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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 March 31, 2020
Commission
File Number
Exact Name of Registrant as Specified in its Charter
I.R.S. Employer
Identification Number
333-179941-01
333-204880
333-225797-01
PROSPER MARKETPLACE, INC.
a Delaware corporation
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5400
73-1733867
333-179941
333-204880-01
333-225797
PROSPER FUNDING LLC
a Delaware limited liability company
221 Main Street, 3rd Floor
San Francisco, CA 94105
Telephone: (415) 593-5400
45-4526070
Securities registered pursuant to Section 12(b) of the Act:
RegistrantTitle of Each ClassName of Each Exchange on Which Registered
Prosper Marketplace, Inc.NoneNone
Prosper Funding LLCNoneNone

Securities registered pursuant to Section 12(g) of the Act:
RegistrantTitle of Each ClassName of Each Exchange on Which Registered
Prosper Marketplace, Inc.NoneNone
Prosper Funding LLCNoneNone

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Prosper Marketplace, Inc.
Yes x No ¨
Prosper Funding LLC
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Prosper Marketplace, Inc.
Yes x No
Prosper Funding LLC
Yes x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large
Accelerated
Filer
Accelerated
Filer
Non-accelerated Filer
Smaller
Reporting
Company
Emerging Growth Company
Prosper Marketplace, Inc.
x
Prosper Funding LLC
x
1



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Prosper Marketplace, Inc.
Yes No x
Prosper Funding LLC
Yes No x
Prosper Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.
As of May 12, 2020, there were 68,455,641 shares of Prosper Marketplace, Inc. common stock outstanding. Prosper Funding LLC does not have any common stock outstanding.
THIS COMBINED FORM 10-Q IS SEPARATELY FILED BY PROSPER MARKETPLACE, INC. AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.

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TABLE OF CONTENTS
 
Page No.
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
Except as the context requires otherwise, as used herein, “Registrants” refers to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “we,” “us,” “our,” “Prosper,” and the “Company” refer to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. (“BillGuard”), a Delaware corporation, Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, Prosper Warehouse I Trust (“PWIT”), a Delaware statutory trust, Prosper Warehouse II Trust (“PWIIT”), a Delaware statutory trust, Prosper Marketplace Issuance Trust, Series 2019-1 (“PMIT 2019-1”), a Delaware statutory trust, Prosper Marketplace Issuance Trust, Series 2019-2 (“PMIT 2019-2”), a Delaware statutory trust and Prosper Marketplace Issuance Trust, Series 2019-4 (“PMIT 2019-4”), a Delaware statutory trust, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis. In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” Investors currently invest in Borrower Loans through two channels: (i) the “Note Channel,” which allows investors to purchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows accredited and institutional investors to purchase Borrower Loans in their entirety directly from PFL. The Notes available to Note Channel investors are distinguishable from notes held by certain third party investors pursuant to Prosper’s securitization transactions, which are referred to herein as “Notes Issued by Securitization Trust.” Finally, although historically the Company has referred to investors as “lender members,” PFL calls them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace.
3


Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, PFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of their respective managements, expressed in good faith and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding Borrower Loans;
our ability to attract potential borrowers and investors to our marketplace;
the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;
our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
credit risks posed by the credit worthiness of borrowers and the effectiveness of our credit rating systems;
potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;
the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;
our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
our compliance with applicable regulations and regulatory developments or court decisions affecting our business;
potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the loans originated through our marketplace;
the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;
the impact of the coronavirus disease 2019 (“COVID-19”) pandemic on our business, results of operations, financial condition and future prospects;
the lack of a public trading market for the Notes and the current lack of any trading platform on which investors can resell the Notes;
the federal income tax treatment of an investment in the Notes and the PMI Management Rights; and
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of the platform or adversely impact our ability to service Borrower Loans.
There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does occur, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” sections of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019 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.
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Where You Can Find More Information
The following filings are available for download free of charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. Our SEC filings are also available to the public on the SEC’s website at www.sec.gov. The information contained on our website is not incorporated into this Quarterly Report on Form 10-Q.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Prosper Marketplace, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except for share and per share amounts)
March 31, 2020December 31, 2019
Assets
Cash and Cash Equivalents$52,829  $64,635  
Restricted Cash (1)141,504  155,773  
Accounts Receivable (1)1,032  1,695  
Loans Held for Sale, at Fair Value (1)153,236  142,026  
Borrower Loans, at Fair Value (1)522,404  634,019  
Property and Equipment, Net31,369  31,296  
Prepaid and Other Assets (1)5,480  5,694  
Servicing Assets11,742  12,602  
Goodwill36,368  36,368  
Intangible Assets, Net664  720  
Total Assets$956,628  $1,084,828  
Liabilities, Convertible Preferred Stock and Stockholders' Deficit
Accounts Payable and Accrued Liabilities$14,297  $19,937  
Payable to Investors87,928  101,092  
Notes, at Fair Value225,491  244,171  
Notes Issued by Securitization Trust (1)
286,296  347,662  
Certificates Issued by Securitization Trust, at Fair Value (1)
35,316  52,168  
Warehouse Lines (1)154,388  131,583  
Other Liabilities20,184  21,726  
Convertible Preferred Stock Warrant Liability94,547  149,996  
Total Liabilities918,447  1,068,335  
Commitments and Contingencies (see Note 17)
Convertible Preferred Stock – $0.01 par value; 444,760,848 shares authorized as of March 31, 2020 and December 31, 2019; 209,613,570 issued and outstanding as of March 31, 2020 and December 31, 2019. Aggregate liquidation preference of $370,456 as of March 31, 2020 and December 31, 2019.
322,748  322,748  
Stockholders' Deficit
Common Stock – $0.01 par value; 625,000,000 shares authorized; 69,391,576 shares issued and 68,455,641 shares outstanding, as of March 31, 2020; 69,387,836 shares issued and 68,451,901 shares outstanding, as of December 31, 2019.
208  208  
Additional Paid-In Capital151,974  151,416  
Less: Treasury Stock(23,417) (23,417) 
Accumulated Deficit(413,332) (434,462) 
Total Stockholders' Deficit(284,567) (306,255) 
Total Liabilities, Convertible Preferred Stock and Stockholders' Deficit$956,628  $1,084,828  
(1) Includes amounts in consolidated variable interest entities (VIEs) presented separately in the table below.
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The following table presents the assets and liabilities of consolidated variable interest entities (VIEs), which are included in the condensed consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. See Note 6, Securitizations, and Note 10, Debt, to our Notes to Condensed Consolidated Financial Statements for additional information.
March 31, 2020December 31, 2019
Assets of consolidated VIEs, included in total assets above
Restricted Cash$39,958  $39,118  
Accounts Receivable
  73  
Loans Held for Sale, at Fair Value153,236  142,026  
Borrower Loans, at Fair Value294,745  388,882  
Prepaid and Other Assets2,705  2,928  
Total assets of consolidated variable interest entities$490,644  $573,027  
Liabilities of consolidated VIEs, included in total liabilities above
Notes Issued by Securitization Trust$286,296  $347,662  
Certificates Issued by Securitization Trust, at Fair Value35,316  52,168  
Warehouse Lines154,388  131,583  
Total liabilities of consolidated variable interest entities$476,000  $531,413  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Prosper Marketplace, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except for share and per share amounts)
Three Months Ended March 31,
20202019
Revenues
Operating Revenues
Transaction Fees, Net$20,413  $26,294  
Servicing Fees, Net6,057  6,202  
Gain on Sale of Borrower Loans1,744  2,697  
Fair Value of Warrants Vested on Sale of Borrower Loans  (9,747) 
Other Revenue1,012  1,036  
Total Operating Revenues29,226  26,482  
Interest Income
Interest Income on Borrower Loans and Loans Held for Sale27,644  18,428  
Interest Expense on Financial Instruments(16,683) (13,120) 
Net Interest Income10,961  5,308  
Change in Fair Value of Financial Instruments, Net(36,942) (1,713) 
Total Net Revenue3,245  30,077  
Expenses
Origination and Servicing8,446  8,161  
Sales and Marketing11,242  16,341  
General and Administrative18,162  18,768  
Restructuring Charges, Net  82  
Change in Fair Value of Convertible Preferred Stock Warrants(55,449) 10,058  
Other Income, Net(320) (648) 
Total Expenses(17,919) 52,762  
Net Income (Loss) Before Taxes21,164  (22,685) 
Income Tax Expense34  29  
Net Income (Loss)$21,130  $(22,714) 
Less: Net Income Allocated to Participating Securities(15,755)   
Net Income (Loss) Attributable to Common Stockholders$5,375  $(22,714) 
Net Income (Loss) Per Share – Basic$0.08  $(0.32) 
Net Income (Loss) Per Share - Diluted$0.02  $(0.32) 
Weighted-Average Shares – Basic68,454,103  70,487,006  
Weighted-Average Shares – Diluted281,955,876  70,487,006  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Prosper Marketplace, Inc.
Condensed Consolidated Statements of Other Comprehensive Loss (Unaudited)
(in thousands)
Three Months Ended March 31,
20202019
Net Income (Loss)$21,130  $(22,714) 
Other Comprehensive Income
Change in Net Unrealized Gain on Available for Sale Investments, at Fair Value
  10  
Other Comprehensive Income, Before Tax  10  
Income Tax Effect
    
Other Comprehensive Income, Net of Tax  10  
Comprehensive Income (Loss), Net of Tax$21,130  $(22,704) 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Prosper Marketplace, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (Unaudited)
(in thousands, except for share amounts)


 Convertible Preferred StockCommon StockTreasury Stock
Additional
Paid-In
Capital
Accumulated Other Comprehensive Income
Accumulated
Deficit
Total
 SharesAmountSharesAmountSharesAmount
Balance as of January 1, 2020209,613,570  $322,748  73,629,136  $208  (5,177,235) $(23,417) $151,416  $—  $(434,462) $(306,255) 
Exercise of vested stock options—  —  3,740  —  —  —  1  —  —  1  
Stock-based Compensation Expense—  —  —  —  —  —  557  —  —  557  
Net Income—  —  —  —  —  —  —  —  21,130  21,130  
Balance as of March 31, 2020209,613,570  $322,748  73,632,876  $208  (5,177,235) $(23,417) $151,974  $—  $(413,332) $(284,567) 
Convertible Preferred StockCommon StockTreasury StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive IncomeAccumulated
Deficit
Total
SharesAmountSharesAmountSharesAmount
Balance as of January 1, 2019214,637,925  $323,793  75,652,445  $229  (5,177,235) $(23,417) $145,486  $(13) $(420,751) $(298,466) 
Exercise of vested stock options—  —  16,085  —  —  —  4  —  —  4  
Stock-based Compensation Expense—  —  —  —  —  —  1,714  —  —  1,714  
Change in net unrealized loss on available for sale investments, at fair value—  —  —  —  —  —  —  10  —  10  
Net Loss—  —  —  —  —  —  —  —  (22,714) (22,714) 
Balance as of March 31, 2019214,637,925  $323,793  75,668,530  $229  (5,177,235) $(23,417) $147,204  $(3) $(443,465) $(319,452) 

The accompanying notes are an integral part of these consolidated financial statements.
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Prosper Marketplace, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended March 31,
20202019
Cash flows from Operating Activities:
Net Income (Loss)$21,130  $(22,714) 
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities:
Change in Fair Value of Financial Instruments, Net36,938  2,214  
Depreciation and Amortization2,006  1,870  
Amortization of Operating Lease Right-of-use Asset901  809  
Gain on Sales of Borrower Loans(1,974) (2,742) 
Change in Fair Value of Servicing Rights2,834  3,246  
Stock-Based Compensation Expense505  1,614  
Fair Value of Warrants Vested on Sale of Borrower Loans  9,747  
Change in Fair Value of Convertible Preferred Stock Warrants(55,449) 10,058  
Other, Net1,073  (252) 
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value(399,550) (490,855) 
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value392,244  464,660  
Accounts Receivable663  4,132  
Prepaid and Other Assets214  (701) 
Accounts Payable and Accrued Liabilities(5,151) (2,167) 
Payable to Investors(13,164) (9,862) 
Other Liabilities(1,496) (679) 
Net Cash Used in Operating Activities(18,276) (31,622) 
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value(41,301) (44,225) 
Principal Payments of Borrower Loans Held at Fair Value80,928  45,155  
Purchases of Property and Equipment(3,362) (2,830) 
Maturities of Available for Sale Investments  18,010  
Net Cash Provided by Investing Activities36,265  16,110  
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value40,575  44,939  
Payments of Notes Held at Fair Value(40,587) (44,117) 
Principal Payments on Notes Issued by Securitization Trust
(61,969) (6,766) 
Principal Payments on Certificates Issued by Securitization Trust(4,833) (1,133) 
Proceeds from Securitization Issuance  1,177  
Proceeds from Warehouse Lines22,749  31,751  
Payment for Debt Issuance Costs(4,417) 
Proceeds from Exercise of Warrants and Stock Options1  5  
Net Cash (Used in) Provided by Financing Activities(44,064) 21,439  
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash(26,075) 5,927  
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period220,408  207,059  
Cash, Cash Equivalents and Restricted Cash at End of the Period$194,333  $212,986  
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest$15,993  $13,295  
Non-Cash Investing Activity - Accrual for Property and Equipment, Net218  293  
Non-Cash Financing Activity - Issuance of Securitization Notes and Certificates  191,591  
Non-Cash Financing Activity - Derecognition of Warehouse Line debt  (100,422) 
Reconciliation to Amounts on Consolidated Balance Sheets
Cash and Cash Equivalents$52,829  $64,188  
Restricted Cash141,504  148,798  
Total Cash, Cash Equivalents and Restricted Cash$194,333  $212,986  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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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 PMI, “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019. The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
The preparation of Prosper’s condensed consolidated financial statements and related disclosures in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in Prosper’s financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions.
The accompanying interim condensed consolidated financial statements include the accounts of PMI, its wholly-owned subsidiaries and consolidated variable interest entities (“VIEs”). All intercompany balances have been eliminated in consolidation.
Securitization Notes are notes held by certain third party investors pursuant to Prosper’s securitization transactions, and are distinguishable from the borrower payment dependent Notes available to investors through our Note Channel.
2. Summary of Significant Accounting Policies
Prosper’s significant accounting policies are included in Note 2, Summary of Significant Accounting Policies, in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no changes to these accounting policies during the first three months of 2020 unless noted below.
Fair Value Measurements
Financial instruments measured at fair value consist principally of Borrower Loans, Loans Held for Sale, Servicing Assets, Notes, Certifications Issued by Securitization Trust and Convertible Preferred Stock Warrant Liability. The estimated fair values of other financial instruments, including Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short-term nature. The estimated fair values of Notes Issued by Securitization Trust and Warehouse Lines do not approximate their carrying values due primarily to differences in the stated and market rates associated with these instruments.
Refer to Note 7 for additional fair value disclosures.
Restricted Cash
Restricted Cash consists primarily of cash deposits, money market funds and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors have on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.
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Borrower Loans, Loans Held for Sale, Notes and Certificates Issued by Securitization Trust
Borrower Loans are funded either through the Note Channel or through the Whole Loan Channel. Through the Note Channel, Prosper purchases Borrower Loans from WebBank, then issues Notes and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans funded and Notes issued through the Note Channel are carried on Prosper’s condensed consolidated balance sheets as assets and liabilities, respectively.
In 2019, Prosper began refinancing the purchase of Borrower Loans through the Whole Loan Channel through securitization transactions, which issue senior notes, risk retention interests, and residual certificates. Associated securitization trusts are deemed consolidated VIEs, and as a result the Borrower Loans held in the securitization trusts are included in “Borrower Loans, at Fair Value”, senior notes sold to third party investors in “Notes Issued by Securitization Trust”, and the risk retention interest and residual certificates held by third party investors in “Certificates Issued by Securitization Trust, at Fair Value” in the Consolidated Balance Sheets. Refer to Note 6, Securitization for additional disclosures.
Prosper uses Warehouse Lines to purchase Loans Held for Sale that may be subsequently contributed to securitization transactions or sold to investors. Loans Held for Sale are included in “Loans Held for Sale, at Fair Value” in the Consolidated Balance Sheets. See Note 10, Debt for more details on Warehouse Lines.
Borrower Loans and Loans Held for Sale are purchased from WebBank. Prosper places Borrower Loans and Loans Held for Sale on non-accrual status when they are 120 days past due. When a loan is placed on non-accrual status, Prosper stops accruing interest and reverses all accrued but unpaid interest as of such date. Additionally, Prosper charges-off Borrower Loans and Loans Held for Sale when they are 120 days past due. The fair value of loans 120 or more days past due generally consists of the expected recovery from debt sales in subsequent periods.
Prosper has elected the fair value option for Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust. Changes in fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of Notes due to the borrower payment-dependent design of the Notes. Changes in fair value of Borrower Loans held in consolidated securitization trusts are partially offset by changes in fair value of the Certificates Issued by Securitization Trust. Changes in fair value of Loans Held for Sale are recorded through Proper's earnings and Prosper collects interest on Loans Held for Sale. Changes in fair value of Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust are included in “Change in Fair Value of Financial Instruments, Net” on the Consolidated Statements of Operations.
Prosper primarily uses a discounted cash flow model to estimate the fair value of Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust. The key assumptions used in the valuation include default rates and prepayment rates derived primarily from historical performance and discount rates based on estimates of the rates of return that investors would require when investing in financial instruments with similar characteristics.
Leases
Management determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are included on the Consolidated Balance Sheets in Property and Equipment, Net and in Other Liabilities, respectively. For certain leases with original terms of twelve months or less, PMI recognizes the lease expense as incurred and does not recognize ROU assets and lease liabilities.
If a contract contains a lease, management evaluates whether it should be classified as an operating or finance lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of PMI's leases do not provide an implicit rate, management uses an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The operating lease ROU assets are evaluated for impairment utilizing the same impairment model used for Property and Equipment..

Consolidation of Variable Interest Entities
The determination of whether to consolidate a VIE in which we have a variable interest requires a significant amount of analysis and judgment regarding whether we are the primary beneficiary of a VIE due to our holding a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The
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determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support and (ii) whether a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity.
Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.
Recent Accounting Pronouncements
Accounting Standards Adopted In The Current Period
In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which is effective for interim and annual periods beginning after December 15, 2019. Prosper adopted the standard in the first quarter of 2020. For loans accounted for at amortized cost, the guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. Because Prosper accounts for Borrower Loans at fair value through net income there was no impact on Prosper loan portfolios upon adoption. For certain available for sale investments, the guidance requires recognition of expected credit losses through recording an allowance for credit losses. The recognition of this allowance is limited to the difference between the security’s amortized cost basis and fair value. The amendments to the available for sale debt securities impairment model did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Prior to ASU No. 2017-04, the goodwill impairment test was a two-step assessment, if indicators of impairment existed. The standard eliminates Step 2 from the goodwill impairment test, which requires a hypothetical purchase price allocation. Instead, entities will record a goodwill impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Prosper adopted the guidance on a prospective basis in the first quarter of 2020, and there was no impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. Prosper adopted the guidance in the first quarter of 2020. The guidance only affects disclosures in the notes to the consolidated financial statements and it had no effect on Prosper’s balance sheet or statement of operations.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year and early adoption is permitted. The Company adopted the new guidance in the first quarter of 2020, and will prospectively capitalize all eligible costs related to cloud computing arrangements starting January 1, 2020. There was, however, no impact on the Company’s consolidated financial statements for the first quarter of 2020.

Accounting Standards Issued, to be Adopted by the Company in Future Periods
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions related to the incremental approach for intraperiod tax allocation, the requirement to recognize or derecognize deferred tax liabilities related to equity method investments that are also foreign subsidiaries and the methodology for calculating income taxes in an interim period. The guidance also clarifies and simplifies other aspects of the accounting for income taxes, including a modification in the guidance for franchise taxes that are partially based on income and recognizing deferred taxes for a subsequent step-up in the
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tax basis of goodwill. This ASU is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact this new standard will have on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional expedients and exceptions for applying GAAP on contract modifications and hedge accounting, in order to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative referenced rates, such as the Secured Overnight Financing Rate. This ASU can be adopted after its issuance date through December 31, 2022. The Company is currently evaluating the impact reference rate reform will have on its contracts that reference LIBOR in order to determine whether to adopt this guidance.
3. Property and Equipment, Net
Property and Equipment consists of the following at the dates presented (in thousands):
March 31, 2020December 31, 2019
Operating lease right-of-use assets$16,213  $16,213  
Computer equipment13,677  13,420  
Internal-use software and website development costs29,998  28,904  
Office equipment and furniture2,999  2,999  
Leasehold improvements7,158  7,158  
Assets not yet placed in service3,980  2,445  
Property and equipment74,025  71,139  
Less: Accumulated depreciation and amortization(42,656) (39,843) 
Total Property and Equipment, Net$31,369  $31,296  

Depreciation and amortization expense for Property and Equipment for the three months ended March 31, 2020 and March 31, 2019 was $2.0 million and $1.8 million, respectively. These charges are included in General and Administrative expenses on the condensed consolidated statements of operations. Prosper capitalized internal-use software and website development costs in the amount of $2.7 million and $2.1 million for the three months ended March 31, 2020 and March 31, 2019, respectively. Additionally, disclosures around the operating lease right-of-use assets are included in Note 16.
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 March 31, 2020 and December 31, 2019, are presented in the following table (in thousands):
Borrower LoansLoans Held for SaleNotes
March 31, 2020December 31, 2019March 31, 2020December 31, 2019March 31, 2020December 31, 2019
Aggregate principal balance outstanding$571,981  $647,209  $166,634  $143,261  $(244,046) $(250,281) 
Fair value adjustments(49,577) (13,190) (13,398) (1,235) 18,555  6,110  
Fair value$522,404  $634,019  $153,236  $142,026  $(225,491) $(244,171) 
Borrower Loans
At March 31, 2020, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and had various maturity dates through March 2025. At December 31, 2019, outstanding Borrower Loans had original maturities of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and had various maturity dates through December 2024.
As of March 31, 2020, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $6.5 million and a fair value of $0.6 million. As of December 31, 2019, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $6.5 million and a fair value of $1.9 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of March 31, 2020 and December 31, 2019, Borrower Loans in non-accrual status had a fair value of $0.7 million and $0.7 million, respectively.
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Loans Held for Sale
At March 31, 2020, outstanding Loans Held for Sale had original terms to maturity between 36 months and 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.82% and had various maturity dates through March 2025. At December 31, 2019, outstanding Loans Held for Sale had original terms to maturity between 36 months and 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.82% and had various maturity dates through December 2024. Fair value adjustments recorded in earnings on loans invested in by us resulted in net losses of $14.3 million and $1.3 million for the three months ended March 31, 2020 and 2019, respectively. Interest income earned on Loans Held for Sale by us was $4.8 million and $4.0 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
As of March 31, 2020, Loans Held for Sale that were 90 days or more delinquent had an aggregate principal amount of $0.8 million and a fair value of $0.1 million. As of December 31, 2019, Loans Held for Sale that were 90 days or more delinquent had an aggregate principal amount of $0.7 million and a fair value of $0.2 million. Prosper places loans on non-accrual status when they are over 120 days past due. As of March 31, 2020 and December 31, 2019, Loans Held for Sale in non-accrual status had a fair value of $0.1 million (for both periods).
5. Loan Servicing Assets
Prosper accounts for Servicing Assets at their estimated fair values with changes in fair values recorded in Servicing Fees. The initial asset or liability is recognized when Prosper sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The Servicing Assets are measured at fair value throughout the servicing period. The total gain recognized on the sale of such Borrower Loans for the three months ended March 31, 2020 was $1.7 million recognized in Gain on Sale of Borrower Loans on the condensed consolidated statement of operations. The total gains and losses recognized on the sale of such Borrower Loans for the three months ended March 31, 2019 consisted of a gain of $2.7 million recognized in Gain on Sale of Borrower Loans and a loss of $9.7 million recognized in Fair Value of Warrants Vested on the Sale of Borrower Loans on the condensed consolidated statement of operations.
As of March 31, 2020, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $2.9 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and various maturity dates through March 2025. At December 31, 2019, Borrower Loans that were sold but for which Prosper retained servicing rights had a total outstanding principal balance of $3.1 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and various maturity dates through December 2024.
Contractually-specified servicing fees and ancillary fees totaling $9.2 million and $10.1 million for the three months ended March 31, 2020 and March 31, 2019, respectively, are included on the condensed consolidated statements of operations in Servicing Fees, Net.

Fair Value Valuation Method
Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the Level 3 Servicing Assets. The following is a description of the significant unobservable inputs provided in the table.

Market Servicing Rate
Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from backup service providers.
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Discount Rate
The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the Servicing Assets based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets.
Default Rate
The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate
The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6.  Securitizations
In 2019, Prosper co-sponsored securitizations of unsecured personal whole loans facilitated through our marketplace with an aggregate outstanding principal balance of $573.0 million through three securitization trusts (PMIT 2019-1, PMIT 2019-2, and PMIT 2019-4). Each securitization trust issued senior notes, a risk retention interest and residual certificates to finance the purchase of Borrower Loans. The risk retention interest represents the right to receive 5.0% of all amounts collected on the Borrower Loans held by the securitization trusts. The resulting senior notes were sold to third party investors. Prosper retained 65.5%, 16.4%, and 19.6% of the residual certificates issued by PMIT 2019-1, PMIT 2019-2, and PMIT 2019-4, respectively. The remaining residual certificates and all the risk retention interests are held by third-party investors. In addition to the retained residual certificates, Prosper's continued involvement includes loan servicing responsibilities over the life of the underlying loans.
PMIT 2019-1, 2019-2 and 2019-4 are deemed VIEs. Prosper consolidated the VIEs as the primary beneficiary because Prosper, through its role as the servicer, has both the power to direct the activities that most significantly affect the VIEs' economic performance and a variable interest that could potentially be significant to the VIEs through holding the retained residual certificates. In evaluating whether Prosper is the primary beneficiary, management considers both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIEs. Management assesses whether Prosper is the primary beneficiary of the VIEs on an on-going basis. For these VIEs, the creditors have no recourse to the general credit of Prosper and the liabilities of the VIEs can only be settled by the respective VIEs' assets. Additionally, the assets of the VIEs can be used only to settle obligations of the VIEs. Because Prosper consolidates the securitization trusts, the loans held in the securitization trusts are included in “Borrower Loans, at Fair Value”, the notes sold to third party investors recorded in “Notes Issued by Securitization Trust”, and the risk retention interests and residual certificates held by third party investors in “Certificates Issued by Securitization Trust, at Fair Value” in the Consolidated Balance Sheets.
PMIT 2019-1
The notes under the PMIT 2019-1 securitization were issued in three classes: Class A in the amount of $127.3 million, Class B in the amount of $25.0 million and Class C in the amount of $19.3 million (collectively, the “2019-1 Notes”). The Class A, Class B and Class C notes bear interest at a fixed rate of 3.54%, 4.03% and 5.27%, respectively. Principal and interest payments began in March 2019 and are payable monthly. These notes are recorded at amortized cost on the balance sheet. The associated debt issuance costs of $2.3 million are deferred and amortized into interest expense over the contractual life of the notes. The notes held by third-party investors and the unamortized debt issuance costs are included in “Notes Issued by Securitization Trust” with a balance of $75.4 million on the condensed consolidated balance sheets as of March 31, 2020 and are secured by Borrower Loans at fair value of $76.2 million included in “Borrower Loans, at Fair Value” on the condensed consolidated balance sheets as of March 31, 2020. The risk retention and residual certificates held by third party investors at fair value of $6.6 million are included in “Certificates Issued by Securitization Trust, at Fair Value” in the Consolidated Balance sheets as of March 31, 2020.
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PMIT 2019-2
The notes under the PMIT 2019-2 securitization were issued in three classes: Class A in the amount of $110.1 million, Class B in the amount of $31.4 million and Class C in the amount of $32.7 million (collectively, the “2019-2 Notes”). The Class A, Class B and Class C notes bear interest at a fixed rate of 3.20%, 3.69% and 5.05%, respectively. Principal and interest payments began in July 2019 and are payable monthly. These notes are recorded at amortized cost on the balance sheet. The associated debt issuance costs of $1.9 million are deferred and amortized into interest expense over the contractual life of the notes. The notes held by third-party investors and the unamortized debt issuance costs are included in “Notes Issued by Securitization Trust” with a balance of $101.1 million on the condensed consolidated balance sheets as of March 31, 2020 and are secured by Borrower Loans at fair value of $103.7 million of included in “Borrower Loans, at Fair Value” on the condensed consolidated balance sheets as of March 31, 2020. The risk retention and residual certificates held by third party investors at fair value of $13.4 million are included in “Certificates Issued by Securitization Trust, at Fair Value” in the Consolidated Balance Sheets as of March 31, 2020.
PMIT 2019-4
The notes under the PMIT 2019-4 securitization were issued in three classes: Class A in the amount of $102.6 million, Class B in the amount of $19.5 million and Class C in the amount of $16.8 million (collectively, the “2019-4 Notes”). The Class A, Class B and Class C notes bear interest at a fixed rate of 2.48%, 3.2% and 4.95% respectively. Principal and interest payments began in December 2019 and are payable monthly. These notes are recorded at amortized cost on the balance sheet. The associated debt issuance costs of $1.2 million are deferred and amortized into interest expense over the contractual life of the notes. The notes held by third-party investors and the unamortized debt issuance costs are included in Notes Issued by Securitization Trust with a balance of $109.8 million and are secured by Borrower Loans with a fair value of $114.9 million as of March 31, 2020. The risk retention interest and residual certificates held by third party investors at fair value of $15.4 million are included in “Certificates Issued by Securitization Trust, at Fair Value” in the Consolidated Balance sheets as of March 31, 2020.
7.  Fair Value of Assets and Liabilities 
Prosper measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. The Company applies this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability. Prosper did not transfer any assets or liabilities in or out of Level 3 for the three months ended March 31, 2020 or 2019.

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Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale, Notes, Certificates Issued by Securitization Trust, Servicing Rights and loan trailing fee liability are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used in the discounted cash flow model include default and prepayment rates primarily derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
The Convertible Preferred Stock Warrant Liability is valued using a Black-Scholes option pricing model. Refer to Note 12 for further details.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):

March 31, 2020Level 1 InputsLevel 2 InputsLevel 3 InputsTotal
Assets:
Borrower Loans$  $  $522,404  $522,404  
Loans Held for Sale    153,236  153,236  
Servicing Assets    11,742  11,742  
Total Assets$  $  $687,382  $687,382  
Liabilities:
Notes $  $  $225,491  $225,491  
Certificates Issued by Securitization Trust, at Fair Value    35,316  35,316  
Convertible Preferred Stock Warrant Liability    94,547  94,547  
Loan Trailing Fee Liability    2,646  2,646  
Total Liabilities$  $  $358,000  $358,000  
 
December 31, 2019Level 1 InputsLevel 2 InputsLevel 3 InputsTotal
Assets:
Borrower Loans$  $  $634,019  $634,019  
Loans Held for Sale    142,026  142,026  
Servicing Assets    12,602  12,602  
Total Assets$  $  $788,647  $788,647  
Liabilities:
Notes$  $  $244,171  $244,171  
Certificates Issued by Securitization Trust    52,168  52,168  
Convertible Preferred Stock Warrant Liability    149,996  149,996  
Loan Trailing Fee Liability    2,997  2,997  
Total Liabilities$  $  $449,332  $449,332  

As Prosper’s Borrower Loans, Loans Held for Sale, Notes, Certificates Issued by Securitization Trust, Convertible Preferred Stock Warrant Liability, servicing rights and loan trailing fee liability do not trade in an active market with readily observable prices, the Company uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, gains and losses for assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
20


Significant Unobservable Inputs
The following tables present quantitative information about the ranges of significant unobservable inputs used for the Company’s Level 3 fair value measurements at March 31, 2020 and December 31, 2019:

Range
Borrower Loans, Loans Held for Sale and NotesMarch 31, 2020December 31, 2019
Discount rate
7.1% - 14.7%
4.4% - 12.2%
Default rate
2.3% - 23.1%
2.1% - 18.6%

Range
Certificates Issued by Securitization TrustMarch 31, 2020December 31, 2019
Discount rate
7.0% - 20.0%
4.0% - 15.0%
Default rate
3.0% - 18.0%
2.0% - 17.0%
Prepayment rate
12.0% - 33.0%
14.5% - 33.0%


Range
Servicing AssetsMarch 31, 2020December 31, 2019
Discount rate
15.0% - 25.0%
15.0% - 25.0%
Default rate
1.9% - 19.6%
1.7% - 18.8%
Prepayment rate
15.3% - 28.3%
16.5% - 28.1%
Market servicing rate (1)
0.625 %0.625 %
(1) Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of March 31, 2020 and December 31, 2019, the market rate for collection fees and non-sufficient fund fees was assumed to be 7 basis points and 6 basis points, respectively, for a weighted-average total market servicing rate of 69.5 basis points and 68.5 basis points respectively.
Range
Loan Trailing Fee LiabilityMarch 31, 2020December 31, 2019
Discount rate
15.0% - 25.0%
15.0% - 25.0%
Default rate
1.9% - 19.6%
1.7% - 18.8%
Prepayment rate
15.3% - 28.3%
16.5% - 28.1%

At March 31, 2020 and December 31, 2019, the discounted cash flow methodology used to estimate the Notes fair values used the same projected cash flows as the related Borrower Loans.

Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis
The following tables present additional information about Level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis (in thousands):
21


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
AssetsLiabilities
Borrower
Loans
Loans Held For SaleNotesCertificates Issued by Securitization TrustTotal
Balance at January 1, 2020$634,019  $142,026  $(244,171) $(52,168) $479,706  
Purchase of Borrower Loans/Issuance of Notes41,301  399,551  (40,575)   400,277  
Principal repayments(96,715) (18,560) 40,588  4,833  (69,854) 
Borrower Loans sold to third parties(2,263) (355,634)     (357,897) 
Other changes(742) 105  138  38  (461) 
Change in fair value(53,196) (14,252) 18,529  11,981  (36,938) 
Balance at March 31, 2020$522,404  $153,236  $(225,491) $(35,316) $414,833  

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
AssetsLiabilities
Borrower
Loans
Loans Held for SaleNotesCertificates Issued by Securitization TrustTotal
Balance at January 1, 2019$263,522  $183,788  $(264,003) $  $183,307  
Purchase of Borrower Loans/Issuance of Notes135,259  490,855  (44,939) (20,616) 560,559  
Transfers in (Transfer out)114,316  (114,316)       
Principal repayments(56,629) (14,739) 44,117  1,133  (26,118) 
Borrower Loans sold to third parties(974) (437,473)     (438,447) 
Other changes139  (166) 601  (167) 407  
Change in fair value(6,923) (1,309) 5,502  516  (2,214) 
Balance at March 31, 2019$448,710  $106,640  $(258,722) $(19,134) $277,494  

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The following tables present additional information about Level 3 Servicing Assets measured at fair value on a recurring basis for the period ending March 31, 2020 and 2019 (in thousands):
Servicing
Assets
Fair Value at January 1, 2020$12,602  
Additions1,974  
Less: Changes in fair value(2,834) 
Fair Value at March 31, 2020$11,742  

Servicing
Assets
Fair Value at January 1, 2019$14,687  
Additions2,742  
Derecognition(364) 
Less: Changes in fair value(3,251) 
Fair Value at March 31, 2019$13,814  
The following table presents additional information about Level 3 Convertible Preferred Stock Warrant Liability measured at fair value on a recurring basis (in thousands):

Convertible Preferred Stock
Warrant Liability
Balance as of January 1, 2020$149,996  
Change in fair value(55,449) 
Balance as of March 31, 2020$94,547  


Convertible Preferred Stock
Warrant Liability
Balance as of January 1, 2019$143,679  
Issuance of Stock Warrants9,747  
Change in fair value10,057  
Balance as of March 31, 2019$163,483  

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Loan Trailing Fee
The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and default rates using a discounted cash flow model. The assumptions used are the same as those used for the valuation of Servicing Assets, as described below.
The following table presents additional information about Level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
Loan Trailing Fee
Liability
Balance at January 1, 2020$2,997  
Issuances385  
Cash Payment of Loan Trailing Fee(675) 
Change in Fair Value(61) 
Balance at March 31, 2020$2,646  

Loan Trailing Fee Liability
Balance at January 1, 2019$3,118  
Issuances566  
Cash Payment of Loan Trailing Fee(658) 
Change in Fair Value58  
Balance at March 31, 2019$3,084  

Significant Recurring Level 3 Fair Value Input Sensitivity
Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at March 31, 2020 and December 31, 2019 for Borrower Loans and Loans Held for Sale are presented in the following table (in thousands, except percentages).

Borrower Loans and Loans Held for Sale
March 31, 2020
December 31, 2019
Fair value, using the following assumptions:$675,640  $776,045  
Weighted-average discount rate11.79 %7.00 %
Weighted-average default rate14.66 %12.63 %
Fair value resulting from:
100 basis point increase in discount rate
$669,775  $768,924  
200 basis point increase in discount rate
$664,042  $761,971  
Fair value resulting from:
100 basis point decrease in discount rate
$681,645  $783,344  
200 basis point decrease in discount rate
$687,792  $790,823  
Fair value resulting from:
100 basis point increase in default rate
$667,800  $765,894  
200 basis point increase in default rate
$660,000  $756,007  
Fair value resulting from:
100 basis point decrease in default rate
$683,522  $786,541  
200 basis point decrease in default rate
$691,449  $797,065  
24


Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at March 31, 2020 and December 31, 2019 for Notes are presented in the following table (in thousands, except percentages).

NotesMarch 31, 2020December 31, 2019
Fair value, using the following assumptions:$225,491  $244,171  
Weighted-average discount rate10.66 %6.43 %
Weighted-average default rate14.82 %13.68 %
Fair value resulting from:
100 basis point increase in discount rate
$223,530  $241,927  
200 basis point increase in discount rate
$221,614  $239,737  
Fair value resulting from:
100 basis point decrease in discount rate
$227,497  $246,471  
200 basis point decrease in discount rate
$229,552  $248,828  
Fair value resulting from:
100 basis point increase in default rate
$222,871  $240,958  
200 basis point increase in default rate
$220,265  $237,831  
Fair value resulting from:
100 basis point decrease in default rate
$228,124  $247,489  
200 basis point decrease in default rate
$230,773  $250,817  
25


Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at March 31, 2020 and December 31, 2019 for Certificates Issued by Securitization Trust are presented in the following table (in thousands, except percentages).

Certificates Issued by Securitization TrustMarch 31, 2020December 31, 2019
Fair value, using the following assumptions:$35,316  $52,168  
Weighted-average discount rate14.59 %9.59 %
Weighted-average default rate12.68 %10.12 %
Weighted-average prepayment rate20.77 %21.41 %
Fair value resulting from:
100 basis point increase in discount rate
$35,014  $51,813  
200 basis point increase in discount rate
$34,719  $51,466  
Fair value resulting from:
100 basis point decrease in discount rate
$35,626  $52,533  
200 basis point decrease in discount rate
$35,944  $52,909  
Fair value resulting from:
100 basis point increase in default rate
$32,999  $48,986  
200 basis point increase in default rate
$30,675  $45,926  
Fair value resulting from:
100 basis point decrease in default rate
$37,651  $55,369  
200 basis point decrease in default rate
$39,998  $58,613  
Fair value resulting from:
100 basis point increase in prepayment rate$35,258  $52,085  
200 basis point increase in prepayment rate$35,195  $52,008  
Fair value resulting from:
100 basis point decrease in prepayment rate$35,381  $52,253  
200 basis point decrease in prepayment rate$35,445  $52,340  
26



Key economic assumptions and the sensitivity of the fair value to immediate changes in those assumptions at March 31, 2020 and December 31, 2019 for Servicing Assets is presented in the following table (in thousands, except percentages).

Servicing Assets
March 31, 2020
December 31, 2019
Fair value, using the following assumptions$11,742  $12,602  
Market servicing rate
0.625 %0.625 %
Weighted-average prepayment rate20.37 %20.99 %
Weighted-average default rate14.03 %12.67 %
Fair value resulting from:
Market servicing rate increase to 0.65%
$11,019  $11,825  
Market servicing rate decrease to 0.60%
$12,464  $13,387  
Fair value resulting from:
Applying a 1.1 multiplier to prepayment rate
$11,507  $12,348  
Applying a 0.9 multiplier to prepayment rate
$11,978  $12,868  
Fair value resulting from:
Applying a 1.1 multiplier to default rate
$11,573  $12,377  
Applying a 0.9 multiplier to default rate
$11,911  $12,840  

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

Assets and Liabilities Not Recorded at Fair Value
The following table presents the fair value hierarchy for assets, and liabilities not recorded at fair value (in thousands):
March 31, 2020Carrying AmountLevel 1 InputsLevel 2 InputsLevel 3 InputsBalance at Fair Value
Assets:
Cash and Cash Equivalents$52,829  $52,829  $  $  $52,829  
Restricted Cash141,504    141,504    141,504  
Accounts Receivable1,032    1,032    1,032  
Total Assets$195,365  $52,829  $142,536  $  $195,365  
Liabilities:
Accounts Payable and Accrued Liabilities$14,297  $  $14,297  $  $14,297  
Payable to Investors87,928    87,928    87,928  
Notes Issued by Securitization Trust286,296    279,931    279,931  
Warehouse Lines154,388    150,996    150,996  
Total Liabilities$542,909  $  $533,152  $  $533,152  



27


December 31, 2019Carrying AmountLevel 1 InputsLevel 2 InputsLevel 3 InputsBalance at Fair Value
Assets:
Cash and Cash Equivalents$64,635  $64,635  $  $  $64,635  
Restricted Cash155,773    155,773    155,773  
Accounts Receivable1,695    1,695    1,695  
Total Assets$222,103  $64,635  $157,468  $  $222,103  
Liabilities:
Accounts Payable and Accrued Liabilities$19,937  $  $19,937  $  $19,937  
Payable to Investors101,092    101,092    101,092  
Notes Issued by Securitization Trust347,662    353,028    353,028  
Warehouse Lines131,583    131,090    131,090  
Total Liabilities$600,274  $  $605,147  $  $605,147  

8. Goodwill and Other Intangible Assets
Goodwill 
Prosper’s goodwill balance of $36.4 million at December 31, 2019 did not change during the three months ended March 31, 2020. We did not record goodwill impairment expense for the three months ended March 31, 2020 and 2019.
Other Intangible Assets 
The following table presents the detail of other intangible assets subject to amortization for the period presented (dollars in thousands):
March 31, 2020
Gross
Carrying Value
Accumulated
Amortization
Net
Carrying Value
Remaining
Useful Life
(In Years)
Developed technology$3,060  $(3,060) $  —  
User base and customer relationships5,050  (4,386) 664  5.1
Brand name60  (60)   —  
Total Intangible Assets Subject to Amortization$8,170  $(7,506) $664  

Prosper’s intangible asset balance was $0.7 million at both March 31, 2020 and December 31, 2019. The user base and customer relationships intangible assets are being amortized on an accelerated basis over a three-to-ten year period.
Amortization expense for the three months ended March 31, 2020 and March 31, 2019 was $0.1 million and $0.1 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):
Year Ending December 31,
2020 (remainder thereof)$164  
2021172  
2022136  
2023107  
202485  
Total
$664  


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9. Other Liabilities
Other Liabilities consist of the following (in thousands):
March 31, 2020December 31, 2019
Loan trailing fee$2,646  $2,997  
Deferred revenue184  241  
Deferred income tax liability438  405  
Operating lease liability16,387  17,507  
Other529  576  
Total Other Liabilities$20,184  $21,726  

Additionally, disclosures around the operating lease liabilities are included in Note 16.

10. Debt
PWIT Warehouse Trust Agreements
Prosper’s consolidated VIEs, PWIT and PWIIT (together, “Warehouse VIEs”), each entered into an agreement (together, “Warehouse Agreements”) with certain lenders for committed revolving lines of credit (“Warehouse Lines”) during 2019 and 2018. In connection with the Warehouse Agreements, the Warehouse VIEs each entered into a security agreement with a bank as administrative agent and a national banking association as collateral trustee and paying agent. Proceeds under the Warehouse Lines may only be used to purchase certain unsecured consumer loans and related rights and documents from Prosper and to pay fees and expenses related to the Warehouse Lines. Both Warehouse VIEs are consolidated because Prosper is the primary beneficiary of the VIEs. The creditors of the Warehouse Lines have no recourse to the general credit of Prosper. Additionally, the assets of the VIEs can be used only to settle obligations of the VIEs. The loans held in the Warehouse VIEs are included in Loans Held for Sale, at Fair Value and Warehouse Lines are in Warehouse Lines in the condensed consolidated balance sheets.
Both Warehouse Agreements contain the same certain covenants including restrictions on each Warehouse VIE's ability to incur indebtedness, pledge assets, merge or consolidate and enter into certain affiliate transactions. Each Warehouse Agreement also requires Prosper to maintain a minimum tangible net worth of $25 million, minimum net liquidity of $15 million and a maximum leverage ratio of 5:1. Tangible net worth is defined as the sum of (i) (A) Convertible Preferred Stock, (B) total Stockholders’ Deficit and (C) Convertible Preferred Stock Warrant Liability, less the sum of (ii) (A) goodwill and (B) intangible assets. Net liquidity is defined as the sum of cash, cash equivalents and Available for Sale Investments. The leverage ratio is defined as the ratio of total consolidated indebtedness other than non-recourse securitization indebtedness, non-recourse or limited recourse warehouse indebtedness and borrower dependent notes, to tangible net worth. As of March 31, 2020, Prosper was in compliance with the covenants under each Warehouse Agreement.
PWIT Warehouse Line
On January 19, 2018, through PWIT, Prosper entered into a Warehouse Agreement for a Warehouse Line. Effective June 12, 2018, the Warehouse Agreement was amended. The amendments included increasing the committed line of credit from $100 million to $200 million, extending the term of the PWIT Warehouse Line (including the final maturity date), amending the monthly unused commitment fee and reducing the rate at which the PWIT Warehouse Line bears interest.
Subsequently the Warehouse Agreement was amended on June 20, 2019 to extend the facility, to reduce the interest rate and unused commitment fee and to expand the eligibility criteria for unsecured consumer loans that can be financed through the PWIT Warehouse Line.
Under the amended agreement, proceeds of loans made under the PWIT Warehouse Line may be borrowed, repaid and reborrowed until the earlier of June 20, 2021 and at the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over the 24 month period ending June 20, 2023, excluding the occurrence of any accelerated amortization event or event of default.
Under the amended agreement, the PWIT Warehouse Line bears interest at a rate of LIBOR plus 2.9% and has an advance rate of 89%. Additionally, the PWIT Warehouse Line bears a monthly unused commitment fee, depending on utilization, of 0.50% per annum on the undrawn portion available under the PWIT Warehouse Line.
As of March 31, 2020, Prosper had $100.4 million in debt and accrued interest outstanding under the PWIT Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $105.1 million included in “Loans Held for Sale, at
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Fair Value” on the Consolidated Balance Sheets. At March 31, 2020 the undrawn portion available under the Warehouse Line was $99.6 million. Prosper incurred $1.8 million of deferred debt issuance costs, which are included in “Prepaids and Other Assets” and amortized to interest expense over the term of the revolving arrangement.
Prosper purchased a swaption to limit the Company's exposure to increases in LIBOR. The swaptions are recorded on the consolidated balance sheet at fair value in Prepaids and Other Assets. Any changes in the fair value are recorded in the Change in Fair Value of Financial Instruments, Net on the Consolidated Statement of Operations. The fair value of the swaption was not material at March 31, 2020.
PWIIT Warehouse Line
On March 28, 2019, through PWIIT, Prosper entered into a second Warehouse Agreement for a $300 million Warehouse Line with a national banking association different than that of PWIT. Under the PWIIT Warehouse Agreement, proceeds of loans made under the PWIIT Warehouse Line may be borrowed, repaid, and reborrowed until the earlier of March 28, 2021 and at the occurrence of any accelerated amortization event or event of default. Repayment of any outstanding proceeds will be made over the 24 month period ending March 28, 2023, excluding the occurrence of any accelerated amortization event or event of default.
Under the agreement, the PWIIT Warehouse Line bears interest at a rate of LIBOR, or the lender's asset-backed commercial paper rate, plus a spread of 2.9%. The spread increases by 0.375% during the first twelve months immediately following the termination of the revolving period with an additional increase of 0.375% one year later. The PWIIT Warehouse Line has an advance rate of 90%. Additionally, the PWIIT Warehouse Line bears a monthly unused commitment fee of 0.50% per annum on the undrawn portion available under the PWIIT Warehouse Line.
As of March 31, 2020, Prosper had $54.0 million in debt and accrued interest outstanding under the PWIIT Warehouse Line. This debt is secured by an aggregate outstanding principal balance of $60.4 million included in Loans Held for Sale, at Fair Value on the Consolidated Balance Sheets. At March 31, 2020 the undrawn portion available under the PWIIT Warehouse Line was $246.0 million. Prosper incurred $2.1 million of deferred debt issuance costs, which are included in Prepaids and Other Assets and amortized to interest expense over the term of the revolving arrangement.
11. Net Income (Loss) Per Share
Prosper computes Net Income (Loss) Per Share in accordance with ASC Topic 260, Earnings Per Share (“ASC Topic 260”). Under ASC Topic 260, basic Net Income (Loss) Per Share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
Proper computes its earnings (loss) per share (“EPS”) using the two-class method in ASC Topic 260. The two-class method allocates earnings that otherwise would have been available to common shareholders to holders of participating securities. Management considers all series of our Convertible Preferred Stock to be participating securities due to their rights to participate in dividends with Common Stock. As such, earnings allocated to these participating securities, which include participation rights in undistributed earnings, are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders.
All participating securities are excluded from basic weighted-average common shares outstanding. Prior to any conversion to common shares, each series of Prosper’s Convertible Preferred Stock was entitled to participate on an if-converted basis in distributions of earnings, when and if declared by the board of directors, that were made to common stockholders and consequently, these shares were considered participating securities. During the periods ended March 31, 2020 and 2019, certain shares issued as a result of the early exercise of stock options which are subject to a repurchase right by PMI were entitled to receive non-forfeitable dividends during the vesting period and consequently, are considered participating securities.
The weighted average shares used in calculating basic and diluted Net Income (Loss) Per Share excludes certain shares that are disclosed as outstanding shares in the 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 income (loss) per share was calculated as follows (in thousands, except share and per share amounts):
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Three Months Ended March 31,
20202019
Numerator:
Net Income (Loss)
$21,130  $(22,714) 
Less: net income allocated to participating securities(15,755)   
Net income (loss) available to common stockholders
$5,375  $(22,714) 
Denominator:
Weighted average shares used in computing net income (loss) per share - basic68,454,103  70,487,006  
Effect of dilutive securities:
Stock options236,928    
Convertible preferred stock warrants213,264,845    
Weighted average shares used in computing diluted net income (loss) per share - diluted281,955,876  70,487,006  
Net income (loss) per share - basic$0.08  $(0.32) 
Net income (loss) per share - diluted$0.02  $(0.32) 

The following common stock equivalents were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have been anti-dilutive:
Three Months Ended March 31,
20202019
(shares)(shares)
Excluded securities:
Convertible preferred stock issued and outstanding209,613,570  214,637,925  
Stock options issued and outstanding72,195,596  70,384,625  
Warrants issued and outstanding1,080,349  1,080,349  
Series E-1 convertible preferred stock warrants  35,544,141  
Series F convertible preferred stock warrants  177,720,704  
Total common stock equivalents excluded from diluted net income (loss) per common share computation
282,889,515  499,367,744  

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12. Convertible Preferred Stock, Warrant Liability and Stockholders’ Deficit
Convertible Preferred Stock and Warrants
Under PMI’s amended and restated certificate of incorporation, preferred stock is issuable in series, and the Board of Directors is authorized to determine the rights, preferences, and terms of each series.
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of March 31, 2020 are disclosed in the table below (amounts in thousands except share and par value amounts):
Convertible Preferred Stock
Par Value
Authorized
Shares
Outstanding
and Issued
Shares
Liquidation
Preference (Outstanding Shares)
Series A$0.01  68,558,220  66,428,185  $19,160  
Series A-1$0.01  24,760,915  22,515,315  45,031  
Series B$0.01  35,775,880  35,127,160  21,190  
Series C$0.01  24,404,770  24,404,770  70,075  
Series D$0.01  23,888,640  23,888,640  165,000  
Series E-1$0.01  35,544,141      
Series E-2$0.01  16,858,078      
Series F$0.01  177,720,707  3    
Series G$0.01  37,249,497  37,249,497  50,000  
444,760,848  209,613,570  $370,456  
Dividends
Dividends on shares of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F and Series G convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock have been paid or set aside for payment to the Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then-effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights. To date, no dividends have been declared on any of PMI’s preferred stock or common stock.
Conversion
Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an initial public offering that values Prosper at least at $2 billion and that results in aggregate proceeds to Prosper of at least $100 million or (ii) upon a written request from the holders of at least 60% of the voting power of the outstanding preferred stock (on an as-converted basis), provided that (i) the Series A-1 convertible preferred stock shall not be converted without at least 14% of the voting power of the outstanding Series A-1 convertible preferred stock; (ii) the Series D shall not be converted without at least 60% of the voting power of the outstanding Series D; (iii) the Series E-1 and Series E-2 shall not be converted without at least 60% of the voting power of the outstanding Series E-1 and Series E-2, voting together as a single class; (iv) the Series F shall not be converted without at least 60% of the voting power of the outstanding Series F, and (v) the shares of Series G Preferred Stock will not be automatically converted unless the holders of at least 60% of the outstanding shares of Series G Preferred Stock approve such conversion. In addition, if a holder of the Series A convertible preferred stock has converted any of the Series A convertible preferred stock, then all of such holder’s shares of Series A-1 convertible preferred stock also will be converted upon a liquidation event. In lieu of any fractional shares of common stock to which a holder would otherwise be entitled, PMI shall pay such holder cash in an amount equal to the fair market value of such fractional shares, as determined by its Board of Directors. At present, each of the Series A, Series B, Series C, Series D, Series E-1, Series E-2, and Series F convertible preferred stock converts into PMI common stock at a 1:1 ratio. The Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio and the Series G convertible preferred stock converts into common stock at a 1:1.36 ratio. The Series G convertible preferred stock conversion ratio reflects the Series G true-up that occurred at end of the vesting period for the Series E-2 and Series F Preferred Stock warrants.
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For the Series G true-up, the conversion price of the Series G Convertible Preferred Stock was reduced to a number equal to the Series G Preferred Stock original issuance price, divided by the quotient obtained by dividing the Series G true-up amount by the total number of Series G Preferred Stock issued as of the Series G closing date. The Series G true-up amount means the aggregate number of shares of Series G Preferred Stock that would have been issued to the purchasers of the Series G Preferred Stock on the Series G closing date, if warrants to purchase shares of Series E-2 Preferred Stock or Series F Preferred Stock that were exercisable or exercised as of the true-up time (end of vesting period) had been exercisable or exercised as of such Series G closing date.
Liquidation Rights
PMI’s convertible preferred stock has been classified as temporary equity on the condensed consolidated balance sheets. The preferred stock is not redeemable; however, in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of Series E-1, Series E-2, and Series F convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A, Series B, Series C, Series D, Series G and Series A-1 convertible preferred stock or common stock, an amount per share for (i) each share of Series E-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, (ii) each share of Series E-2 convertible preferred stock equal to the sum of two-thirds the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (iii) each share of Series F convertible preferred stock equal to the sum of two-thirds of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series E-1, Series E-2, and Series F convertible preferred stock, each holder of Series A, Series B, Series C and Series D, Series E-2, Series F, and Series G convertible preferred stock is entitled to receive, on a pari passu basis, prior to and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 convertible preferred stock or common stock, (i) an amount per share for each share of Series E-2 and Series F convertible preferred stock equal to the sum of one-third of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share, and (ii) an amount per share for each share of Series A, Series B, Series C, Series D and Series G convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, and Series G convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock, an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of Series A, Series B, Series C, Series D, Series E-1, Series E-2, Series F, Series G, and Series A-1 convertible preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of Series A convertible preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the Series A convertible preferred stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum aggregate amount per share of Series A convertible preferred stock which the holders of Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the Series A convertible preferred stock.
At present, the liquidation preferences are equal to $0.29 per share for the Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the Series B convertible preferred stock, $2.87 per share for the Series C convertible preferred stock, $6.91 per share for the Series D convertible preferred stock, $0.84 per share for the Series E-1 convertible preferred stock, $0.84 per share for the Series E-2 convertible preferred stock, $0.84 per share for the Series F convertible preferred stock and $1.34 per share for the Series G convertible preferred stock.
Voting
Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the Bylaws of PMI. 

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Convertible Preferred Stock Warrant Liability
Series E-1 Warrants
In connection with the Settlement and Release Agreement dated November 17, 2016 among PMI, PFL and Colchis, on December 16, 2016, PMI issued the First Series E-1 Warrant. The Second Series E-1 Warrant for an additional 15,277,006 shares of Series E-1 convertible preferred stock was granted on the signing of the Consortium Purchase Agreement (as defined in Note 15) on February 27, 2017. The warrants expire ten years from the date of issuance. For the three months ended March 31, 2020 and 2019, Prosper recognized $9.2 million of income and $2.1 million of expense, respectively, from the re-measurement of the fair value of the warrants. The income or expense resulted from the remeasurement of the fair value of the warrants is recorded through Change in Fair Value of Convertible Preferred Stock Warrants in the condensed consolidated statements of operations.
To determine the fair value of the Series E-1 Warrants, the Company first determined the value of a share of a Series E-1 Convertible Preferred Stock. To determine the fair value of the Convertible Preferred Stock, the Company first derived the business enterprise value (“BEV”) of the Company using a variety of valuation methods, including discounted cash flow models and market based methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the option pricing method ("OPM") was used to allocate the BEV to the various classes of our equity, including our preferred stock. The concluded per share value for the Series E-1 Convertible Preferred Stock was utilized as an input to the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding Series E-1 Warrants utilizing the following assumptions as of the following dates:
March 31, 2020December 31, 2019
Volatility68.0%46.0%
Risk-free interest rate0.30%1.60%
Expected term (in years)2.752.75
Dividend yield0%0%

The above assumptions were determined as follows:

Volatility. The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant as the Company has limited information on the volatility of its preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.

Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield in effect as of the period end date and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.

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

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

Series F Warrants
In connection with the Consortium Purchase Agreement (as described in Note 15), PMI issued warrants to purchase up to 177,720,706 shares of PMI's Series F convertible preferred stock at $0.01 per share. For the three months ended March 31, 2020, and 2019, Prosper recognized $46.2 million of income and $7.9 million of expense, respectively, from the re-measurement of the fair value of the warrants. The income resulting from changes in the fair value of the warrant is recorded through Change in Fair Value of Convertible Preferred Stock Warrants in the condensed consolidated statements of operations.

To determine the fair value of the Series F Warrants, the Company first determined the value of a share of a Series F Convertible Preferred Stock. To determine the fair value of the Convertible Preferred Stock, the Company first derived the BEV using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the OPM was used to allocate the BEV to the various classes
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of Prosper's equity, including our preferred stock. The concluded per share value for the Series F Convertible Preferred Stock warrants utilized the Black-Scholes option pricing model.
The Company determined the fair value of the outstanding Series F Warrants utilizing the following assumptions as of the following dates:
March 31, 2020December 31, 2019
Volatility68.0%46.0%
Risk-free interest rate0.30%1.60%
Expected term (in years)2.752.75
Dividend yield0%0%

The above assumptions were determined using the same criteria described above for the Series E-1 Warrants.
The combined activity of the Convertible Preferred Stock Warrant Liability for the three months ended March 31, 2020 and 2019 are as follows (in thousands):
Warrant Activity
Balance at January 1, 2020$149,996  
Change in Fair Value(55,449) 
Balance at March 31, 2020$94,547  


Warrant Activity
Balance at January 1, 2019$143,679  
Warrants Vested9,747  
Change in Fair Value10,058  
Balance at March 31, 2019$163,484  

Common Stock
PMI, through its Amended and Restated Certificate of Incorporation, is the sole issuer of common stock and related options, restricted stock units ("RSUs") and warrants. On February 16, 2016, PMI amended and restated its Certificate of Incorporation to, among other things, effect a 5-for-1 forward stock split. On September 20, 2017, PMI further amended its Amended and Restated Certificate of Incorporation to increase the number of shares of common stock authorized for issuance. The total number of shares of stock which PMI has the authority to issue is 1,069,760,848, consisting of 625,000,000 shares of common stock, $0.01 par value per share, and 444,760,848 shares of preferred stock, $0.01 par value per share. As of March 31, 2020, 69,391,576 shares of common stock were issued and 68,455,641 shares of common stock were outstanding. As of December 31, 2019, 69,387,836 shares of common stock were issued and 68,451,901 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 three months ended March 31, 2020, PMI issued 3,740 shares of common stock upon the exercise of vested options for cash proceeds of $1 thousand.
13. Share Based Incentive Plan and Compensation
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1, Amendment No. 2 and Amendment No. 3, which were approved by PMI's stockholders effective as of February 15, 2016, May 31, 2016, and September 5, 2018 respectively (as amended, the "2015 Plan"). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms.

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Stock Option Reprice
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2016 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.
On March 17, 2017, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program (the “2017 Reprice” and together with the 2016 Reprice, the "Repricings"), authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock. The repricing was effected on March 17, 2017 for eligible directors and employees.
Prosper believes that the Repricings will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of the Repricings.
The financial statement impact of the above Repricings was not material in the three months ended March 31, 2020, and the unamortized Repricings amount (net of forfeitures) is also not material as of March 31, 2020.
Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized for the three months ended March 31, 2020 below:
Options
Issued and
Outstanding
Weighted-
Average
Exercise
Price
Balance as of January 1, 202076,236,757  $0.31  
Options issued3,856,400  $0.15  
Options exercised(3,740) $0.38  
Options forfeited(3,018,124) $0.41  
Options expired(3,318,260) $0.13  
Balance as of March 31, 202073,753,033  $0.30  
Options vested and expected to vest as of March 31, 202060,558,411  $0.30  
Options vested and exercisable at March 31, 202048,558,546  $0.29  

Other Information Regarding Stock Options
The weighted-average remaining life for options outstanding as of March 31, 2020 was 7.60 years.
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires Prosper to make assumptions and judgments about the variables used in the calculation, including the fair value of PMI’s common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of PMI’s common stock, a risk-free interest rate, and expected dividends. Given the absence of a publicly traded market, Prosper considered numerous objective and subjective factors to determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists, (ii) the prices for PMI’s preferred stock sold to outside investors, (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock, (iv) the lack of marketability of PMI’s common stock, (v) developments in the business, (vi) secondary transactions of PMI’s common and preferred shares, and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not publicly traded, volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of Prosper. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Prosper uses an expected dividend yield of zero as it does not anticipate paying any dividends in the foreseeable future.

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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 March 31, 2020 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
Three Months Ended March 31,
2020
Volatility of common stock47.41 %
Risk-free interest rate0.68 %
Expected life6.0 years
Dividend yield %
No stock options were granted for the three months ended March 31, 2019.
Restricted Stock Unit Activity
During the three months ended March 31, 2020, PMI did not grant any RSUs to employees. In previous reporting periods, PMI granted certain employees RSUs that are subject to three-year or four-year vesting terms and the occurrence of a liquidity event.
The following table summarizes the number of PMI’s outstanding RSUs and their weighted-average grant date fair value during the three months ended March 31, 2020:
Number of SharesWeighted-Average Grant Date Fair Value
Unvested - January 1, 20204,803,141  $0.95  
Forfeited(140,000) $2.18  
Unvested - March 31, 20204,663,141  $0.91  

The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s condensed consolidated statements of operations for the periods presented (in thousands):
Three Months Ended March 31,
20202019
Origination and servicing$38  $196  
Sales and marketing11  83  
General and administrative456  1,335  
Total stock based compensation$505  $1,614  

Prosper capitalized stock-based compensation as internal-use software and website development costs of $0.1 million for both the three months ended March 31, 2020 and March 31, 2019. As of March 31, 2020, the unamortized stock-based compensation expense adjusted for forfeiture estimates related to our employees’ unvested stock-based awards was approximately $3.0 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.2 years.
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14. Income Taxes
For the three months ended March 31, 2020 and March 31, 2019, Prosper recognized $34 thousand and $29 thousand of income tax expense, respectively. The income tax expense relates to state income tax expense and the amortization of tax deductible goodwill which gives rise to an indefinite-lived deferred tax liability. No other income tax expense or benefit was recorded for the three month periods ended March 31, 2020 and March 31, 2019 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.
15. Consortium Purchase Agreement
On February 27, 2017, Prosper entered into a series of agreements (the “Consortium Purchase Agreement”) with a consortium of investors (the "Consortium"), pursuant to which the Consortium agreed to purchase Borrower Loans in an aggregate principal amount of up to $5.0 billion (including certain loans purchased by one of the investors prior to the date of the Consortium Purchase Agreement). PFL was obligated to offer for purchase minimum monthly volumes of eligible loans to the Consortium, for the Consortium to elect to purchase. The obligation to offer for purchase minimum monthly volumes of eligible loans and the related vesting ended upon the expiration of the Consortium Purchase Agreement in May 2019.
In connection with the Consortium Purchase Agreement, PMI issued to the Consortium three warrants to purchase up to an aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”). The Consortium's right to exercise these Series F Warrants was subject to monthly vesting and was fully vested in May 2019.
On vesting of the Series F Warrants, Prosper recorded a liability as Convertible Preferred Stock Warrant Liability on the condensed consolidated balance sheets at fair value and a corresponding amount as Fair Value of Warrants Vested on Sale of Borrower Loans on the condensed consolidated statement of operations. Subsequent changes in the fair value of the vested warrants are recorded in Change in Fair Value of Convertible Preferred Stock Warrants on the condensed consolidated statement of operations. Additionally, in connection with the execution of the Consortium Purchase Agreement, certain previously issued rebates were settled by an issuance of vested Series F Convertible Preferred Stock Warrants. The difference in fair value of these warrants over the cash settlement price is recorded in Change in Fair Value of Convertible Preferred Stock Warrants on the condensed consolidated statement of operations.
Through its expiration in May 2019, $3.3 billion in loans were acquired and 177.7 million warrants vested under the Consortium Purchase Agreement. In addition to the $3.3 billion of loans acquired above, warrants vested on signing of the Consortium Purchase Agreement were issued to settle certain rebates on $0.3 billion of whole loan purchases by members of the Consortium prior to the signing of the Consortium Purchase Agreement. This $0.3 billion also reduced the up to $5.0 billion aggregate amount under the Consortium Purchase Agreement.
16. Leases
Prosper has operating leases for corporate offices and datacenters. Our leases have remaining lease terms of one year to seven years. Some of the lease agreements include options to extend the lease term for up to an additional five years. Rental expense under operating lease arrangements was $1.5 million and $1.3 million for the three months ended March 31, 2020 and March 31, 2019, respectively. Additionally, Prosper subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income from operating lease arrangements was $0.2 million and $0.3 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Operating Lease Right-of-Use (“ROU”) Assets
The following represents the operating lease right-of-use assets as of March 31, 2020, which are included in "Property and Equipment, Net" on the condensed consolidated balance sheets.
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March 31, 2020
Gross
Carrying Value
Accumulated
Amortization
Net
Carrying Value
ROU Assets - Office buildings$15,921  $4,103  $11,818  
ROU Assets - Other292  292    
Total right-of-use assets subject to amortization$16,213  $4,395  $11,818  

Lease Liabilities
Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows (in thousands). The present value of the future minimum lease payments represent our lease liabilities as of March 31, 2020 and are included in "Other Liabilities" on the condensed consolidated balance sheets.
Minimum Lease Payments
Remainder of 2020$3,885  
20215,130  
20225,014  
20231,562  
2024871  
Thereafter1,820  
Total future minimum lease payments$18,282  
Less imputed interest(1,895) 
Present value of future minimum lease payments$16,387  

Because the rate implicit in each lease is not readily determinable, we use our incremental borrowing rate to determine the present value of the lease payments. Other information related to leases was as follows ($ in thousands):
March 31, 2020
Cash paid for operating leases year-to-date$1,351  
Right of use assets obtained in exchange for new operating lease obligations$  
Weighted average remaining lease term (in years)3.97
Weighted average discount rate5.54 %

17. Commitments and Contingencies
In the normal course of its operations, Prosper becomes involved in various legal actions. Prosper maintains provisions it considers to be adequate for such actions. Prosper does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper's financial condition, results of operations or cash flows.
Operating Commitments
Prosper entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining nine months of 2020 is $1.3 million. The minimum fees are $1.7 million and $0.1 million for the years 2021 and 2022, respectively.
Additionally, under the agreement with WebBank, Prosper is required to maintain minimum net liquidity of $15.0 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. As of March 31, 2020, Prosper was in compliance with the covenant.
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Loan Purchase Commitments
Prosper entered into an agreement with WebBank to purchase $4.9 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended March 31, 2020. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending June 30, 2020.
Repurchase Obligation 
Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols or a violation of the applicable federal, state or local lending laws. Prosper recognizes a liability at fair value for the repurchase obligation when the Borrower Loans are sold. The fair value of the repurchase obligation is estimated based on historical experience. Repurchased Borrower Loans associated with violations of federal, state or local lending laws or verifiable identity theft are written off at the time of repurchase. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which at March 31, 2020 is $2.9 billion. Prosper has accrued $0.4 million as of both March 31, 2020 and December 31, 2019, in regard to this obligation.
Regulatory Contingencies
Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, an amount is recorded which management considers to be the best estimate within the range of potential losses that are both probable and estimable; however, if management cannot quantify the amount of the estimated loss, then the low end of the range of the potential losses is recorded.
SEC Inquiry
In April 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to Note investors. Prosper was advised by the SEC that it was investigating whether violations of federal securities laws had occurred in connection with the error. On April 19, 2019, the SEC accepted an offer of settlement from PFL to resolve the matter. Under the settlement, the SEC alleged a violation of Section 17(a)(2) of the Securities Act and ordered PFL to cease and desist from any future violations of that provision. PFL neither admitted nor denied any wrongdoing, and agreed to pay a civil monetary penalty of $3.0 million. The penalty of $3.0 million was paid in full in April 2019.
West Virginia Matter
In January 2018, the Attorney General of the State of West Virginia (the “Attorney General”) initiated discussions regarding certain acts and practices of PMI and PFL that the Attorney General asserts may have violated the West Virginia Consumer Credit and Protection Act (the “Consumer Act”), to which Prosper responded with such information as was requested by the Attorney General. Following a period of more than a year with limited to no communication, in February 2020, Prosper received a proposed Assurance of Discontinuance (an “AOD”) from the Attorney General requesting that, without in any way admitting that any of its prior practices were in violation of the Consumer Act, Prosper agree to certain terms and conditions regarding its past and potential future conduct of its business with respect to customers in West Virginia, including a release by the Attorney General of any claims it may have related to the matters identified in the AOD. Prosper is evaluating and intends to discuss the proposed terms in the AOD with the Attorney General.
We cannot predict the outcome of the matter and any potential fines or penalties, if any, that may arise from the matter. Further, we are unable to estimate a range of outcomes and as a result no accrual has been made.
No loans have been originated through the Prosper platform to West Virginians since June 2016.
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18. Related Parties
Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers, and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers, and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers, and certain affiliates participate in its marketplace by placing bids and purchasing Notes and Borrower Loans. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be affiliates and related parties of Prosper for the three and three months ended March 31, 2020 and March 31, 2019, as well as the Notes and Borrower Loans outstanding as of March 31, 2020 and December 31, 2019 are summarized below (in thousands):

Aggregate Amount of
Notes and Borrower Loans Purchased
Three Months Ended March 31,
Interest Earned on
Notes and Borrower Loans
Three Months Ended March 31,
Related Party2020201920202019
Executive officers and management$6  $6  $1  $1  
Directors (excluding executive officers and management)122  109  15  12  
Total$128  $115  $16  $13  

Notes Balance as of
Related PartyMarch 31, 2020December 31, 2019
Executive officers and management$36  $35  
Directors (excluding executive officers and management)691  682  
$727  $717  

19. Significant Concentrations
Prosper is dependent on third party funding sources such as banks, asset managers, and investment funds to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the three months ended March 31, 2020, one party purchased 16.6% of such loans. For the three months ended March 31, 2019, two parties purchased 14.8% and 14.4% of such loans, respectively. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, through which 91% and 93% of Borrower Loans were originated in the three months ended March 31, 2020 and March 31, 2019, respectively.
Prosper receives all of its transaction fee revenue from WebBank. Prosper earns a transaction fee from WebBank for its services in facilitating originations of Borrower Loans issued by WebBank. The rate of the transaction fee for each individual Borrower Loan is based on the term and credit grade of the Borrower Loan. No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented.

20. Subsequent Events
The Paycheck Protection Program (“PPP”), established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and sponsored by the U.S. Small Business Administration (“SBA”), is providing small businesses – sole proprietors, independent contractors, and, with certain industry exceptions, businesses with fewer than 500 employees – the opportunity to apply for a loan of up to $10 million to cover up to eight weeks of payroll costs, including benefits. Funds may also be used to cover interest on mortgage obligations, leases, and utilities incurred or in place before February 15, 2020. PPP loan payments are deferred for six months, and, based on SBA guidance, will be forgiven as long as (i) loan proceeds are used for covered expenses, (ii) full-time employee headcount is maintained during the eight-week period covered by the PPP loan and (iii) compensation for employees who earned less than $100,000 on an annualized basis in 2019 is not reduced by more than 25% during the covered period. For purposes of calculating maximum loan eligibility, payroll costs per employee are capped at $100,000 on an annualized basis. Due to anticipated high PPP participation rates, the SBA expects that not more than 25% of any forgiven loan amount may be for non-payroll costs.
In April 2020, the Company obtained an $8.4 million loan under the PPP. The Company plans to use the PPP Loan proceeds to cover payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.
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The Company has taken steps to reduce the impact of COVID-19 on its business, such as: deferring applicable payroll taxes as permitted under the CARES Act, temporary salary reductions for employees with annualized base salaries greater than $100,000, including all named executive officers, effective May 1, 2020; temporary suspension of certain benefits, including 401(k) match, which will take effect for all employees starting July 1, 2020; reductions of third-party spend; and limiting discretionary expenses where possible.
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Prosper Funding LLC
Condensed Consolidated Balance Sheets (Unaudited)
(amounts in thousands)
March 31, 2020December 31, 2019
Assets
Cash and Cash Equivalents$10,473  $7,462  
Restricted Cash105,200  110,399  
Borrower Loans, at Fair Value227,659  245,137  
Property and Equipment, Net7,015  7,549  
Servicing Assets13,690  14,888  
Other Assets540  749  
Total Assets$364,577  $386,184  
Liabilities and Member’s Equity
Accounts Payable and Accrued Liabilities$2,388  $2,133  
Payable to Related Party12,838  2,679  
Payable to Investors90,852  105,287  
Notes at Fair Value225,491  244,171  
Other Liabilities3,273  3,727  
Total Liabilities334,842  357,997  
Member's Equity
Member's Equity15,904  15,904  
Retained Earnings13,831  12,283  
Total Member's Equity$29,735  $28,187  
Total Liabilities and Member's Equity$364,577  $386,184  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Prosper Funding LLC
Condensed Consolidated Statements of Operations (Unaudited)
(amounts in thousands)
Three Months Ended March 31,
20202019
Revenues
Operating Revenues
Administration Fee Revenue - Related Party$5,835  $16,975  
Servicing Fees, Net6,459  6,645  
Gain (Loss) on Sale of Borrower Loans2,000  (6,827) 
Other Revenue180  57  
Total Operating Revenues14,474  16,850  
Interest Income on Borrower Loans9,838  10,331  
Interest Expense on Notes(9,216) (9,649) 
Net Interest Income622  682  
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net63  (87) 
Total Net Revenues15,159  17,445  
Expenses
Administration Fee - Related Party12,364  14,991  
Servicing1,193  1,067  
General and Administrative54  96  
Total Expenses13,611  16,154  
Total Net Income$1,548  $1,291  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Prosper Funding LLC
Condensed Consolidated Statements of Member’s Equity (Unaudited)
(amounts in thousands)
Member’s
Equity
Retained Earnings
(Accumulated
Deficit)
Total
Balance as of January 1, 2020$15,904  $12,283  $28,187  
Net Income —  1,548  1,548  
Balance as of March 31, 2020$15,904  $13,831  $29,735  
Member’s
Equity
Retained Earnings
(Accumulated
Deficit)
Total
Balance as of January 1, 2019$24,904  $6,341  $31,245  
Net Income—  1,291  1,291  
Balance as of March 31, 2019$24,904  $7,632  $32,536  

The accompanying notes are an integral part of these consolidated financial statements.
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Prosper Funding LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
Three Months Ended March 31,
20202019
Cash Flows from Operating Activities:
Net Income$1,548  $1,291  
Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities:
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes(63) 87  
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes(47) (516) 
Gain on Sale of Borrower Loans(2,196) (2,966) 
Change in Fair Value of Servicing Rights3,394  3,337  
Depreciation and Amortization1,025  1,097  
Changes in Operating Assets and Liabilities:
Purchase of Loans Held for Sale at Fair Value(399,550) (490,855) 
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value399,550  490,855  
Other Assets209  (105) 
Accounts Payable and Accrued Liabilities255  (2,348) 
Payable to Investors(14,435) (9,727) 
Net Related Party Receivable/Payable10,251  (802) 
Other Liabilities(454) 2,819  
Net Cash Used in Operating Activities(513) (7,833) 
Cash Flows from Investing Activities:
Purchase of Borrower Loans Held at Fair Value(41,301) (44,223) 
Principal Payment of Borrower Loans Held at Fair Value40,222  42,172  
Purchases of Property and Equipment(583) (1,598) 
Net Cash Used in Investing Activities(1,662) (3,649) 
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Held at Fair Value40,575  44,939  
Payments of Notes Held at Fair Value(40,588) (44,117) 
Net Cash (Used in) Provided by Financing Activities(13) 822  
Net Decrease in Cash, Cash Equivalents and Restricted Cash(2,188) (10,660) 
Cash, Cash Equivalents and Restricted Cash at Beginning of the Period117,861  147,181  
Cash, Cash Equivalents and Restricted Cash at End of the Period$115,673  $136,521  
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest$9,366  $10,250  
Non-Cash Investing Activity - Accrual for Property and Equipment, Net154  446  
Reconciliation to Amounts on Consolidated Balance Sheets
Cash and Cash Equivalents$10,473  $13,216  
Restricted Cash105,200  123,305  
Total Cash, Cash Equivalents and Restricted Cash$115,673  $136,521  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Prosper Funding LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Prosper Funding LLC (“PFL”) was formed in the state of Delaware in February 2012 as a limited liability company with the Prosper Marketplace, Inc. (“PMI”) as its sole equity member. Except as the context otherwise requires, as used in these Notes to the condensed consolidated financial statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiary, Prosper Depositor LLC, a Delaware limited liability company, on a consolidated basis.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and disclosure requirements for interim financial information and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019. The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date. Management believes these unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
Prosper Funding did not have any items of other comprehensive income (loss) for any of the periods presented in the condensed consolidated financial statements as of and for the three months ended March 31, 2020 and March 31, 2019.
The preparation of Prosper Funding's condensed consolidated financial statements and related disclosures in conformity with US GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material.
2. Significant Accounting Policies
Prosper Funding's significant accounting policies are included in Note 2, Summary of Significant Accounting Policies, in Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no changes to these accounting policies during the first three months of 2020.
Fair Value Measurements
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors and Notes. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
Refer to Note 7 for additional fair value disclosures.
Restricted Cash
Restricted cash consists primarily of cash deposits, money market funds and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors have on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.

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Borrower Loans, Loans Held for Sale and Notes
With respect to the Note Channel, Prosper Funding purchases Borrower Loans from WebBank, then issues Notes and holds the Borrower Loans until maturity. The obligation to repay a series of Notes funded through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes funded through the Note Channel are carried on Prosper Funding’s condensed consolidated balance sheets as assets and liabilities, respectively.
Prosper Funding places Borrower Loans and Loans Held for Sale on non-accrual status when they are 120 days past due. When a loan is placed on non-accrual status, Prosper stops accruing interest and reverses all accrued but unpaid interest as of such date. Additionally, Prosper charges-off Borrower Loans and Loans Held for Sale when they are 120 days past due. The fair value of loans 120 days past due generally consists of the expected recovery from debt sales in subsequent periods.
Management has elected the fair value option for Borrower Loans, Loans Held for Sale, and Notes. Changes in fair value of Borrower Loans are largely offset by the changes in fair value of Notes due to the borrower payment-dependent design of the Notes. Changes in fair value of Borrower Loans, Loans Held for Sale and Notes are included in “Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net” on the Consolidated Statements of Operations.
Prosper Funding primarily uses a discounted cash flow model to estimate the fair value of Borrower Loans, Loans Held for Sale and Notes. The key assumptions used in the valuation include default rates and prepayment rates derived primarily from historical performance and discount rates based on estimates of the rates of return that investors would require when investing in financial instruments with similar characteristics.

Recent Accounting Pronouncements
Accounting Standards Adopted In The Current Period
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820); Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The guidance only affects disclosures in the notes to the consolidated financial statements and has no effect on Prosper Funding’s balance sheet or statements of operations.
Accounting Standards Issued, To Be Adopted By Prosper Funding In Future Periods
No issued and pending accounting standards were identified that are expected to have an impact on Prosper Funding.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
March 31, 2020December 31, 2019
Internal-use software and web site development costs$25,381  $24,930  
Less accumulated depreciation and amortization(18,366) (17,381) 
Total property and equipment, net$7,015  $7,549  

Depreciation expense for the three months ended March 31, 2020 and March 31, 2019 was $1.0 million and $1.1 million, respectively.
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4. Borrower Loans and Notes Held at Fair Value
The aggregate principal balances outstanding and fair values of Borrower Loans and Notes as of March 31, 2020 and December 31, 2019, are presented in the following table (in thousands):
Borrower LoansNotes
March 31, 2020December 31, 2019March 31, 2020December 31, 2019
Aggregate principal balance outstanding$243,525  $248,702  $(244,046) $(250,281) 
Fair value adjustments(15,866) (3,565) 18,555  6,110  
Fair value$227,659  $245,137  $(225,491) $(244,171) 
 
At March 31, 2020, outstanding Borrower Loans had original terms to maturity of either 36 or 60 months, had monthly payments with fixed interest rates ranging from 5.31% to 31.92% and had various maturity dates through March 2025. At December 31, 2019, outstanding Borrower Loans had original maturities of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and had various maturity dates through December 2024.
As of March 31, 2020, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.2 million and a fair value of $0.2 million. As of December 31, 2019, Borrower Loans that were 90 days or more delinquent had an aggregate principal amount of $2.6 million and a fair value of $0.8 million. Prosper Funding places loans on non-accrual status when they are over 120 days past due. As of March 31, 2020 and December 31, 2019, Borrower Loans in non-accrual status had a fair value of $0.2 million and $0.3 million, respectively.
5. Loan Servicing Assets
Prosper Funding accounts for Servicing Assets at their estimated fair values with changes in fair values recorded in Servicing Fees, Net on the condensed consolidated statements of operations. The initial asset or liability is recognized when Prosper Funding sells Borrower Loans to unrelated third-party buyers through the Whole Loan Channel and the servicing rights are retained. The total recognized gains and losses on the sale of such Borrower Loans were a $2.0 million gain and a $6.8 million loss for the three months ended March 31, 2020 and March 31, 2019, respectively.
As of March 31, 2020, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.4 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and various maturity dates through March 2025. At December 31, 2019, Borrower Loans that were sold, but for which Prosper Funding retained servicing rights, had a total outstanding principal balance of $3.7 billion, original terms of either 36 or 60 months, monthly payments with fixed interest rates ranging from 5.31% to 31.92%, and various maturity dates through December 2024.
Contractually-specified servicing fees and ancillary fees of $8.5 million and $10.8 million for the three months ended March 31, 2020 and March 31, 2019, respectively, are included on our condensed consolidated statements of operations in Servicing Fees, Net.
Fair Value Valuation Method
Prosper Funding uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount..
Significant unobservable inputs presented in the table within Note 7 are those that Prosper Funding considers significant to the estimated fair values of the Level 3 Servicing Assets. The following is a description of the significant unobservable inputs provided in the table.
Market Servicing Rate
Prosper Funding estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper Funding estimates these market servicing rates based on observable market rates for other loan types in the industry and bids from sub-servicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper Funding sells and services and information from backup service providers.
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Discount Rate
The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. Management used a range of discount rates for the Servicing Assets based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper Funding’s Servicing Assets.
Default Rate
The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate
The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e., risk ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans. Prepayments reduce servicing revenues as they shorten the period over which Prosper Funding expects to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6. Income Taxes
Prosper Funding incurred no income tax provision for the three months ended March 31, 2020 and March 31, 2019. Prosper Funding is a U.S. disregarded entity and its income and loss are included in the income tax reporting of its parent, PMI. Since PMI is in a cumulative loss position, is not currently subject to income taxes, and has fully reserved against its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.
7. Fair Value of Assets and Liabilities
Prosper Funding has elected to record certain financial instruments at fair value on the balance sheet. Prosper Funding classifies Borrower Loans, Loans Held for Sale and Notes as financial instruments and assesses their fair value each on a quarterly basis for financial statement presentation purposes. Gains and losses on these financial instruments are shown separately on the condensed consolidated statements of operations.
At March 31, 2020 and December 31, 2019, the discounted cash flow methodology used to estimate the Notes fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the table below, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
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Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability. Prosper Funding did not transfer any assets or liabilities in or out of Level 3 for the three months ended March 31, 2020 or 2019.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans and Notes include default and prepayment rates derived primarily from historical performance and discount rates that reflect estimates of the rates of return that investors would require when investing in financial instruments with similar characteristics.

The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands): 
March 31, 2020Level 1 InputsLevel 2 InputsLevel 3 InputsTotal
Assets:
Borrower Loans$  $  $227,659  $227,659  
Servicing Assets    13,690  13,690  
Total Assets$  $  $241,349  $241,349  
Liabilities:
Notes$  $  $225,491  $225,491  
Loan Trailing Fee Liability    2,646  2,646  
Total Liabilities$  $  $228,137  $228,137  

December 31, 2019Level 1 InputsLevel 2 InputsLevel 3 InputsTotal
Assets:
Borrower Loans$  $  $245,137  $245,137  
Servicing Assets    14,888  14,888  
Total Assets$  $  $260,025  $260,025  
Liabilities:
Notes$  $  $244,171  $244,171  
Loan Trailing Fee Liability    2,997  2,997  
Total Liabilities$  $  $247,168  $247,168  

As Prosper Funding’s Borrower Loans, Notes, Servicing Assets and loan trailing fee liability do not trade in an active market with readily observable prices, Prosper Funding uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
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Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper Funding’s Level 3 fair value measurements at the dates presented:

Range
Borrower Loans and NotesMarch 31, 2020December 31, 2019
Discount rate
7.1% - 14.4%
4.4% - 12.1%
Default rate
3.3% - 23.1%
2.4% - 17.7%

Range
Servicing AssetsMarch 31, 2020December 31, 2019
Discount rate
15.0% - 25.0%
15.0% - 25.0%
Default rate
1.9% - 19.6%
1.7% - 18.8%
Prepayment rate
15.3% - 28.3%
16.5% - 28.1%
Market servicing rate (1)
0.625 %0.625 %
(1) Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of March 31, 2020 and December 31, 2019, the market rate for collection fees and non-sufficient fund fees was assumed to be 7 basis points and 6 basis points, respectively, for a weighted-average total market servicing rate of 69.5 basis points and 68.5 basis points respectively.

Range
Loan Trailing Fee LiabilityMarch 31, 2020December 31, 2019
Discount rate
15.0% - 25.0%
15.0% - 25.0%
Default rate
1.9% - 19.6%
1.7% - 18.8%
Prepayment rate
15.3% - 28.3%
16.5% - 28.1%

Changes in Level 3 Fair Value Assets and Liabilities on a Recurring Basis
The following tables present additional information about Level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis for three months ended March 31, 2020 and 2019 (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
AssetsLiabilities
Borrower 
Loans
Loans Held for SaleNotesTotal
Balance at January 1, 2020$245,137  $  $(244,171) $966  
Originations41,301  399,550  (40,575) 400,276  
Principal repayments(39,340)   40,588  1,248  
Borrower Loans sold to third parties(882) (399,550)   (400,432) 
Other changes(91)   138  47  
Change in fair value(18,466)   18,529  63  
Balance at March 31, 2020$227,659  $  $(225,491) $2,168  

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
AssetsLiabilities
Borrower 
Loans
Loans Held for SaleNotesTotal
Balance at January 1, 2019$263,522  $  $(264,003) $(481) 
Originations44,223  490,855  (44,939) 490,139  
Principal repayments(41,198)   44,117  2,919  
Borrower Loans sold to third parties(974) (490,855)   (491,829) 
Other changes(85)   601  516  
Change in fair value(5,589)   5,502  (87) 
Balance at March 31, 2019$259,899  $  $(258,722) $1,177  

The following tables present additional information about Level 3 Servicing Assets recorded at fair value (in thousands):
Servicing
Assets
Fair Value at January 1, 2020$14,888  
Additions2,196  
Less: Changes in fair value(3,394) 
Fair Value at March 31, 2020$13,690  


Servicing
Assets
Fair Value at January 1, 2019$15,550  
Additions2,966  
Less: Changes in fair value(3,342) 
Fair Value at March 31, 2019$15,174  

Loan Trailing Fee Liability
The fair value of the Loan Trailing Fee Liability represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and default rates using a discounted cash flow model. The assumptions used are the same as those used for the valuation of Servicing Assets, as described below.
The following tables present additional information about Level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
Loan Trailing Fee Liability
Fair Value at January 1, 2020$2,997  
    Issuances385  
    Cash payment of Loan Trailing Fee(675) 
    Change in fair value(61) 
Fair Value at March 31, 2020$2,646  

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Loan Trailing Fee Liability
Fair Value at January 1, 2019$3,118  
    Issuances566  
    Cash payment of Loan Trailing Fee(658) 
    Change in fair value58  
Fair Value at March 31, 2019$3,084  
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Key economic assumptions are used to compute the fair value of Borrower Loans. The sensitivity of the fair value to immediate changes in assumptions at March 31, 2020 and December 31, 2019 for Borrower Loans are presented in the following table (in thousands, except percentages).
Borrower Loans
March 31, 2020
December 31, 2019
Fair value, using the following assumptions:$227,659  $245,137  
Weighted-average discount rate10.66 %6.43 %
Weighted-average default rate14.82 %13.68 %
Fair value resulting from:
    100 basis point increase in discount rate
$225,683  $242,888  
    200 basis point increase in discount rate
223,751  240,691  
Fair value resulting from:
    100 basis point decrease in discount rate
$229,683  $247,442  
    200 basis point decrease in discount rate
231,754  249,805  
Fair value resulting from:
    100 basis point increase in default rate
$225,017  $241,930  
    200 basis point increase in default rate
222,389  238,807  
Fair value resulting from:
    100 basis point decrease in default rate
$230,315  $248,453  
    200 basis point decrease in default rate
232,986  251,777  

Key economic assumptions are used to compute the fair value of Notes. The sensitivity of the fair value to immediate changes in assumptions at March 31, 2020 and December 31, 2019 for Notes funded through the Note Channel are presented in the following table (in thousands, except percentages).
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NotesMarch 31, 2020December 31, 2019
Fair value, using the following assumptions:$225,491  $244,171  
Weighted-average discount rate10.66 %6.43 %
Weighted-average default rate14.82 %13.68 %
Fair value resulting from:
    100 basis point increase in discount rate
$223,530  $241,927  
    200 basis point increase in discount rate
221,614  239,737  
Fair value resulting from:
    100 basis point decrease in discount rate
$227,497  $246,471  
    200 basis point decrease in discount rate
229,552  248,828  
Fair value resulting from:
    100 basis point increase in default rate
$222,871  $240,958  
    200 basis point increase in default rate
220,265  237,831  
Fair value resulting from:
    100 basis point decrease in default rate
$228,124  $247,489  
    200 basis point decrease in default rate
230,773  250,817  

Key economic assumptions are used to compute the fair value of Servicing Assets. The sensitivity of the current fair value to immediate changes in assumptions at March 31 2020 and December 31, 2019 for Servicing Assets are presented in the following table (in thousands, except percentages).

Servicing Assets
March 31, 2020
December 31, 2019
Fair Value at March 31, 2020$13,690  $14,888  
Market servicing rate
0.625 %0.625 %
Weighted-average prepayment rate20.37 %20.99 %
Weighted-average default rate14.03 %12.67 %
Fair value resulting from:
Market servicing rate increase to 0.65%
$12,848  $13,966  
Market servicing rate decrease to 0.60%
14,532  15,811  
Fair value resulting from:
Applying a 1.1 multiplier to prepayment rate
$13,417  $14,583  
Applying a 0.9 multiplier to prepayment rate
13,966  15,197  
Fair value resulting from:
Applying a 1.1 multiplier to default rate
$13,493  $14,618  
Applying a 0.9 multiplier to default rate
13,888  15,165  
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.
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8. Commitments and Contingencies
Operating Commitments
Prosper entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month. To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency. Accordingly, the minimum fee for the remaining nine months of 2020 is $1.3 million. The minimum fees are $1.7 million and $0.1 million for the years 2021 and 2022, respectively.
Additionally, under the agreement with WebBank, Prosper is required to maintain minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. As of March 31, 2020, we were in compliance with the covenant.
Loan Purchase Commitments
Under the terms of Prosper Funding’s agreement with WebBank, Prosper Funding is committed to purchase $4.9 million of Borrower Loans that WebBank originated during the last two business days of the quarter ended March 31, 2020. Prosper Funding will purchase these Borrower Loans within the first three business days of the quarter ending June 30, 2020.
Repurchase Obligation
Under the terms of the loan purchase agreements between Prosper Funding and investors that participate in the Whole Loan Channel, Prosper Funding may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience. Prosper Funding recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made. The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans issued through the Whole Loan Channel, which as of March 31, 2020 is $3.4 billion. Prosper Funding has accrued $0.4 million as of both March 31, 2020 and December 31, 2019 in regard to this obligation.
Regulatory Contingencies
Prosper accrues for contingencies when a loss from such contingencies is probable and the amount of loss can be reasonably estimated. In determining whether a loss is probable and if it is possible to quantify the amount of the estimated loss, Prosper reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If Prosper determines that an unfavorable outcome is not probable or that the amount of a loss cannot be reasonably estimated, Prosper does not accrue for a potential litigation loss. If an unfavorable outcome is probable and Prosper can estimate a range of outcomes, we record the amount we consider to be the best estimate within the range of potential losses that are both probable and estimable; however, if we cannot quantify the amount of the estimated loss, then we record the low end of the range of those potential losses.
SEC Inquiry
In April 2017, we became aware of an error in the annualized net return and seasoned annualized net return numbers displayed to Note investors. Prosper was advised by the SEC that it was investigating whether violations of federal securities laws had occurred in connection with the error. On April 19, 2019, the SEC accepted an offer of settlement from PFL to resolve the matter. Under the settlement, the SEC alleged a violation of Section 17(a)(2) of the Securities Act and ordered PFL to cease and desist from any future violations of that provision. PFL neither admitted nor denied any wrongdoing, and agreed to pay a civil monetary penalty of $3.0 million. The penalty of $3.0 million was paid in full in April 2019.
West Virginia Matter
In January 2018, the Attorney General of the State of West Virginia (the “Attorney General”) initiated discussions regarding certain acts and practices of PMI and PFL that the Attorney General asserts may have violated the West Virginia
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Consumer Credit and Protection Act (the “Consumer Act”), to which Prosper responded with such information as was requested by the Attorney General. Following a period of more than a year with limited to no communication, in February 2020, Prosper received a proposed Assurance of Discontinuance (an “AOD”) from the Attorney General requesting that, without in any way admitting that any of its prior practices were in violation of the Consumer Act, Prosper agree to certain terms and conditions regarding its past and potential future conduct of its business with respect to customers in West Virginia, including a release by the Attorney General of any claims it may have related to the matters identified in the AOD. Prosper is evaluating and intends to discuss the proposed terms in the AOD with the Attorney General.
We cannot predict the outcome of the matter and any potential fines or penalties, if any, that may arise from the matter. Further, we are unable to estimate a range of outcomes and as a result no accrual has been made.
No loans have been originated through the Prosper platform to West Virginians since June 2016.
9. Related Parties
Since inception, Prosper Funding has engaged in various transactions with its directors, executive officers, 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 for the three months ended March 31, 2020 and March 31, 2019 are summarized below (in thousands):
Aggregate Purchases
Interest Earned
Three Months Ended March 31,Three Months Ended March 31,
Related Party2020201920202019
Executive officers and management$6  $6  $1  $1  
Directors (excluding executive officers and management)        
Total$6  $6  $1  $1  

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

Related PartyMarch 31, 2020December 31, 2019
Executive officers and management$36  $35  
Directors  (excluding executive officers and management)    
$36  $35  

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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROSPER MARKETPLACE, INC.
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks, and assumptions associated with these statements. This discussion should be read in conjunction with Prosper’s historical condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper’s Annual Report on Form 10-K for the year ended December 31, 2019.

Overview
Prosper is a pioneer of online marketplace lending that connects borrowers and investors. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return.

We believe our online marketplace model has key advantages relative to traditional bank lending, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology-driven automation that increases efficiency and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure; instead, we use data and technology to drive automation and efficiency in our operations. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including portions of the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.

During the year ended December 31, 2019, our marketplace facilitated $2.7 billion in Borrower Loan originations, of which $2.5 billion were funded through our Whole Loan Channel, representing 94% of the total Borrower Loans originated through our marketplace during this period. From inception through March 31, 2020, our marketplace facilitated $17.1 billion in Borrower Loan originations, of which $15.3 billion were funded through our Whole Loan Channel, representing 90% of the total Borrower Loans originated through our marketplace during this period. In the three months ended March 31, 2020, our marketplace facilitated $449 million in Borrower Loan originations, a decrease of 25% from the same period in 2019. The percentage of loans funded through the Whole Loan Channel for the three months ended March 31, 2020 was 91%.

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

Recent Developments
A novel strain of coronavirus, known as SARS-CoV-2, which causes COVID-19, first surfaced in December 2019. COVID-19 continues to spread globally and, at the time of this filing, the World Health Organization has declared the COVID-19 outbreak to be a global pandemic. The COVID-19 outbreak has led to federal, state and local governments enacting various restrictions in an attempt to limit the spread of the virus, including declaration of a federal National State of Emergency, multiple cities and states declaring states of emergency, school and business closings, limitations on social or public gatherings and other social distancing measures, such as working remotely, travel restrictions, quarantines and shelter in place orders. We expect these efforts to continue and to possibly become more stringent. The financial markets have declined significantly and been subject to increased trading volatility due to uncertainty regarding the duration of the pandemic and the resulting economic disruption. In response to the economic and financial effects of COVID-19, the Federal Reserve has sharply reduced interest rates and instituted quantitative easing measures as well as domestic and global capital market support programs, and the Trump Administration and Congress are considering fiscal measures to address the economic and social consequences of the
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pandemic, including the CARES Act, which was signed into law on March 27, 2020. The CARES Act includes, among other matters, expanded eligibility for Small Business Administration loans under a new Paycheck Protection Program (“PPP loans”), provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits, and technical corrections to tax depreciation methods for qualified improvement property. As disclosed above in Note 20, Subsequent Events, to Prosper’s Notes to Consolidated Financial Statements, Prosper has obtained a PPP loan in the amount of $8.4 million, which we expect to apply towards payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. The Company is also deferring applicable payroll taxes as permitted under the CARES Act.
Prosper is also actively tracking the impact of COVID-19 on our communities, and offering assistance to qualified borrowers who are facing financial hardship as a result of the COVID-19 pandemic. These relief options include, among other things, the ability to delay up to three monthly loan payments, the ability to reduce minimum monthly payments for up to six months and extend the term of the loan by up to 11 months, and waived late and non-sufficient funds fees. Borrowers are expressing significant interest in enrolling in Prosper’s COVID-19 relief programs, and we expect enrollment to continue to increase as long as the pandemic continues to trigger increased work stoppages and unemployment. Prosper is also complying with new state mandates that may temporarily impact collections activity with respect to delinquent loans.
Over the last few years, Prosper has been tightening credit and focusing on borrowers’ ability and intent to pay in order to generate sustainable and attractive risk-adjusted returns for our investors. In light of changes in the economic environment caused by COVID-19, we have recently taken additional actions to actively manage investor returns and adapt to this rapidly changing environment. As a result, we expect to see a significant reduction in approved loan listings with higher risk C, D, E or HR Prosper Ratings.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. While marketplace activity has declined as a result of COVID-19, it is uncertain as to the full magnitude that the pandemic will have on our workforce, financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of COVID-19. Although Prosper cannot predict the length or gravity of the impacts of these events at this time, if the pandemic continues for an extended period of time, it may have a material adverse effect on our results of future operations, financial position, and liquidity.

Key Operating and Financial Metrics (in thousands)

Three Months Ended March 31,
20202019
Loan Originations$449,380  $598,197  
Transaction Fees, Net20,413  26,294  
Whole Loans Outstanding (1)
3,440,040  3,649,839  
Servicing Fees, Net6,057  6,202  
Total Net Revenue3,245  30,077  
Core Revenue (2)
3,245  39,824  
Net Income (Loss)21,130  (22,714) 
Adjusted EBITDA (2)
(31,942) 357  
(1) Balance as of March 31.
(2) Core Revenue and Adjusted EBITDA are non-GAAP Financial measures. For more information regarding these measures and a reconciliation of these measures to the most comparable US GAAP measure, see “Non-GAAP Financial Measures.”
Loan Originations
From inception through March 31, 2020, a total of 1,324,135 Borrower Loans totaling $17.1 billion were originated through Prosper’s marketplace.

During the three months ended March 31, 2020, 32,690 Borrower Loans totaling $449.4 million were originated through Prosper’s marketplace, compared to 43,133 Borrower Loans totaling $598.2 million during the three months ended March 31, 2019. This represents a decrease of 24% in terms of the number of loans and a 25% decrease in the dollar amount of loans. The originations decrease for the quarter ended March 31, 2020 versus the quarter ended March 31, 2019 was due to greater
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competition for borrowers earlier in the first quarter of 2020, followed by tighter underwriting and higher borrower rates in March 2020 to address the negative economic impact of the COVID-19 outbreak.

Loan origination volume by Prosper Rating was as follows (in millions):
Three Months Ended March 31,
20202019
Amount%Amount%
AA$58.5  13 %$83.7  14 %
A104.6  23 %143.6  24 %
B109.8  24 %161.1  27 %
C107.5  24 %138.7  23 %
D35.0  %52.6  %
E10.6  %13.8  %
HR1.6  — %4.7  %
Other (1)
21.8  %—  — %
Total$449.4  $598.2  
(1) Represents loans originated through the Prosper platform via the Whole Loan Channel but not assigned Prosper Ratings.

For the three months ended March 31, 2020, the mix of originations on the Prosper platform was generally consistent with the mix for the three months ended March 31, 2019.
Results of Operations
The following table summarizes Prosper’s net income (loss) for the three months ended March 31, 2020 and 2019 (in thousands, except percentages): 

Three Months Ended March 31,
20202019$ Change% Change
Total Net Revenues$3,245  $30,077  $(26,832) (89)%
Total Expenses(17,919) 52,762  (70,681) (134)%
Net Income (Loss) Before Taxes21,164  (22,685) 43,849  (193)%
Income Tax Expense34  29   17 %
Net Income (Loss)$21,130  $(22,714) $43,844  (193)%

Total net revenues for the three months ended March 31, 2020 decreased $26.8 million, or 89%, when compared to the three months ended March 31, 2019. The decrease was primarily attributable to a $36.9 million loss from the Change in Fair Value of Financial Instruments, Net, which compared to a $1.7 million loss for the three months ended March 31, 2019, as the economic impact brought on by the COVID-19 outbreak negatively impacted the fair value of our Borrower Loans and Loans Held for Sale. These economic conditions also resulted in reduced originations in March, following greater competition for borrowers earlier in the quarter, contributing to a $5.9 million decrease in Transaction Fees, Net. These decreases were partially offset by the Fair Value of Warrants Vested on Sale of Borrower Loans, which had a $9.7 million negative revenue impact for the three months ended March 31, 2019, and no impact for the three months ended March 31, 2020. This was due to the maturity of the Consortium agreement in May 2019, after which no additional warrants were issued. There was also a $5.7 million increase in Net Interest Income due primarily to the additional interest income generated from two securitizations and one warehouse line subsequent to March 31, 2019.
Total expenses for the three months ended March 31, 2020 decreased $70.7 million from the same period in 2019, primarily due to a $55.4 million gain from the Change in Fair Value of Convertible Preferred Stock Warrants, as compared to a $10.1 million loss for the three months ended March 31, 2019. Additionally, there was a $5.1 million decrease in Sales and Marketing expenses due to declines in originations and our efforts to reduce costs. Accordingly, net income for the three months ended March 31, 2020 increased $43.8 million when compared to the net loss incurred for the three months ended March 31, 2019.
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Revenues
The following tables summarize our revenues for the three months ended March 31, 2020 and 2019 (in thousands, except percentages):

Three Months Ended March 31,
20202019$ Change% Change
Operating Revenues:
Transaction Fees, Net$20,413  $26,294  $(5,881) (22)%
Servicing Fees, Net6,057  6,202  (145) (2)%
Gain on Sale of Borrower Loans1,744  2,697  (953) (35)%
Fair Value of Warrants Vested on the Sale of Borrower Loans—  (9,747) 9,747  (100)%
Other Revenues1,012  1,036  (24) (2)%
Total Operating Revenues29,226  26,482  2,744  10 %
Interest Income:
Interest Income on Borrower Loans and Loans Held for Sale27,644  18,428  9,216  50 %
Interest Expense on Financial Instruments(16,683) (13,120) (3,563) 27 %
Net Interest Income10,961  5,308  5,653  106 %
Change in Fair Value of Financial Instruments, Net(36,942) (1,713) (35,229) n/m  
Total Net Revenues$3,245  $30,077  $(26,832) (89)%
n/m: not meaningful
Transaction Fees, Net
We earn a transaction fee upon the successful origination of all Borrower Loans facilitated through our marketplace. Prosper receives payments from WebBank as compensation for the activities we perform on behalf of WebBank. Our fee is determined by the term and credit grade of the Borrower Loans that 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 for the three months ended March 31, 2020 decreased by $5.9 million, or 22%, as compared to the corresponding period in 2019, primarily due to lower origination volumes, as discussed above.
Servicing Fees, Net
Investors who purchase Borrower Loans from Prosper through the Whole Loan Channel typically pay Prosper a servicing fee which is currently set at 1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. The servicing fee compensates Prosper for the costs incurred in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. We record Servicing Fees from investors as a component of operating revenue when received. The 2% decrease in Servicing Fees during the three months ended March 31, 2020 compared to 2019 was primarily due to a lower principal balance of whole loans serviced.
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 $1.0 million decrease in the gain, or 35%, during the three months ended March 31, 2020 compared to the corresponding period in 2019 was primarily due to a decrease in the volume of whole loans sold due to lower origination volume, as discussed above.
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Fair Value of Warrants Vested on the Sale of Borrower Loans
Fair Value of Warrants Vested on the Sale of Borrower Loans relates to warrants to purchase Series F Convertible Preferred Stock issued to the Consortium that vested when the Consortium purchased whole loans under the Consortium Purchase Agreement, which ended in May 2019. The increase of $9.7 million for the three months ended March 31, 2020 is due to the May 2019 termination of the Consortium Purchase Agreement, after which no further warrants have been issued.
Other Revenues
Other Revenues consist primarily of securitization fees and credit referral fees. Credit referral fees are where partner companies pay us an agreed upon amount for referrals of customers from our platform. Securitization fees represent fees Prosper earns to facilitate securitizations for purchasers of Borrower Loans. The changes in Other Revenues were not significant for the three months ended March 31, 2020 as compared to the corresponding period in 2019.
Interest Income on Borrower Loans and Loans Held for Sale and Interest Expense on Financial Instruments
We recognize Interest Income on Borrower Loans and Loans Held for Sale using the accrual method based on the stated interest rate to the extent we believe it to be collectible. We record interest expense on the corresponding Notes, Notes Issued by Securitization Trust, Certificates Issued by Securitization Trust, and Warehouse Lines based on the contractual interest rates. The interest rate on Notes is generally 1% lower than the interest rate on the corresponding Borrower Loans to compensate us for servicing the underlying Borrower Loans.
The increase of $5.7 million in Net Interest Income for the three months ended March 31, 2020 compared to the corresponding period in 2019 was primarily due to net interest income earned from the two securitization trusts and one warehouse trust subsequent to March 31, 2019.
Change in Fair Value of Financial Instruments, Net
Prosper records Borrower Loans, Loans Held for Sale, Notes, and Certificates Issued by Securitization Trust at fair value. Changes in fair value of Borrower Loans funded through Note Channel are largely offset by the changes in fair value of the Notes due to their borrower payment-dependent structure. Prosper's obligation to pay principal and interest on Notes is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of the servicing fee, which is generally 1.0% of the outstanding balance.
In 2018, Prosper began using Warehouse Lines to finance the purchase of Loans Held for Sale for the purpose of earning Net Interest Income and contributing to securitization transactions. Loans Held for Sale consist primarily of loans held in warehouse trusts. Changes in the fair value of Loans Held for Sale are not offset by changes in fair value of Warehouse Lines because Warehouse Lines are carried at amortized cost. See Note 10 of the accompanying notes to PMI’s condensed consolidated financial statements for more details on Warehouse Lines. During 2019, Prosper co-sponsored and consolidated three securitization transactions, two of which were consolidated after March 31, 2019. Refer to Note 6 of the accompanying notes to PMI’s condensed consolidated financial statements for additional information on those securitization transactions. Changes in fair value of Borrower Loans held in consolidated securitization trusts are partially offset by changes in fair value of the Certificates Issued by the Securitization Trusts. Changes in fair value of loans held in warehouse and securitization trusts are generally negative due to actual charge-offs and changes in fair value adjustments that are attributable to changes in expected credit performance and implied market discount rates. We earn interest income on loans held in warehouse and securitization trusts during the period we own the loans, which partially offsets changes in the fair value of those loans. The following table illustrates the composition of the loans held in warehouse and securitization trusts by Prosper Rating, which is an indicator of the credit quality:
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Three Months Ended March 31,
20202019
Loans Held for Sale(1):
AA13 %13 %
A32 %35 %
B39 %37 %
C12 %%
D%%
E%%
HR— %%
Grand Total100 %100 %
Borrower Loans - Securitizations(2):
AA%11 %
A19 %16 %
B23 %26 %
C32 %27 %
D14 %14 %
E%%
HR%%
Grand Total100 %100 %
(1) The percentages are calculated using the weighted average of month-end principal balances of Loans Held for Sale by Prosper Rating.
(2)The percentages are calculated using the weighted-average of month-end principal balances of Borrower Loans by Prosper Rating.

Fair value of Borrower Loans, Loans Held for Sale, Notes and Certificates Issued by Securitization Trust is estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The key assumptions used include default rates and prepayment rates derived primarily from historical performance, and discount rates based on estimates of the rates of return that investors would require when investing in other financial instruments with similar characteristics. The loss in the Change in Fair Value of Financial Instruments, Net was $36.9 million for the three months ended March 31, 2020, as compared to a loss of $1.7 million for the corresponding period in 2019. In response to the negative economic impact brought on by the COVID-19 impact, we adjusted certain of our fair value assumptions for the three months ended March 31, 2020 to reflect available market information and market feedback, which resulted in the increase in the loss year-over-year. Refer to Note 7 of the accompanying condensed consolidated financial statements for additional information on fair value assumptions.
The following table details the changes in our fair value of our financial instruments for the three months ended March 31, 2020 and 2019, respectively (in thousands):

Three Months Ended March 31,
20202019
Assets:
Borrower Loans$(53,196) $(6,923) 
Loans Held for Sale(14,252) (1,309) 
Liabilities:
Notes18,529  5,502  
Certificates Issued by Securitization Trust11,981  516  
$(36,938) $(2,214) 

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Expenses
The following table summarizes Prosper’s expenses for the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended March 31,
20202019$ Change% Change
Expenses
Origination and Servicing$8,446  $8,161  $285  %
Sales and Marketing11,242  16,341  (5,099) (31)%
General and Administrative - Research and Development4,522  4,456  66  %
General and Administrative - Other13,640  14,312  (672) (5)%
Change in Fair Value of Convertible Preferred Stock Warrants(55,449) 10,058  (65,507) (651)%
Restructuring Charges—  82  (82) (100)%
Other Income, Net(320) (648) 328  (51)%
Total Expenses$(17,919) $52,762  $(70,681) (134)%

As of March 31, 2020, Prosper had 403 full-time employees compared to 416 full-time employees as of March 31, 2019. The following table reflects full-time employees as of March 31, 2020 and 2019 by functional area:
March 31, 2020March 31, 2019
Origination and Servicing149163
Sales and Marketing1717
General and Administrative - Research and Development10297
General and Administrative - Other135139
Total Headcount403416
Origination and Servicing
Origination and Servicing costs consist primarily of salaries, benefits and stock-based compensation expense related to our capital markets, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans. The increase in Origination and Servicing costs for the three months ended March 31, 2020 as compared to the corresponding period in 2019 was not significant.
Sales and Marketing
Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations and direct mail marketing, as well as compensation expenses such as wages, benefits and stock based compensation for the employees who support these activities. For the three months ended March 31, 2020 as compared to the same period in 2019, the decrease of $5.1 million, or 31%, was largely driven by decreases of (a) $2.3 million in direct mailing costs, (b) $2.0 million in partnership costs and (c) $0.8 million in digital marketing costs. These decreases reflect our efforts to optimize our marketing programs to improve efficiencies, combined with declines in originations during the period, as discussed above. We plan to continue to optimize and manage spend for the foreseeable future, especially in light of the current environment.
General and Administrative - Research and Development
General and Administrative – Research and Development costs consist primarily of salaries, benefits and stock-based compensation expense related to our engineering and product development employees and related vendor costs. The increase in General and Administrative – Research and Development for the three months ended March 31, 2020 as compared to the same period in 2019 was not significant.
General and Administrative - Other
General and Administrative – Other expenses consist primarily of salaries, benefits and stock-based compensation expense related to our accounting and finance, risk, legal, human resources and facilities employees, professional fees related to
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legal and accounting and facilities expenses. The decrease in General and Administrative - Other costs for the three months ended March 31, 2020, as compared to the same period in 2019, was $0.7 million, or 5%. This decrease was primarily attributable to a $0.4 million decline in compensation and benefits costs, which was generally in line with the change in headcount for the period.
Change in Fair Value of Convertible Preferred Stock Warrants
Change in Fair Value of Convertible Preferred Stock Warrants was a gain of $55.4 million for the three months ended March 31, 2020, due to a decrease in the fair value of the underlying Convertible Preferred Stock. Change in Fair Value of Convertible Preferred Stock warrants was a loss of $10.1 million for the same period in 2019, due to an increase in the fair value of the underlying Convertible Preferred Stock for that period.
Other Income, Net
Other Income, Net for the three months ended March 31, 2020 primarily consists of interest income on cash and cash equivalents, as well as sublease income. The decrease in Other Income, Net for the three months ended March 31, 2020, as compared to the corresponding period in 2019, was primarily due to a decline in interest income, as our outstanding cash, cash equivalents and available for sale investments all decreased from the prior year.
Non-GAAP Financial Measures

Core Revenue
Core Revenue is a non-GAAP financial measure that we define as our Total Net Revenue adjusted to exclude the Fair Value of Warrants Vested on Sale of Borrower Loans. We believe it is useful to exclude the Fair Value of Warrants Vested on Sale of Borrower Loans from Total Net Revenue to derive a better measurement of our business performance. We believe that this adjustment also affords greater comparability to other marketplace lenders.
The underlying Fair Value of Warrants Vested on the Sale of Borrower Loans relates to the Consortium Purchase Agreement. This agreement expired in May 2019 and we currently do not expect to sign a similar agreement to replace it. As a result, we believe that providing the Core Revenue metric that excludes the impact of Fair Value of Warrants Vested on Sale of Borrower Loans is useful to investors.
Core Revenue has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for Total Net Revenue which has been prepared in accordance with U.S. GAAP. These limitations include the following:
Core Revenue is net of Fair Value of Warrants Vested on Sale of Borrower Loans, which was historically our largest contra revenue item (no amount has been recorded since May 2019, when the Consortium agreement ended); and
Other companies, including companies in our industry, may calculate Core Revenue differently or not at all, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Core Revenue alongside other financial performance measures, including Total Net Revenue and our financial results presented in accordance with U.S. GAAP. The following table presents a reconciliation of Total Net Revenue to Core Revenue for each of the periods indicated (in thousands):
Three Months Ended March 31,
20202019
Total Net Revenues$3,245  $30,077  
Less: Fair Value of Warrants Vested on Sale of Borrower Loans—  (9,747) 
Core Revenue$3,245  $39,824  

Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as Net Income (Loss) adjusted for interest income on Available for Sale Investments and Cash and Cash Equivalents, SEC Settlement Costs, Income Tax Expense, depreciation and amortization, impairment of Intangible Assets, stock based compensation expense, Fair Value of Warrants Vested on the Sale of Borrower Loans, Restructuring Charges, and Change in Fair Value of Convertible Preferred Stock Warrants. The
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presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.
We consider Adjusted EBITDA to be a helpful indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Management uses Adjusted EBITDA to, among other things, understand and compare operating results across accounting periods, evaluate our operations and financial performance and for internal planning and forecasting purposes. Inclusion of Adjusted EBITDA is intended to provide investors insight into the manner in which management views the performance of the Company, enhance investors’ evaluation of our operating results, and to facilitate meaningful comparisons of our results between periods. These non-GAAP financial measures should not be considered an alternative to, or more meaningful than, the GAAP financial information provided herein.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA does not consider the potentially dilutive impact of equity-based charges;
Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

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

Fair value of warrants vested on the sale of Borrower Loans and change in the fair value of convertible preferred stock warrants liability. We exclude these charges primarily because they are non-cash charges and the fair value varies based on the fair value of the underlying preferred stock, varying valuation methodologies and subjective assumptions. Their inclusion makes the comparison of our current financial results to previous and future periods difficult to evaluate.
Stock-based compensation expense. This consists of expenses for equity awards under our equity incentive plans. Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to evaluate; therefore, we believe it is useful to exclude stock-based compensation. We also excluded these expenses because they are non-cash.
Amortization or impairment of acquired intangible assets and impairment of goodwill. We incur amortization or impairment of acquired Intangible Assets and Goodwill in connection with acquisitions and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.

The following table presents a reconciliation of Net Income (Loss) to Adjusted EBITDA for each of the periods indicated (in thousands):
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Three Months Ended March 31,
20202019
Net Income (Loss)$21,130  $(22,714) 
Fair Value of Warrants Vested on Sale of Borrower Loans—  9,747  
Depreciation expense:
    Servicing and Origination1,369  1,146  
    General and Administration - Other582  654  
Amortization of Intangibles55  70  
Stock-Based Compensation505  1,614  
Restructuring Charges—  82  
Change in the Fair Value of Warrants(55,449) 10,058  
Interest Income on Available for Sale Securities, Cash and Cash Equivalents(168) (329) 
Income Tax Expense34  29  
Adjusted EBITDA$(31,942) $357  

Expenses on the condensed consolidated statements of operations include the following amounts of stock based compensation for the periods presented (in thousands):
Three Months Ended March 31,
20202019
Origination and Servicing$38  $196  
Sales and Marketing11  83  
General and Administrative456  1,335  
Total Stock-Based Compensation$505  $1,614  

Liquidity and Capital Resources
We anticipate that our available funds, Warehouse Lines, and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future. However, there remains significant uncertainty regarding the future impact of the COVID-19 outbreak on our financial condition and liquidity. As more fully described in Note 20 - Subsequent Events of the accompanying condensed consolidated financial statements, as well as the Recent Developments section above, we have taken actions to optimize our liquidity, which include obtaining an $8.4 million loan under the PPP, deferring certain payroll taxes, implementing salary reductions for all employees with annualized base salaries greater than $100,000 effective May 1, 2020, suspending certain benefits such as 401(k) match for all employees effective July 1, 2020, reducing third-party spend and limiting discretionary expenses where possible. We plan to apply the PPP loan proceeds towards payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

The following table summarizes Prosper’s cash flow activities for the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended March 31,
20202019
Net Income (Loss)$21,130  $(22,714) 
Net cash used in operating activities(18,276) (31,622) 
Net cash provided by investing activities36,265  16,110  
Net cash (used in) provided by financing activities(44,064) 21,439  
Net (decrease) increase in cash, cash equivalents and restricted cash(26,075) 5,927  
Cash, cash equivalents and restricted cash at the beginning of the period220,408  207,059  
Cash, cash equivalents and restricted cash at the end of the period$194,333  $212,986  
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Net Cash, Cash Equivalents and Restricted Cash decreased by $26.1 million for the three months ended March 31, 2020, based on the following components:
Operating Activities: $18.3 million in cash was used in operating activities, primarily driven by less cash held on the platform that is classified as Restricted Cash, as well as $7.3 million in net purchases of Loans Held for Sale.
Investing Activities: $36.3 million in cash was provided by investing activities due to (a) $80.9 million in principal payments on Borrower Loans, offset by (b) $41.3 million in purchases of Borrower Loans and (c) $3.4 million in purchases of property and equipment, primarily consisting of internal-use software.
Financing Activities: $44.1 million in cash was used in financing activities, primarily driven by payments on Notes and Certificates Issued by Securitization Trusts of $66.8 million, offset by proceeds from Warehouse Lines of $22.7 million.
Net Cash, Cash Equivalents and Restricted Cash increased $5.9 million for the three months ended March 31, 2019 based on the following components:
Operating Activities: $31.6 million in cash was used in operating activities, primarily driven by less cash held on the platform that is classified as Restricted Cash, as well as $26.2 million in net purchases of Loans Held for Sale.
Investing Activities: $16.1 million in cash was provided by investing activities, primarily due to $18.0 million in maturities on Available for Sale Securities, partially offset by $2.8 million in purchases of property and equipment, primarily consisting of internal-use software.
Financing Activities: $21.4 million in cash was provided by financing activities, primarily driven by $31.8 million in proceeds from Warehouse Lines and $1.1 million in proceeds from securitization issuance, partially offset by $7.9 million in principal payments on Notes and Certificates Issued by Securitization Trusts and $4.4 million in debt issuance costs.
Due to volatility in the financial markets brought on by the COVID-19 outbreak, we may not be able to access the securitization market in the near future. Despite this, we believe our liquidity needs are met through transaction fees, servicing fees, net interest income, proceeds from sales of loans and interests in existing securitization transactions, draws on Warehouse Lines, and Cash and Cash Equivalents. Management is continuing to monitor the impact of the COVID-19 pandemic on our financial results and operations. If the financial results anticipated are not achieved, whether due to COVID-19 or otherwise, our sources of liquidity may not be sufficient to meet our operating and liquidity requirements without obtaining additional liquidity which may not be available on favorable terms or at all.
Income Taxes
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets. Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, we have provided a full valuation allowance against our net deferred tax assets.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are required to make subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.
Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, we are an interest holder in certain special purpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as we are not the primary beneficiary. Other than these special purpose entities, as of March 31, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.
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Critical Accounting Policies
Certain of Prosper's accounting policies that involve a higher degree of judgment and complexity are discussed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in Prosper’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes to these critical accounting estimates during the first three months of 2020.
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PROSPER FUNDING LLC
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper Funding’s historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper Funding’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” sections and elsewhere in this Quarterly Report on Form 10-Q and Prosper Funding’s Annual Report on Form 10-K for the year ended December 31, 2019.
Prosper Funding was formed in the state of Delaware in February 2012 as a limited liability company with PMI as its sole equity member. Prosper Funding was formed by PMI to hold Borrower Loans originated through the Note Channel and issue related Notes. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and by implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI.
As a credit marketplace, we believe our customers are more highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate in our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
Recent Developments
A novel strain of coronavirus, known as SARS-CoV-2, which causes COVID-19, first surfaced in December 2019. COVID-19 continues to spread globally and, at the time of this filing, the World Health Organization has declared the COVID-19 outbreak to be a global pandemic. The COVID-19 outbreak has led to federal, state and local governments enacting various restrictions in an attempt to limit the spread of the virus, including declaration of a federal National State of Emergency, multiple cities and states declaring states of emergency, school and business closings, limitations on social or public gatherings and other social distancing measures, such as working remotely, travel restrictions, quarantines and shelter in place orders. We expect these efforts to continue and to possibly become more stringent. The financial markets have declined significantly and been subject to increased trading volatility due to uncertainty regarding the duration of the pandemic and the resulting economic disruption. In response to the economic and financial effects of COVID-19, the Federal Reserve has sharply reduced interest rates and instituted quantitative easing measures as well as domestic and global capital market support programs, and the Trump Administration and Congress are considering fiscal measures to address the economic and social consequences of the pandemic, including the CARES Act, which was signed into law on March 27, 2020. The CARES Act includes, among other matters, expanded eligibility for Small Business Administration loans under a new Paycheck Protection Program (“PPP loans”), provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits, and technical corrections to tax depreciation methods for qualified improvement property.
Prosper is also actively tracking the impact of COVID-19 on our communities, and offering assistance to qualified borrowers who are facing financial hardship as a result of the COVID-19 pandemic. These relief options include, among other things, the ability to delay up to three monthly loan payments, the ability to reduce minimum monthly payments for up to six months and extend the term of the loan by up to 11 months, and waived late and non-sufficient funds fees. Borrowers are expressing significant interest in enrolling in Prosper’s COVID-19 relief programs, and we expect enrollment to continue to increase as long as the pandemic continues to trigger increased work stoppages and unemployment. Prosper is also complying with new state mandates that may temporarily impact collections activity with respect to delinquent loans.
Over the last few years, Prosper has been tightening credit and focusing on borrowers’ ability and intent to pay in order to generate sustainable and attractive risk-adjusted returns for our investors. In light of changes in the economic environment caused by COVID-19, we have recently taken additional actions to actively manage investor returns and adapt to this rapidly changing environment. As a result, we expect to see a significant reduction in approved loan listings with higher risk C, D, E or HR Prosper Ratings.
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The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. While marketplace activity has declined as a result of COVID-19, it is uncertain as to the full magnitude that the pandemic will have on Prosper’s workforce, financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of COVID-19. Although Prosper Funding cannot predict the length or gravity of the impacts of these events at this time, if the pandemic continues for an extended period of time, it may have a material adverse effect on our results of future operations, financial position, and liquidity.
Results of Operations
Overview
The following table summarizes Prosper Funding’s net income for the three and three months ended March 31, 2020 and 2019 (in thousands, except percentages):
Three Months Ended March 31,
20202019$ Change% Change
Total Net Revenues$15,159  $17,445  $(2,286) (13)%
Total Expenses13,611  16,154  (2,543) (16)%
Net Income$1,548  $1,291  $257  20 %

Total net revenues for the three months ended March 31, 2020 decreased $2.3 million, a 13% decrease from the three months ended March 31, 2019, primarily due to the decreased number of loan listings on the marketplace during the period, which resulted in decreased administration fee revenue for the listing-driven portion of such fee. Total expenses for the three months ended March 31, 2020 decreased $2.5 million, a 16% decrease from the three months ended March 31, 2019, primarily due to decreased origination volume of Borrower Loans and lower administrative fee per loan listing during the period. The decreases in loan listings and originations are due to greater competition for borrowers earlier in the first quarter of 2020, followed by tighter underwriting and higher borrower rates in March 2020 to address the negative economic impact of the COVID-19 outbreak.
Net income for the three months ended March 31, 2020 increased $0.3 million, a 20% increase from the three months ended March 31, 2019, primarily due to the decreased expenses described above.
Revenues
The following table summarizes Prosper Funding’s revenue for the three months ended March 31, 2020 and 2019 (in thousands, except percentages):
Three Months Ended March 31,
20202019$ Change% Change
Revenues
Operating Revenues:
Administration Fee Revenue - Related Party$5,835  $16,975  $(11,140) (66)%
Servicing Fees, Net6,459  6,645  (186) (3)%
Gain (Loss) on Sale of Borrower Loans2,000  (6,827) 8,827  (129)%
Other Revenues180  57  123  216 %
Total Operating Revenues14,474  16,850  (2,376) (14)%
Interest Income on Borrower Loans9,838  10,331  (493) (5)%
Interest Expense on Notes(9,216) (9,649) 433  (4)%
Net Interest Income622  682  (60) (9)%
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, net63  (87) 150  (172)%
Total Net Revenue$15,159  $17,445  $(2,286) (13)%

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Administration Fee Revenue - Related Party
Prosper Funding primarily generates revenue through license fees it earns under its Administration Agreement with PMI. The Administration Agreement contains a license granted by PFL to PMI that entitles PMI to use the marketplace for, and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement. The Administration Agreement requires PMI to pay PFL a monthly license fee that is partially based on the number of loan listings posted on the marketplace in that month, as well as a rebate fee based on rebates given to investors as an incentive to purchase Borrower Loans from PFL. The decrease in Administrative Fee Revenue of $11.1 million for the three months ended March 31, 2020, as compared to the corresponding period in 2019, was primarily due to (a) no additional rebates being provided under the Consortium Purchase Agreement after the agreement ended in May 2019 and (b) the decrease in loan listings posted on the marketplace for the period.
Servicing Fees, Net
Investors who purchase Borrower Loans from Prosper Funding through the Whole Loan Channel typically pay Prosper Funding a servicing fee, which is currently set at 1.075% per annum of the outstanding principal balance of the Borrower Loans prior to applying the current payment. The servicing fee compensates Prosper Funding for the costs incurred in servicing the Borrower Loans, including managing payments from borrowers, managing payments to investors and maintaining investors’ account portfolios. Prosper Funding records Servicing Fees from investors as a component of operating revenue when received. The decrease in Servicing Fees of $0.2 million for the three months ended March 31, 2020, as compared to the corresponding period in 2019, was primarily due to a lower outstanding balance of Borrower Loans.
Gain (Loss) on Sale of Borrower Loans
Gain (Loss) on Sale of Borrower Loans consists of net gains and losses on Borrower Loans sold through the Whole Loan Channel. This account went from a loss of $6.8 million for the three months ended March 31, 2019 to a $2.0 million gain for the three months ended March 31, 2020. This $8.8 million increase was primarily due to the fact that no rebates were issued related to Consortium warrants for the three months ended March 31, 2020, as the related Consortium Purchase Agreement ended in May 2019. These rebates totaled $9.7 million for the three months ended March 31, 2019.
Other Revenues
Other Revenues consists primarily of fees earned from facilitating securitizations for whole loan purchasers. Other Revenues for the three months ended March 31, 2020 and 2019 were not significant.
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper Funding recognizes interest income on Borrower Loans originated through the Note Channel using the accrual method based on the stated interest rate to the extent Prosper Funding believes them to be collectable. Prosper Funding also records interest expense on the corresponding Notes using the accrual method based on the contractual interest rates. The interest rate charged on the Borrower Loans is generally 1% higher than the interest rate paid on the corresponding Notes in order to compensate Prosper Funding for servicing the Borrower Loans.
Overall, the decrease in net interest income for the three months ended March 31, 2020, as compared to the same period in 2019, was primarily driven by the decrease in volume of Borrower Loans originated through the Note Channel.
Change in Fair Value of Financial Instruments
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net captures losses from a change in fair value estimates using discounted cash flow methodologies that are based upon a set of valuation assumptions. The key assumptions used in valuation include default and prepayment rates derived primarily from historical performance, and discount rates based on estimates of the rates of return that investors would require when investing in other financial instruments with similar characteristics. Changes in fair value of Borrower Loans funded through the Note Channel are largely offset by the changes in fair value of the corresponding Notes due to the borrower payment dependent structure. Loans Held for Sale are primarily comprised of Borrower Loans held for short durations and their valuation uses the same approach as the Borrower Loans.
The following table summarizes the fair value adjustments for the three month periods ended March 31, 2020 and 2019 (in thousands):
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Three Months Ended March 31,
20202019
Borrower Loans$(18,466) $(5,589) 
Notes18,529  5,502  
Total$63  $(87) 
Expenses
The following table summarizes Prosper Funding’s expenses for the three month periods ended March 31, 2020 and 2019 (in thousands, except percentages):
Three Months Ended March 31,
20202019$ Change% Change
Expenses
Administration Fee Expense – Related Party$12,364  $14,991  $(2,627) (18)%
Servicing1,193  1,067  126  12 %
General and Administrative54  96  (42) (44)%
Total Expenses$13,611  $16,154  $(2,543) (16)%

Administration Fee Expense - Related Party
Pursuant to the Administration Agreement between Prosper Funding and PMI, PMI manages the marketplace on behalf of Prosper Funding. Accordingly, each month Prosper Funding is required to pay PMI (a) a corporate administration fee of $500,000 per month, (b) a fee for each Borrower Loan originated through the marketplace, (c) 62.5% of all Servicing Fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of Prosper Funding. The decrease of Administration Fee expense of $2.6 million for the three months ended March 31, 2020, as compared to the same period 2019, was primarily due to the decreased origination volume of Borrower Loans for the current period.
Servicing
Servicing costs consist primarily of vendor costs and depreciation of internal-use software costs associated with servicing Borrower Loans. The increase in Servicing costs for the three months ended March 31, 2020, as compared to the corresponding period in 2019, was not significant.
General and Administrative
General and Administrative costs consist primarily of bank service charges and professional fees. General and Administrative costs were not significant for the three months ended March 31, 2020 and 2019.
Liquidity and Capital Resources
We anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for the foreseeable future. However, there remains significant uncertainty regarding the future impact of the COVID-19 outbreak on our financial condition and liquidity. Management is continuing to monitor the impact of COVID-19 on its operations and financial results.
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The following table summarizes Prosper Funding’s cash flow activities for the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended March 31,
20202019
Net Income$1,548  $1,291  
Net cash used in operating activities(513) (7,833) 
Net cash used in investing activities(1,662) (3,649) 
Net cash (used in) provided by financing activities(13) 822  
Net decrease in cash, cash equivalents and restricted cash(2,188) (10,660) 
Cash, cash equivalents and restricted cash at the beginning of the period117,861  147,181  
Cash, cash equivalents and restricted cash at the end of the period$115,673  $136,521  
 
Net Cash, Cash Equivalents and Restricted Cash decreased $2.2 million for the three months ended March 31, 2020, based on the following components:
Operating Activities: $0.5 million was used in operating activities, primarily driven by less cash held on the platform by investors that is classified as Restricted Cash.
Investing Activities: $1.7 million was used in investing activities, due to purchases of Borrower Loans of $41.3 million and property and equipment of $0.6 million, partially offset by $40.2 million in principal payments under Borrower Loans.
Financing Activities: Cash used in financing activities was not significant, as payments on Notes and proceeds on the issuance of Notes both totaled $40.6 million.
Net Cash, Cash Equivalents and Restricted Cash decreased $10.7 million for the three months ended March 31, 2019, based on the following components:
Operating Activities: $7.8 million was used in operating activities, primarily driven by less cash held on the platform by investors that is classified as Restricted Cash.
Investing Activities: $3.6 million was used in investing activities, due to purchases of Borrower Loans of $44.2 million and property and equipment of $1.6 million, partially offset by $42.2 million in principal payments under Borrower Loans.
Financing Activities: $0.8 million was provided by financing activities due to $44.9 million in proceeds from the issuance of Notes, partially offset by $44.1 million in payments on Notes.
Income Taxes
Prosper Funding incurred no income tax expense for the three months ended March 31, 2020 and 2019. Prosper Funding is a US disregarded entity for income tax purposes and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses, 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 March 31, 2020, Prosper Funding has not engaged in any off-balance sheet financing activities.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk and Interest Rate Risk
Prosper Marketplace, Inc.
Market Risk
Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.
Through the Warehouse Lines we invest in Loans Held for Sale. Investments in interest-earning instruments carry a degree of interest rate risk. Changes in U.S. interest rates affect the market value of these Loans Held for Sale held on our balance sheet. Our future investment income may fall short of expectations, or we may suffer a loss in principal if we are forced to sell Loans Held for Sale, which have declined in market value due to changes in interest rates, as stated above, as well as the economic impact of the COVID-19 outbreak. Additionally, if the fair value of the Loans Held for Sale continues to decline, we may not be able to repay the Warehouse Lines using the sale of Loans Held for Sale alone. Changes in the market value of Loans Held for Sale are recorded on the Consolidated Statement of Operations. The fair value of Loans Held for Sale was $153.2 million and $142.0 million as of March 31, 2020 and December 31, 2019, respectively.
The fair values of Borrower Loans, Loans Held for Sale, Notes, Certificates Issued by the Securitization Trust are determined using discounted cash flow methodologies based upon a set of valuation assumptions such as default rate, prepayment rate and discount rate. Default rate, prepayment rate and discount rate may change due to expected loan performance or changes in the expected returns of similar financial instruments available in the market. We are exposed to the risk of decrease in the fair value of loans held in the warehouse and securitization trusts. For Borrower Loans and Notes presented on our Balance Sheet on behalf of our Note Channel investors, the fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
We are also exposed to variable interest rate risk under the debt from the Warehouse Lines, which had an outstanding balance of $154.4 million and $131.6 million as of March 31, 2020 and December 31, 2019, respectively. To reduce the impact of large fluctuations in interest rates, we hedged a portion of our interest rate risk by entering into a derivative agreement with a financial institution, which is currently out of the money. The derivative agreement that we use to manage the risk associated with fluctuations in interest rates may not be able to eliminate the exposure to these changes. Interest rates are sensitive to numerous factors outside of our control, such as government and central bank monetary policy in the United States. Depending on the size of the exposures and the relative movements of interest rates, if we choose not to hedge or fail to effectively hedge our exposure, we could experience a material adverse effect on our results of operations and financial condition.
Prosper had cash and cash equivalents of $52.9 million and $64.6 million as of March 31, 2020 and December 31, 2019, respectively. These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities which may include money market funds, U.S. Treasury securities, and U.S. agency securities. Cash and Cash Equivalents are held for working capital purposes. Due to their short-term nature, Prosper believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will moderately reduce interest income on these Cash and Cash Equivalents. Increases in short-term interest rates will moderately increase the interest income earned on the Cash and Cash Equivalents.
Interest Rate Sensitivity
As more fully described in Note 7, Fair Value of Assets and Liabilities, of Prosper's condensed consolidated financial statements attached to this Quarterly Report on Form 10-Q, the combined fair value of Borrower Loans and Loans Held for Sale is $675.6 million as of March 31, 2020, determined using a weighted-average discount rate of 11.79%. The combined fair value of Borrower Loans and Loans Held for Sale was $776.0 million as of December 31, 2019, determined using a weighted-average discount rate of 7.00%. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $5.9 million and $7.1 million in the fair value of Prosper’s investment in Borrower Loans and Loans Held for Sale as of March 31, 2020 and December 31, 2019, respectively. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $6.0 million and $7.3 million in the fair value of Prosper’s investment in Borrower Loans and Loans Held for Sale as of March 31, 2020 and December 31, 2019, respectively. Any realized or unrealized gains or losses resulting from such interest rate change would be recorded in our statement of operations so long as we hold these Borrower Loans and Loans Held for Sale on our balance sheet.
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Prosper Funding LLC 
Market Risk
Market risk is the risk of loss to future earnings, values, or future cash flows that may result from changes in financial market prices and interest rates.
Because balances, interest rates, and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net of our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.
The fair values of Borrower Loans and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
Prosper Funding had cash and cash equivalents of $10.5 million as of March 31, 2020, and $7.5 million as of December 31, 2019. These amounts were held in various unrestricted deposits with highly rated financial institutions and short term, highly liquid marketable securities which may include money market funds, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes. Due to their short-term nature, Prosper Funding believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will moderately reduce interest income on these cash and cash equivalents, while increases in short-term interest rates will moderately increase the interest income earned on these cash and cash equivalent balances.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Registrants’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including to each Registrant’s Principal Executive Officer (PEO) and Principal Financial Officer (PFO), to allow timely decisions regarding required disclosures. The management of each Registrant, with the participation of such Registrant’s PEO and PFO, has evaluated the effectiveness of such Registrant’s disclosure controls and procedures as of March 31, 2020. Based on this evaluation, each Registrant’s PEO and PFO have concluded that these disclosure controls and procedures were effective as of March 31, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in either Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the three months ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, either Registrant’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings

Prosper's disclosure set forth under Note 17, Commitments and Contingencies—West Virginia Matter, of the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

Prosper Funding's disclosure set forth under Note 8, Commitments and Contingencies—West Virginia Matter, of the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

On April 21, 2009, PMI and the North American Securities Administrators Association (“NASAA”) reached agreement on the terms of a model consent order between PMI and the states in which PMI, under its initial platform structure, offered promissory notes for sale directly to investor members prior to November 2008. The consent order involves payment by PMI of up to an aggregate of $1 million in penalties, which have been allocated among the states based on PMI’s promissory note sale transaction volume in each state prior to November 2008. A state that enters into a consent order receives its portion of the $1 million in exchange for its agreement to terminate, or refrain from initiating, any investigation of PMI’s promissory note sale activities prior to November 2008. Penalties are paid promptly after a state enters into a consent order. NASAA has recommended that each state enter into a consent order; however, no state is obliged to do so, and there is no deadline by which a state must make its decision. PMI is not required to pay any portion of the penalty to those states that do not elect to enter into a consent order. If a state does not enter into a consent order, it is free to pursue its own remedies against PMI, subject to any applicable statute of limitations. As of December 31, 2019, PMI has entered into consent orders with 34 states and the District of the Columbia and has paid an aggregate of $0.78 million in associated penalties. PMI has not entered into any such consent orders since 2016.
Item 1A. Risk Factors 
You should carefully consider all information in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and related notes, and the risks described in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019.

RISKS RELATED TO BORROWER DEFAULT

Loss rates on the Borrower Loans may increase as a result of economic conditions beyond our control and beyond the control of the borrower, such as the current COVID-19 pandemic.

Borrower Loan loss rates may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrowers. In particular, loss rates on Borrower Loans may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, residential real estate values, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions in the credit markets and other factors.

Borrowers may be more likely to incur additional unsecured or secured debt in an effort to mitigate economic harm caused by COVID-19, which may further reduce their likelihood of repaying Borrower Loans.

The global spread of COVID-19 and the self-quarantine and shelter-in-place public health orders issued in response have forced many businesses to suspend their operations. The resulting economic contraction has had a particularly deleterious effect on small businesses, self-employed individuals and independent contractors whose livelihoods depend on providing in-person goods and services. In response, in March 2020, Congress enacted and the president signed into law the Coronavirus Preparedness and Response Supplemental Appropriations Act and the CARES Act. The relief measures provided by these laws include expanding eligibility criteria for Small Business Administration loan programs. To the extent the COVID-19 pandemic and legislation passed in response to the pandemic result in borrowers incurring additional debt above and beyond ordinary levels, borrowers’ overall ability to repay Borrower Loans may be further impaired.

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RISKS INHERENT IN INVESTING IN THE NOTES

We may choose or be required to implement payment and collections relief programs in response to the COVID-19 pandemic and other public health emergencies or crises, which may extend or otherwise alter the repayment schedule of Borrower Loans and reduce the expected return on the corresponding Notes.

The continued spread of COVID-19 has caused significant market volatility and workforce disruptions. With an increasing number of state and local governments imposing self-quarantine and shelter-in-place orders to protect public health, unemployment levels are rising as businesses are forced to curtail operations. Prosper recognizes the serious economic hardship triggered by COVID-19, and is offering assistance to qualified borrowers who are facing financial hardship as a result of the COVID-19 pandemic. These relief options include, among other things, the ability to delay up to three monthly loan payments and waived late and non-sufficient funds fees. Prosper is also complying with new state mandates that may temporarily impact collections activity with respect to delinquent loans.

Prosper’s current COVID-19 relief options for qualified borrowers allow borrowers to skip loan payments or temporarily reduce their minimum monthly payments and extend the maturity date of their loans which could impact investor returns on corresponding Notes. No payments will be made on any corresponding Notes during a month in which a borrower relying on our COVID-19 relief options skips a loan payment. Likewise, to the extent Prosper is required to comply with state mandates to pause collections activity on delinquent loans, investors will not receive recoveries on any Notes corresponding to Borrower Loans that cannot be collected upon while such mandates are in effect. Prosper continues to actively monitor the impact of COVID-19 on economic conditions.

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

A decline in economic conditions may adversely affect our customers, which may negatively impact our business and results of operations.

As a lending marketplace, we believe our customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate in our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations. The current COVID-19 pandemic has created turbulent economic conditions, with many businesses grinding to a halt in response to public health orders to shelter in place. Over 36 million people have filed unemployment claims in the U.S. since March 15, with the unemployment rate reaching a record 14.7 percent in April 2020.

Prosper has experienced a decline in marketplace participation as a result of COVID-19. If the effects of COVID-19 continue for an extended period of time and we are unable to originate sufficient loan volumes or attract sufficient investor purchase commitments from new and existing investors, our business and results of operations may be materially adversely affected.

If the security of PFL’s investors’ and borrowers’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, users’ secure information may be stolen, our reputations may be harmed, and we may be exposed to liability.

As with any entity with a significant Internet presence, we and the third parties that Prosper uses for website hosting and mobile technologies occasionally have experienced cyber-attacks, breaches of our and their systems and other similar incidents, which to-date have not had a material effect on our business, operations or reputation. Future attacks are likely to occur. Our marketplace stores PFL’s investors’ and borrowers’ bank information and other personally-identifiable sensitive data. Any accidental or willful security breaches or other unauthorized access could cause users’ secure information to be stolen and used for criminal purposes. Security breaches or unauthorized access to secure information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee or contractor error, malfeasance, faulty password management or otherwise, or if design flaws in the relevant software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any investors’ or borrowers’ data, PFL’s relationships with its users could be severely damaged, and PFL (or PMI) could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and PMI’s third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity,
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which may cause our users to lose confidence in the effectiveness of PFL’s and PMI's data security measures. Further, California has recently enacted the California Consumer Privacy Act, a comprehensive bill that affords individuals in the state affected by data breaches a private right of action against companies that have allegedly been the target of such breaches due to a failure to implement and maintain appropriate cybersecurity policies and procedures. Any security breach, whether actual or perceived, would harm our reputations, and we could lose users.

In addition, we face an increased risk of cyber-attacks during the novel coronavirus (COVID-19) pandemic, which has forced us and many other companies to institute remote work protocols in order to protect the health and safety of employees and comply with shelter-in-place mandates by public health officials. Prosper uses industry standard technologies to maintain secure remote work protocols and protect sensitive data within its control, and we require employees to complete security awareness training at regular intervals. However, we are necessarily limited in our ability to control or ensure the security of networks that employees use to work remotely. Further, cybersecurity experts and officials are reporting increased phishing, spoofing and other cyber-attack efforts during COVID-19, as hackers seek to take advantage of the uptick in remote work and continued public interest in COVID-19 developments.

Any significant disruption in service in our marketplace or in PMI’s computer systems could adversely affect PMI’s ability to perform its obligations under the Administration Agreement.

PMI’s ability to perform its obligations under the Administration Agreement could be materially and adversely affected by events outside of its control. The satisfactory performance, reliability and availability of PMI’s technology and its underlying network infrastructure are important to our respective operations, level of customer service, reputation and ability to attract new users and retain existing users. PMI’s system hardware is hosted in several hosting facilities located in Las Vegas, Nevada; Scottsdale, Arizona; The Dalles, Oregon; and Council Bluffs, Iowa. Our hosting facilities service providers do not guarantee that access to our marketplace or to PMI’s own systems will be uninterrupted, error-free or secure. The operation of our marketplace and PMI's operation of its own systems depend on our service providers’ ability to protect the relevant systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity or other environmental concerns, computer viruses or other attempts to harm them, criminal acts and similar events. As noted above, there is an increased risk of cyber-attacks during the COVID-19 pandemic, which has forced many companies to implement remote work protocols and resulted in greater attempts by malicious actors to carry out cyber-attacks. If PMI’s arrangement with any hosting facilities service provider is terminated, or there is a lapse of service or damage to such provider’s facilities, PMI could experience interruptions in providing its services under the Administration Agreement, PFL could experience interruptions in the operations of our marketplace, and both could experience delays and additional expense in arranging new facilities. Any interruptions or delays in PMI’s performance of its services or in the functioning of and accessibility of our marketplace, whether as a result of a hosting facility service provider or other third-party error, PMI’s error, natural disasters or security breaches, whether accidental or willful, could harm PFL’s relationships with users and its reputation. Additionally, in the event of damage or interruption, PMI’s insurance policies may not be sufficient for PMI to adequately compensate PFL for any losses that it may incur. PMI’s disaster recovery plan has not been tested under actual disaster conditions, and PMI may not have sufficient capacity to recover all data and services in the event of an outage at one or more hosting facilities. These factors could prevent PMI from processing or posting payments on the Borrower Loans or the Notes, damage PFL’s brand and reputation, divert the attention of PMI’s employees, reduce PFL’s revenue, subject PMI or PFL to liability and cause users to abandon our marketplace, any of which could adversely affect our respective businesses, financial condition and results of operations.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Prosper – None.
Prosper Funding – Information for this Item is not required for Prosper Funding because it meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q; Prosper Funding is therefore filing this Form with the reduced disclosure format.
Item 3. Defaults upon Senior Securities
Not applicable. 
Item 4. Mine Safety Disclosures
Not applicable. 
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Item 5. Other Information
Director Resignations
On May 12, 2020, Nigel W. Morris resigned from the board of directors (the “Board”) of PMI and the Risk Committee of the Board on which he served, effective as of May 14, 2020. Mr. Morris’ resignation did not involve a disagreement with PMI on any matter relating to its operations, policies or practices.
On May 12, 2020, Patrick W. Grady resigned from the Board of PMI and the Audit Committee and Compensation Committee of the Board on which he served, effective as of May 14, 2020. Mr. Grady’s resignation did not involve a disagreement with PMI on any matter relating to its operations, policies or practices.
Director Appointment
On May 15, 2020, Thomas R. Kearney was appointed as an independent director of the Board of PMI, effective immediately. Mr. Kearney is also expected to be named to the Audit Committee of the Board.
In connection with Mr. Kearney’s appointment as a director of PMI, he entered into a Board of Directors Offer Letter (the “Offer Letter”) dated as of May 15, 2020. Pursuant to the Offer Letter, as compensation for his service on the Board, Mr. Kearney will receive (a) an annual independent director’s fee of $75,000, to be paid on a quarterly basis; and (b) an option to purchase 1,000,000 shares of PMI’s common stock at an exercise price equal to the fair market value of the common stock on the grant date, subject to the approval of the Compensation Committee of the Board. The option will vest over a four-year period, subject to and in accordance with the terms of the Offer Letter.
There are no arrangements or understandings between Mr. Kearney and any other persons pursuant to which Mr. Kearney was selected as a director, and there are no transactions in which Mr. Kearney has an interest requiring disclosure under Item 404(a) of Regulation S-K.
Item 6. Exhibits
The exhibits listed on the Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference.

EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Fifth Amended and Restated Limited Liability Company Agreement of PFL, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of the Post-Effective Amendment No. 3 to the Registration Statement on Form S-1, filed October 23, 2013 by PFL and PMI)
Amended and Restated Certificate of Incorporation of PMI, as further amended on October 15, 2018 (incorporated by reference to Exhibit 3.2 of PMI and PFL’s Quarterly Report on Form 10-Q, filed on November 14, 2018)
PFL Certificate of Formation (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1/A, filed April 23, 2012 by PFL)
Bylaws of PMI, as amended by an Amendment No. 1 dated February 15, 2016 (incorporated by reference to Exhibit 3.2 of PMI's and PFL's Form 10-Q, filed on August 15, 2016)
Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.2)
Amended and Restated Indenture, dated January 22, 2013, between PFL and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K, filed on January 28, 2013)
First Supplemental Indenture, dated May 10, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and PFL's Quarterly Report on Form 10-Q, filed on August 14, 2013)
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Promissory Note, dated April 24, 2020, by and between Broadway National Bank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI’s Current Report on Form 8-K, filed on April 30, 2020)
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 March 31, 2020 (1)
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (1)
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (1)
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 March 31, 2020 (1)
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PMI’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (1)
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to PFL’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (1)
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL  Taxonomy Extension Schema Document
101.CAL
Taxonomy Extension Calculation Linkbase Document
101.LAB
Taxonomy Extension Label Linkbase Document
101.PRE
Taxonomy Extension Presentation Linkbase Document
101.DEF
Taxonomy Extension Definition Linkbase Document
(1) 
Filed herewith.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
PROSPER MARKETPLACE, INC.
PROSPER FUNDING LLC
May 15, 2020
/s/ David Kimball
David Kimball
Chief Executive Officer of Prosper Marketplace, Inc.
Chief Executive Officer and President of
Prosper Funding LLC
(Principal Executive Officer)
May 15, 2020
/s/ Usama Ashraf
Usama Ashraf
Chief Financial Officer of Prosper Marketplace, Inc.
Chief Financial Officer and Treasurer of
Prosper Funding LLC
(Principal Financial Officer)

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