value at September 30, 2016	12,274		254



	Servicing Assets		Servicing Liabilities
Amortized Cost at January 1, 2015	3,116		624
Adjustment to Adopt Fair Value Measurement	399		(29	)
Fair Value at January 1, 2015	3,515		595
Additions	10,204		246
Less: Transfers to PMI	(249	)	—
Less: Changes in fair value	(3,049	)	(291	)
Fair Value at September 30, 2015	10,421		550



	Servicing Assets		Servicing Liabilities
Fair Value at July 1, 2016	13,798		324
Additions	1,342		—
Less: Changes in fair value	(2,866	)	(70	)
Fair Value at September 30, 2016	12,274		254



	Servicing Assets		Servicing Liabilities
Fair Value at July 1, 2015	7,634		606
Additions	4,367		53
Less: Transfers to PMI	—		—
Less: Changes in fair value	(1,580	)	(109	)
Fair Value at September 30, 2015	10,421		550

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at September 30, 2016 for Borrower Loans, Loans Held for Sale and Notes funded are presented in the following table (in thousands):



	Borrower Loans and Loans Held for Sale				Notes
Discount rate assumption:	7.59		%	*	7.59		%	*
Resulting fair value from:
100 basis point increase	$	311,509			$	310,760
200 basis point increase	308,426				307,680
Resulting fair value from:
100 basis point decrease	$	317,914			$	317,161
200 basis point decrease	321,244				320,488
Default rate assumption:	11.50		%	*	11.50		%	*
Resulting fair value from:
100 basis point increase	$	311,358			$	310,601
200 basis point increase	308,142				307,380
Resulting fair value from:
100 basis point decrease	$	318,009			$	317,264
200 basis point decrease	321,389				320,651

* Represents weighted average assumptions considering all credit grades.

Servicing Asset and Liability Fair Value Input Sensitivity:

The following table presents the estimated impact on Prosper Funding’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of September 30, 2016 (in thousands, except percentages).



	Servicing Assets		Servicing Liabilities
Market servicing rate assumptions	0.625	%	0.625	%
Resulting fair value from:
Market servicing rate increase to 0.65%	11,509		279
Market servicing rate decrease to 0.60%	13,311		228
Weighted average prepayment assumptions	21.06	%	21.06	%
Resulting fair value from:
Applying a 1.1 multiplier to prepayment rate	12,043		249
Applying a 0.9 multiplier to prepayment rate	12,507		258
Weighted average default assumptions	11.64	%	11.64	%
Resulting fair value from:
Applying a 1.1 multiplier to default rate	12,068		253
Applying a 0.9 multiplier to default rate	12,484		254

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.

8. Commitments and Contingencies

Operating Commitments

Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining three months of 2016 is $0.4 million. The minimum fee is $1.7 million, $1.7 million and $1.0 million for years 2017, 2018 and 2019 respectively.

Loan Purchase Commitments

Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase $16.5 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended September 30, 2016 and first business day of the quarter ended December 31, 2016. Prosper Funding will purchase these Borrower Loans within the first three business days of the quarter ended December 31, 2016.

Repurchase and Indemnification Contingency

Under the terms of the loan purchase agreements between Prosper Funding and investor members that participate in the Whole Loan Channel, Prosper Funding may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor member. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience. Prosper Funding recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at September 30, 2016 is $3,615 million. Prosper Funding had accrued $437 thousand and $460 thousand as of September 30, 2016 and December 31, 2015, respectively, in regard to this obligation.

9. Related Parties

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

Prosper Funding’s executive officers and directors who are not executive officers participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be related parties of Prosper Funding as of September 30, 2016 and December 31, 2015 are summarized below (in thousands):



	Aggregate Amount of Notes and Borrower Loans Purchased				Interest Earned on Notes and Borrower Loans
	Nine Months Ended September 30,				Nine Months Ended September 30,
Related Party	2016		2015		2016		2015
Executive officers and management	$	1,039	$	1,232	$	170	$	152
Directors (excluding executive officers and management)	—		—		—		—
Total	$	1,039	$	1,232	$	170	$	152



	Aggregate Amount of Notes and Borrower Loans Purchased				Interest Earned on Notes and Borrower Loans
	Three Months Ended September 30,				Three Months Ended September 30,
Related Party	2016		2015		2016		2015
Executive officers and management	$	245	$	386	$	62	$	53
Directors (excluding executive officers and management)	—		—		—		—
Total	$	245	$	386	$	62	$	53



	Note and Borrower Loan Balance as of
Related Party	September 30, 2016		December 31, 2015
Executive officers and management	$	1,966	$	2,173
Directors (excluding executive officers and management)	—		—
	$	1,966	$	2,173

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

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 Prosper’s Annual Report on Form 10-K 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” section and elsewhere in Prosper’s Annual Report on Form 10-K.

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 operation. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.

During the year ended December 31, 2015, our marketplace facilitated $3.7 billion in Borrower Loan originations, of which $3.5 billion were funded through our Whole Loan Channel, representing 95% of the total Borrower Loans originated through our marketplace during this period. In the three months ended September 30, 2016, our marketplace facilitated $311.8 million in Borrower Loan originations, of which $255.2 million were funded through our Whole Loan Channel, representing 82% of the total Borrower Loans originated through our marketplace during this period. In the nine months ended September 30, 2016, our marketplace facilitated $1.7 billion in Borrower Loan originations, of which $1.6 billion were funded through our Whole Loan Channel, representing 90% of the total Borrower Loans originated through our marketplace during this period. From inception through September 30, 2016, our marketplace facilitated $7.9 billion in Borrower Loan originations, of which $6.7 billion were funded through our Whole Loan Channel, representing 85% of the total Borrower Loans originated through our marketplace during this period.

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.

As discussed below, we saw reduced demand from investors who purchase Borrower Loans through the Whole Loan Channel during the second and third quarters of 2016. As a result, we experienced a decline in transaction fee revenue during this period and expect a decrease in transaction fee revenue in the fourth quarter of 2016 from the fourth quarter of 2015. Transaction fee revenues reached its lowest point for the year in July 2016, with transaction fee revenues increasing month over month in August and September 2016. Additionally, we expect transaction fee revenues to increase in the fourth quarter of 2016 from the third quarter of 2016. Finally, as described in note 14 of the financial statements, Prosper began a restructuring of its operations during the second quarter of 2016, which resulted in increased expenses during the nine months ended September 30, 2016 from the nine months ended September 30, 2015.

Results of Operations

Overview

The following table summarizes Prosper’s net loss for the three months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,
	2016			2015			$ Change		% Change
Total Net Revenue	$	23,951		$	58,629		(34,678	)	(59	)%
Total Expenses	41,294			62,437			(21,143	)	(34	)%
Net Loss Before Taxes	(17,343		)	(3,808		)	(13,535	)	355	%
Income Tax Expense	74			35			39		111	%
Net Loss	$	(17,417	)	$	(3,843	)	(13,574	)	353	%

Total net revenue for the three months ended September 30, 2016 decreased $34.7 million, a 59% decrease from the three months ended September 30, 2015, primarily due to decreased Borrower Loan originations, which decreased 71%. See below for an explanation of the decrease in origination volume. Total expenses for the three months ended September 30, 2016 decreased $21.1 million, a 34% decrease from the three months ended September 30, 2015, primarily due to a reduction in sales and marketing costs of $22.5 million. Net loss for the three months ended September 30, 2016 increased $13.6 million, primarily due to the decrease in our transaction fee revenue resulting from the decline in Borrower Loan originations during the period.

The following table summarizes Prosper’s net loss for the nine months ended September 30, 2016 and 2015 (in thousands):



	Nine Months Ended September 30,
	2016			2015			$ Change		% Change
Total Net Revenue	$	108,639		$	139,861		(31,222	)	(22	)%
Total Expenses	178,804			156,901			21,903		14	%
Net Loss Before Taxes	(70,165		)	(17,040		)	(53,125	)	312	%
Income Tax Expense	344			284			60		21	%
Net Loss	$	(70,509	)	$	(17,324	)	(53,185	)	307	%

Total net revenue for the nine months ended September 30, 2016 decreased $31.2 million, a 22% decrease from the nine months ended September 30, 2015, primarily due to decreases in transaction fee revenues and gain on sale of borrower loans due to the decrease in origination volume. Total expenses for the nine months ended September 30, 2016 increased $21.9 million, a 14% increase from the nine months ended September 30, 2015, primarily due to higher compensation costs as Prosper added more staff to support its anticipated business growth, additional facilities related expenses incurred in connection with expansion into Utah, Delaware and Israel, and restructuring costs of $14.2 million. Net loss for the nine months ended September 30, 2016 increased $53.2 million, due to lower revenues and the increased expenses.

Origination Volume

From inception through September 30, 2016, a total of 628,678 Borrower Loans, totaling $7.865 billion, were originated through Prosper’s marketplace.

During the third quarter ended September 30, 2016, 22,963 Borrower Loans totaling $311.8 million were originated through Prosper’s marketplace, compared to 79,457 Borrower Loans totaling $1.1 billion during the third quarter ended September 30, 2015. This represented a decrease of 71% in terms of both loan amounts and the number of loans.

The origination decreases experienced during the third quarter ended September 30 2016 are due to the fact that, beginning in the second quarter of the year, a number of our largest investors paused or significantly reduced their purchases of Borrower Loans. We believe these investors have paused or reduced Borrower Loan purchases because of an increase in their cost of capital; negative actions and publicity at competitors; and our limited use of investor rebates, which have become more prevalent in the industry.

Prosper is taking a number of actions to try to increase the amount of capital committed to make purchases through its marketplace, due to reduced investor demand. These actions include launching a new line of asset management products, improving the retail investor experience, and pursuing strategic transactions with large institutional investors. There is no assurance that these actions will result in significant additional capital available on the marketplace.

Revenue

The following table summarizes Prosper’s revenue for the three months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,
	2016			2015			$ Change		% Change
Operating Revenues
Transaction Fees, Net	$	14,086		$	46,842		(32,756	)	(70	)%
Servicing Fees, Net	7,079			4,652			2,427		52	%
Gain on Sale of Borrower Loans	761			4,263			(3,502	)	(82	)%
Other Revenues	973			2,229			(1,256	)	(56	)%
Total Operating Revenues	22,899			57,986			(35,087	)	(61	)%
Interest Income
Interest Income on Borrower Loans	11,735			10,280			1,455		14	%
Interest Expense on Notes	(10,636		)	(9,550		)	(1,086	)	11	%
Net Interest Income	1,099			730			369		51	%
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net	(47		)	(87		)	40		(46	)%
Total Revenues	23,951			58,629			(34,678	)	(59	)%

The following table summarizes Prosper’s revenue for the nine months ended September 30, 2016 and 2015 (in thousands):



	Nine Months Ended September 30,
	2016			2015			$ Change		% Change
Operating Revenues
Transaction Fees, Net	$	75,186		$	111,984		(36,798	)	(33	)%
Servicing Fees, Net	21,898			10,796			11,102		103	%
Gain on Sale of Borrower Loans	3,865			9,881			(6,016	)	(61	)%
Other Revenues	4,562			4,935			(373	)	(8	)%
Total Operating Revenues	105,511			137,596			(32,085	)	(23	)%
Interest Income
Interest Income on Borrower Loans	33,710			30,892			2,818		9	%
Interest Expense on Notes	(30,456		)	(28,561		)	(1,895	)	7	%
Net Interest Income	3,254			2,331			923		40	%
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net	(126		)	(66		)	(60	)	91	%
Total Revenues	108,639			139,861			(31,222	)	(22	)%

Transaction Fees, Net

Prosper earns a transaction fee upon the successful origination of all Borrower Loans facilitated through Prosper’s marketplace. Prosper receives payments from WebBank as compensation for the activities Prosper performs on behalf of WebBank. Prosper’s 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 decreased primarily due to lower origination volume through Prosper’s marketplace during the three months ended September 30, 2016. The average transaction fee (gross of fees retained by WebBank) was 4.80% and 4.57% of the principal amount of originated loans facilitated through Prosper’s marketplace for the three months ended September 30, 2016 and 2015, respectively. This increase was due to price increases implemented in the second quarter of 2016.

Transaction fees decreased primarily due to lower origination volume through Prosper’s marketplace during the nine months ended September 30, 2016. The average transaction fee (gross of fees retained by WebBank) was 4.54% and 4.54% of the principal amount of originated loans facilitated through Prosper’s marketplace for the nine months ended September 30, 2016 and 2015, respectively.

Servicing Fees, Net

Prosper earns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates us for the costs we incur in servicing the Borrower Loan, including managing payments from borrowers and payments to investors and maintaining investors’ account portfolios. Historically, the servicing fee has been generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has been set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The increase in servicing fees during the three and nine months ended September 30, 2016 was due to the increase in Borrower Loans being serviced as a result of the increase in sales of Borrower Loans through the Whole Loan Channel in the past year.

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 decrease was due to a decrease in volume of such sales and $0.6 million and $3.0 million of rebates offered to certain whole loan purchasers during the three and nine months ending September 30, 2016, respectively. No such rebates were offered in the comparative periods of 2015.

Other Revenue

Other revenues consist primarily of credit referral fees, where partner companies pay us an agreed upon amount for referrals of customers from our website. The decrease in other revenue for the three months ended September 30, 2016 was primarily the result of decreased traffic to existing partners. As described below, Prosper decreased its sales and marketing efforts in the three months ending September 30, 2016, which resulted in less traffic to the marketplace and as a result less traffic to our existing partners. The decrease in other revenue for the nine months ended September 30, 2016 was the result of reduced traffic to existing partners and was offset by $1.2 million that was earned in the period in relation to work performed for a BillGuard partner.

Interest Income on Borrower Loans and Interest Expense on Notes

Prosper recognizes interest income on Borrower Loans funded through the Note Channel using the accrual method based on the stated interest rate to the extent we believe it to be collectable. We record interest expense on the corresponding Notes based on the contractual interest rates. The interest rate charged on the Borrower Loans is generally 1% higher than the corresponding interest rate on the Note to compensate us for servicing the Borrower Loans.

Overall, the increase in net interest income for the periods above was primarily driven by the increase in volume of Borrower Loans funded through the Note Channel.

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net

The fair value of Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance, and discount rates. Loans held for sale are primarily comprised of Borrower Loans held for short durations and are valued using the same approach as the Borrower Loans held at fair value.

The following table summarizes the fair value adjustments for the three and nine months ended September 30, 2016 and 2015, respectively (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Borrower Loans	$	(7,028	)	$	(6,496	)	$	(19,962	)	$	(16,465	)
Loans held for sale	(2		)	(25		)	(2		)	(121		)
Notes	6,983			6,434			19,838			16,520
Total	$	(47	)	$	(87	)	$	(126	)	$	(66	)

Expenses

The following table summarizes Prosper’s expenses for the three months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,
	2016			2015		$ Change			% Change
Expenses
Origination and Servicing	$	7,633		$	8,357	(724		)	(9	)%
Sales and Marketing	9,391			31,844		(22,453		)	(71	)%
General and Administrative -Research and Development	6,353			4,803		1,550			32	%
General and Administrative - Other	18,387			17,433		954			5	%
Restructuring Charges	(470		)	—		(470		)	100	%
Total Expenses	$	41,294		$	62,437	$	(21,143	)	(34	)%

The following table summarizes Prosper’s expenses for the nine months ended September 30, 2016 and 2015 (in thousands):



	Nine Months Ended September 30,
	2016		2015		$ Change			% Change
Expenses
Origination and Servicing	$	26,850	$	22,335	4,515			20	%
Sales and Marketing	54,303		76,996		(22,693		)	(29	)%
General and Administrative -Research and Development	21,517		10,527		10,990			104	%
General and Administrative - Other	61,981		47,043		14,938			32	%
Restructuring Charges	14,153		—		14,153			100	%
Total Expenses	$	178,804	$	156,901	$	21,903		14	%

As of September 30, 2016, Prosper had 392 full-time employees compared to 535 full-time employees as of September 30, 2015. The following table reflects full-time employees as of September 30, 2016 and 2015 by department:



	September 30, 2016	September 30, 2015
Origination and Servicing	147	201
Sales and Marketing	36	105
General and Administrative - Research and Development	103	109
General and Administrative - Other	106	120
Total Headcount	392	535

Origination and Servicing

Origination and servicing costs consists primarily of salaries, benefits and stock-based compensation expense related to Prosper’s credit, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans. The decrease in the three months ending September 30, 2016 was primarily the result of a decrease in compensation costs of $0.6 million and a decrease in outsourced customer support costs of $0.8 million. The decrease in compensation costs was a result of the reduction in personnel as part of our May 2016 restructuring. These were offset by increased amortization costs for internal use software of $0.5 million.

The increase for the nine months ending September 30, 2016 was primarily due to an increase in personnel related expenses of $3.0 million, as in the first half of the period Prosper expanded its verification and customer support teams to support the larger number of loans that were serviced and to support an anticipated future increase in loan application and processing volumes. Additionally, Prosper incurred an additional $0.8 million in costs relating to data services for the Prosper Daily application and $0.5 million in increased amortization costs for internal use software. These increases were offset by a $1.0 million decrease in outsourced customer support costs during the period.

Sales and Marketing

Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations, and direct mail marketing, as well as the compensation expenses such as wages, benefits and stock based compensation for the employees who support these activities. For the three months ended September 30, 2016, the

decrease in expenses was largely due to decreased variable costs and a decrease in personnel as Prosper slowed its marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium. These decreases included a $8.2 million or 57% decrease in direct mailing costs as Prosper reduced the volume of its direct mail campaigns, a $9.5 million or 92% decrease in partnership costs as Prosper significantly reduced partnership activities and negotiated lower rates with existing partners, a $1.4 million or 85% decrease in online marketing costs as Prosper significantly reduced its efforts in this area and a $1.3 million or 41% decrease in compensation costs as Prosper significantly reduced its sales and marketing headcount with its restructuring, this included the closing of its Utah office which contained mainly sales employees.

For the nine months ended September 30, 2016, the decrease in expenses was largely due to decreased variable costs and a decrease in personnel as Prosper slowed its marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium. These decreases included a $0.7 million or 2% decrease in direct mailing costs as Prosper reduced the volume of its direct mail campaigns, a $20.0 million or 73% decrease in partnership costs as Prosper significantly reduced partnership activities and negotiated lower rates with existing partners and a $1.2 million or 32% decrease in online marketing costs as Prosper significantly reduced its efforts in this area. These reductions in expenses were offset by a $1.3 million or 16% increase in compensation costs resulting from Prosper's increased sales and marketing headcount during the first half of 2016 (the significant reductions in such headcount only occurred with the restructuring in May 2016).

Research and Development

Research and development costs consist primarily of salaries, benefits and stock-based compensation expense related to engineering and product development employees and related vendor costs. The increase for the three months ended September 30, 2016 was primarily due to an increase in stock based compensation costs due large grants to new employees who were granted options in late 2015 and due to additional expense as a result of the reprice that occurred in May 2016. The increase for the nine months ended September 30, 2016 was primarily due to an increase in compensation costs as employee levels in research and development were higher in 2016 before the restructuring that occurred in May 2016. The total increase in costs for the three and nine months ended September 30, 2016, respectively, is not as large as the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are amortized in origination and servicing. Prosper capitalized internal-use software and website development costs in the amount of $1.1 million and $2.0 million for the three months ended September 30, 2016 and 2015, respectively. Prosper capitalized internal-use software and website development costs in the amount of $4.6 million and $5.0 million for the nine months ended September 30, 2016 and 2015, respectively.

General and Administrative

General and administrative expenses consists primarily of salaries, benefits and stock-based compensation expense related to accounting and finance, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expense. The increase for the three months ended September 30, 2016 was primarily the result of an increase in stock based compensation expense of $0.9 million and depreciation of $1.5 million. These increases were offset by savings in professional fees of $0.4 million. The increase for the nine months ended September 30, 2016 was primarily due to an increase in personnel related expenses as Prosper increased its headcount during the second half of 2015 to support anticipated future growth, and an increase in facilities expenses as Prosper obtained additional space to support the increased headcount. These headcount levels were subsequently reduced as part of the restructuring that occurred in May 2016.

Restructuring Charges

Restructuring costs consist of personnel and facilities related costs related to the strategic restructuring of the business that Prosper announced on May 3, 2016. This restructuring includes the termination of employees in our Phoenix, Arizona and San Francisco, California locations; and the closing of our Salt Lake City, Utah location. Personnel costs include employee severance and benefits for the termination of 167 employees. Facilities charges include estimated losses on the sublease and lease termination costs for properties in Phoenix, Salt Lake City and San Francisco. For the three months ended September 30, 2016, Prosper recorded a gain on restructuring due to a favorable lease termination that was obtained that reversed a previous reserve and an favorable adjustment to estimated sublease income for another property's reserve.

Liquidity and Capital Resources

The following table summarizes Prosper’s cash flow activities for the three months ended September 30, 2016 and 2015 (in thousands):



	Nine Months Ended September 30,
	2016			2015
Net Loss	$	(70,509	)	$	(17,324	)
Net cash provided by (used in) operating activities	$	(47,522	)	$	2,623
Net cash used in investing activities	(23,280		)	(107,304		)
Net cash provided by financing activities	36,360			174,646
Net increase (decrease) in cash and cash equivalents	(34,442		)	69,965
Cash and cash equivalents at the beginning of the period	66,295			50,557
Cash and cash equivalents at the end of the period	$	31,853		$	120,522

Net cash decreased for the nine months ended September 30, 2016 primarily due to the $35.7 million loss, net of non-cash items, $6.7 million reduction in Accounts Payable and Accrued Liabilities, $10.0 million for purchase of Property and Equipment, an additional $6.5 million for investing activity restricted cash which includes $5 million in additional collateral for WebBank and a $3 million scheduled payment to reduce our settlement liability. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties, which is included in cash flow from operations along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans and $30.4 million of available for sale securities that have been converted into cash. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes. In the nine month ended September 30, 2015 cash provided by financing activities consisted primarily of $165 million raised through the issuance of New Series D preferred convertible shares, which was offset by $29.2 million paid to repurchase common stock from certain employees.

Prosper also has available for sale securities that are available for its liquidity needs. The fair value of securities available for sale as of September 30, 2016 was $42.8 million. As a result the total cash, cash equivalents and available for sale investments available to Prosper at September 30, 2016 for its liquidity needs was $74.6 million. At September 30, 2016, the available for sale securities included corporate debt securities, commercial paper, US treasury securities and agency bonds. All securities were rated investment grade (defined as a rating equivalent to a Moody’s rating of “Baa3” or higher, or a Standard & Poor’s rating of “BBB-” or higher) and there were no significant unrealized losses. These securities provided $0.1 million of interest income for the third quarter of 2016. These securities continue to be available to meet liquidity needs.

Income Taxes

Prosper recognizes benefits from uncertain tax positions only if it believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

Given Prosper’s history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for its net operating loss carry-forwards. Based on the weight of available evidence, which includes historical operating performance and the reported cumulative net losses in prior years, Prosper has recorded a full valuation allowance against its net deferred tax assets. The income tax expense relates to state income tax expense and the amortization of goodwill from the acquisition of PHL for tax purposes which gives rise to an indefinite-lived deferred tax liability.

Off-Balance Sheet Arrangements

As a result of retaining servicing rights on the sale of Borrower Loans, Prosper is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as Prosper is not the primary beneficiary.

Critical Accounting Policies

Certain of Prosper's accounting policies that involve a higher degree of judgment and complexity are discussed in Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Estimates in Prosper’s Annual Report on Form 10-K. There have been no significant changes to these critical accounting estimates during the first nine months of 2016.

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 Prosper Funding’s Annual Report on Form 10-K 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” section and elsewhere in Prosper Funding’s Annual Report on Form 10-K.

Prosper Funding was formed in the state of Delaware on February 17, 2012 as a limited liability company with its sole equity member being PMI. 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 implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI.

PFL formed PAH in November 2013 as a limited liability company with the sole equity member being PFL. PAH was formed to purchase certain Borrower Loans from PFL and, sell them to certain participants in the Whole Loan Channel.

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

As discussed below, Prosper Funding saw reduced listings on the marketplace as Prosper slowed down marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium. As a result, Prosper Funding experienced a decline in administration fee revenue-related party during this period and expects a decrease in administration fee revenue-related party in the fourth quarter of 2016 from the fourth quarter of 2015.

Results of Operations

Overview

The following table summarizes Prosper Funding’s net income for the three months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,
	2016		2015		$ Change			% Change
Total Net Revenue	$	14,230	$	26,397	$	(12,167	)	(46	)%
Total Expenses	13,959		19,269		(5,310		)	(28	)%
Net Income	$	271	$	7,128	$	(6,857	)	(96	)%

Total net revenue for the three months ended September 30, 2016 decreased $12.2 million, a 46% decrease from the three months ended September 30, 2015, primarily due to the reduced number of loan listings on the marketplace during the quarter, which resulted in decreased administration fee revenue. Total expenses for the three months ended September 30, 2016 decreased $5.3 million, a 28% decrease from the three months ended September 30, 2015, primarily due to lower corporate administration fees during the quarter.

The following table summarizes Prosper Funding’s net income for the nine months ended September 30, 2016 and 2015 (in thousands):



	Nine Months Ended September 30,
	2016		2015		$ Change			% Change
Total Net Revenue	$	56,321	$	63,146	$	(6,825	)	(11	)%
Total Expenses	53,721		45,464		8,257			18	%
Net Income	$	2,600	$	17,682	$	(15,082	)	(85	)%

Total net revenue for the nine months ended September 30, 2016 decreased $6.8 million, an 11% decrease from the nine months ended September 30, 2016, primarily due to a decrease in administration fee revenue. Total expenses for the nine months ended September 30, 2016 increased $8.3 million, an 18% increase from the nine months ended September 30, 2015, primarily due to higher corporate administration fees during the period.

Revenue

The following table summarizes Prosper Funding’s revenue for the three months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,
	2016			2015			$ Change		% Change
Revenues
Operating Revenues
Administration Fee Revenue - Related Party	$	5,530		$	16,544		(11,014	)	(67	)%
Servicing Fees, Net	7,026			4,408			2,618		59	%
Gain on Sale of Borrower Loans	761			4,263			(3,502	)	(82	)%
Other Revenues	30			561			(531	)	(95	)%
Total Operating Revenues	13,347			25,776			(12,429	)	(48	)%
Interest Income on Borrower Loans	11,566			10,258			1,308		13	%
Interest Expense on Notes	(10,636		)	(9,550		)	(1,086	)	11	%
Net Interest Income	930			708			222		31	%
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net	(47		)	(87		)	40		(46	)%
Total Revenue	$	14,230		$	26,397		(12,167	)	(46	)%

The following table summarizes Prosper Funding’s revenue for the nine months ended September 30, 2016 and 2015 (in thousands):



	Nine Months Ended September 30,
	2016			2015			$ Change		% Change
Revenues
Operating Revenues
Administration Fee Revenue - Related Party	$	27,878		$	40,430		(12,552	)	(31	)%
Servicing Fees, Net	21,650			9,945			11,705		118	%
Gain on Sale of Borrower Loans	3,865			9,881			(6,016	)	(61	)%
Other Revenues	448			557			(109	)	(20	)%
Total Operating Revenues	53,841			60,813			(6,972	)	(11	)%
Interest Income on Borrower Loans	33,062			30,960			2,102		7	%
Interest Expense on Notes	(30,456		)	(28,561		)	(1,895	)	7	%
Net Interest Income	2,606			2,399			207		9	%
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net	(126		)	(66		)	(60	)	91	%
Total Revenue	$	56,321		$	63,146		(6,825	)	(11	)%

Administration Fee Revenue - Related Party

Prosper Funding primarily generates revenue through license fees it earns under its Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the marketplace for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement. Effective July 1, 2016 the Administration Agreement was amended. The amendments included amending the License Fee to include a fixed monthly fee alongside a reduce variable fee and the introduction of a Rebates Fee related to rebates given to investors. The decreases in the administration fee revenue were the result of a reduction in the number of loan listings on the marketplace during 2016. The decrease in listings was the result of Prosper reducing marketing spending to reduce demand and maintain marketplace equilibrium.

Servicing Fee Revenue, Net

Prosper Funding earns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates Prosper Funding for the costs it incurs in servicing these Borrower Loans, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Historically, the servicing fee has been generally set at 1% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. For loans sold after August 1, 2016, the servicing fee has been set at 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The increase in servicing fees was due to the increase in Borrower Loans being serviced as a result of the increase in loan originations in the past year.

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 decrease was due to a decrease in volume of such sales and rebates issued to certain whole loan purchasers in the second and third quarters of 2016, totaling $0.6 million and $3.1 million in the three and nine months ending September 30, 2016, respectively.

Other Revenue

Other revenue consists primarily of fees earned from assisting whole loan purchasers with securitizations of their holdings. The decrease is due to the fees earned by Prosper Funding from assisting whole loan purchasers with securitizations. Less securitization fees were earned in the nine months ended September 30, 2016 due to a smaller dollar amount of loans being securitized during the period.

Interest Income on Borrower Loans and Interest Expense on Notes

Prosper Funding recognizes interest income on Borrower Loans funded through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes it to be collectable. Prosper Funding records interest expense on the corresponding Notes based on the contractual interest rates. The interest rate charged on a Borrower Loan is generally 1% higher than the interest rate on the corresponding Notes to compensate Prosper Funding for servicing the Borrower Loan. This is recorded in interest income.

Overall, the increase in net interest income for the periods above was primarily driven by the increase in volume of Borrower Loans funded through the Note Channel.

Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net

The fair value of Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance, and discount rates. Loans Held for Sale are primarily comprised of Borrower Loans held for short durations and are recorded using the same approach as the Borrower Loans held at fair value.

The following table summarizes the fair value adjustments for the three and nine months ended September 30, 2016 and 2015, respectively (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Borrower Loans	$	(7,028	)	$	(6,496	)	$	(19,962	)	$	(16,465	)
Loans held for sale	$	(2	)	$	(25	)	$	(2	)	$	(121	)
Notes	$	6,983		$	6,434		$	19,838		$	16,520
Total	$	(47	)	$	(87	)	$	(126	)	$	(66	)

Expenses

The following table summarizes Prosper Funding’s expenses for the three months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,
	2016		2015		$ Change		% Change
Expenses
Administration Fee Expense – Related Party	$	12,243	$	18,236	(5,993	)	(33	)%
Servicing	1,374		675		699		104	%
General and Administrative	342		358		(16	)	(4	)%
Total Expenses	$	13,959	$	19,269	(5,310	)	(28	)%

The following table summarizes Prosper Funding’s expenses for the nine months ended September 30, 2016 and 2015 (in thousands):



	Nine Months Ended September 30,
	2016		2015		$ Change	% Change
Expenses
Administration Fee Expense – Related Party	$	48,500	$	41,615	6,885	17	%
Servicing	4,139		2,946		1,193	40	%
General and Administrative	1,082		903		179	20	%
Total Expenses	$	53,721	$	45,464	8,257	18	%

Administration Fee Expense - Related Party

Pursuant to an 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 Corporate Administration Fee, a fee for each Borrower Loan originated through the marketplace, a proportion of all servicing fees collected by or on behalf of Prosper Funding, and all nonsufficient funds fees collected by or on behalf of Prosper Funding. Effective July 1, 2016 the Administration Agreement was amended. The amendments included amending the Corporate Administration Fee to a fixed amount of $500,000 per month, increasing the Loan Platform Servicing Fee to $150 per Borrower Loan funded and reducing the Loan and Note Servicing Fee to 62.5% of all servicing fee collected by or on behalf of the Company. The decrease in fees for the three months ended September 30, 2016 was due to lower fees paid on the origination of borrower loans due to the decrease in origination volume. The increase for the nine months ended September 30, 2016 in the administration fee expense was primarily due to a higher corporate administration fee and higher servicing fees which increased fees owed to PMI by Prosper Funding.

Servicing

Servicing costs consists primarily of vendor costs and depreciation of internal use software costs associated with servicing Borrower Loans. The increase was primarily due to an increase in depreciation costs and fraud losses.

General and Administrative

General and administrative costs consist primarily of bank service charges and professional fees. The increase for the nine months ended September 30, 2016 was primarily due to an increase in outsourced collection fees resulting from enhancements Prosper Funding made to its collection process on delinquent loans that it services.

Liquidity and Capital Resources

The following table summarizes Prosper Funding’s cash flow activities for the nine months ended September 30, 2016 and 2015 (in thousands):



	Nine Months Ended September 30,
	2016			2015
Net Income	$	2,600		$	17,682
Net cash provided by operating activities	$	7,845		$	26,881
Net cash used in investing activities	(44,719		)	(35,620		)
Net cash provided by (used in) financing activities	36,124			(4,970		)
Net decrease in cash and cash equivalents	(750		)	(13,709		)
Cash and cash equivalents at the beginning of the period	15,026			23,777
Cash and cash equivalents at the end of the period	$	14,276		$	10,068

The net decrease in Cash for the nine months ended September 30, 2016, primarily due to purchases of property and equipment of $5.4 million. Net cash used in investing primarily represents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans sold to unrelated third parties which is included in cash flow from operations along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes.

Income Taxes

Prosper Funding incurred no income tax expense for the three months ended September 30, 2016 and 2015. Prosper Funding is a US disregarded entity for income tax purposes and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses and inability to achieve profitable operations, it is difficult to accurately forecast how Prosper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.

Off-Balance Sheet Arrangements

As a result of retaining servicing rights on the sale of Borrower Loans, Prosper Funding is a variable interest holder in certain special purposes entities that purchase these Borrower Loans. None of these special interest entities are consolidated as Prosper Funding is not the primary beneficiary. Otherwise as of September 30, 2016, Prosper Funding has not engaged in any off-balance sheet financing activities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Prosper Marketplace, Inc.

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

Because balances, interest rates and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.

The fair values of Borrower Loans, Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.

Prosper had cash and cash equivalents of $31.9 million as of September 30, 2016, and $66.3 million as of December 31, 2015. These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly

liquid marketable securities consisting primarily of money market funds, commercial paper, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, Prosper believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will moderately increase the interest income earned on these cash balances.

Interest Rate Sensitivity

Prosper holds available for sale investments. The fair value of Prosper’s available for sale investment portfolio was $42.8 million and $73.2 million as of September 30, 2016 and December 31, 2015, respectively. These investments consisted of corporate debt securities, commercial paper, U.S. agency bonds, U.S. Treasury securities and short term bonds. To mitigate the risk of loss, Prosper’s investment policy and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns. To manage this risk, Prosper limits and monitors maturities, credit ratings, and concentrations within the investment portfolio. Changes in U.S. interest rates affect the interest earned on Prosper’s available for sale investments and the market value of those investments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $0.3 million in the fair value of Prosper’s available for sale investments as of September 30, 2016, and of approximately $0.6 million in the fair value of Prosper’s available for sale investments as of December 31, 2015. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $0.2 million in the fair value of Prosper’s available for sale investments as of September 30, 2016, and of approximately $0.6 million in the fair value of Prosper’s available for sale investments as of December 31, 2015. Any realized gains or losses resulting from such interest rate changes would only be recorded if Prosper sold the investments prior to maturity and the investments were not considered other-than-temporarily impaired.

Prosper Funding LLC

As a smaller reporting company, Prosper Funding is not required to provide the information required under this Item 3.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Registrants’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including to each of the Registrant’s Principal Executive Officer (PEO) and the Principal Financial Officer (PFO), to allow timely decisions regarding required disclosures. The management of each Registrant, with the participation of such Registrant’s PEO and PFO, has evaluated the effectiveness of such Registrant’s disclosure controls and procedures as of September 30, 2016. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of September 30, 2016.

Changes in Internal Control Over Financial Reporting

There were no changes in either Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three months ended September 30, 2016, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Colchis Arbitration

PMI, PFL and Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which PMI and PFL agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of the Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis.

On November 17, 2016, PMI, PFL and Colchis entered into a Settlement and Release Agreement, pursuant to which Colchis has agreed to terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a $9 million cash payment by PMI and an agreement by PMI to issue a warrant to purchase shares of a new series of preferred stock representing 7% of PMI’s capitalization on a fully diluted basis as of the date of the issuance of the warrant (the “New Series”) for $.01 per share (the “Equity Payment”). PMI’s obligation to make the Equity Payment is subject to PMI obtaining the requisite stockholder approval.

Item 1A. Risk Factors

You should carefully consider the information in this Quarterly Report on Form 10-Q and the condensed consolidated financial statements and related notes, and "Part I - Item 1A - Risk Factors" in our Annual Report on Form 10-K when evaluating our business.

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

None.

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 and 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 accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	PROSPER MARKETPLACE, INC.
	PROSPER FUNDING LLC

Date: November 17, 2016	/s/ Aaron Vermut
	Aaron Vermut
	Chief Executive Officer of Prosper Marketplace, Inc.
	Chief Executive Officer of Prosper Funding LLC
	(Principal Executive Officer)

Date: November 17, 2016	/s/ David Kimball
	David Kimball
	Chief Financial Officer of Prosper Marketplace, Inc.
	Treasurer of Prosper Funding LLC (Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX



Exhibit Number		Exhibit Description

3.1		Fifth Amended and Restated Limited Liability Company Agreement of PFL, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of the Post-Effective Amendment No. 3 to the Registration Statement on Form S-1, filed October 23, 2013 by PFL and PMI)

3.2		Amended and Restated Certificate of Incorporation of PMI, as further amended on May 31, 2016 (incorporated by reference to Exhibit 3.2 of PMI's and PFL's Form 10-Q, filed on August 15, 2016)

3.3		PFL Certificate of Formation (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1/A, filed April 23, 2012 by PFL and PMI)

3.4		Bylaws of PMI, as amended by an Amendment No. 1 dated February 15, 2016 (incorporated by reference to Exhibit 3.2 of PMI's and PFL's Form 10-Q, filed on August 15, 2016)

4.1		Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5)

4.2		Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4)

4.3		Supplemental Indenture, dated January 22, 2013, between PMI, PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)

4.4		Indenture, dated June 15, 2009, between PMI and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed June 26, 2009)

4.5		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)

10.1		Form of PFL Borrower Registration Agreement

10.2		Form of PFL Investor Registration Agreement (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Form 10-Q filed on August 15, 2016)

10.3		Amendment No. 2 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Form 10-Q filed on August 15, 2016)

10.4		Asset Sale Agreement, dated July 1, 2016, between PFL and WebBank (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K filed on July 8, 2016)

10.5		Marketing Agreement, dated July 1, 2016, between PMI and WebBank (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K filed on July 8, 2016)

10.6		Stand By Purchase Agreement, dated July 1, 2016, between PMI and WebBank (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Current Report on Form 8-K filed on July 8, 2016)

10.7		Amendment No. 3 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc., dated as of November 8, 2016 and made effective as of July 1, 2016

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

31.3		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.



31.4		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

32.2		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

101.INS		XBRL Instance Documents

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		Taxonomy Extension Calculation Linkbase Document

101.LAB		Taxonomy Extension Label Linkbase Document

101.PRE		Taxonomy Extension Presentation Linkbase Document

101.DEF		Taxonomy Extension Definition Linkbase Document

Attached files

PROSPER MARKETPLACE, INC Reports

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