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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) 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 our 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 our 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 elsewhere in this Quarterly Report on Form 10-Q and those included in the "Risk Factors" section and elsewhere in our Annual Report on Form 10-K. Overview We provide a peer-to-peer online loan auction platform that enables our borrower members to borrow money and our lender members to purchase Notes that we issue, the proceeds of which facilitate the funding of specific loans made to borrowers. Our platform enables our borrower members to request and obtain personal, unsecured loans by posting anonymous "listings" on the platform indicating the principal amount of the desired loan and the maximum interest rate the borrower is willing to pay. We assign a Prosper Rating consisting of one of seven letter credit grades, based in part on the borrower's credit score, to each borrower who requests a borrower loan. Prosper borrower members' Prosper Rating and credit score range, debt-to-income ratios and other credit data are displayed with their listings and are available for viewing by lender members on an anonymous basis. Lender members access our platform and "bid" the amount they are willing to commit to the purchase of a Note that is dependent for payment on the corresponding borrower loan and the minimum yield percentage they are willing to receive, subject to a minimum yield percentage based on the Prosper Rating assigned to each listing. The highest yield percentage lender members may bid on a listing is the yield percentage that corresponds to the maximum interest rate set by the borrower. The lowest yield percentage lender members may bid will be the minimum yield percentage set forth in the listing. The minimum yield percentage applicable to each listing is based on the Prosper Rating assigned to the listing and will be calculated by adding the national average certificate of deposit rate that matches the term of the borrower loan, as published by BankRate.com, to the minimum estimated loss rate associated with the Prosper Rating assigned to the listing, which is based on the historical performance of similar Prosper borrower loans. As of September 30, 2010, for listings with AA Prosper Ratings, an estimated loss rate of 1.0%, which represents the middle of the estimated loss rate range for that Prosper Rating, is added to the national average certificate of deposit rate to determine the minimum yield percentage. By making a bid on a listing, a lender member is committing to purchase from Prosper a Note in the principal amount of the lender's winning bid. The lender members who purchase the Notes will designate that the sale proceeds be applied to facilitate the funding of a corresponding borrower loan listed on our platform. Loans originated to borrower members are made by WebBank, an FDIC-insured, Utah-chartered industrial bank, and sold and assigned to Prosper. All loans requested and obtained by Prosper borrower members through our platform are unsecured obligations of individual borrower members with a fixed interest rate and a loan term set at three years as of September 30, 2010. In October 2010, Prosper began offering loan terms with one and five year loan terms, in addition to the existing three year loan term. Prosper anticipates in the near future extending available loan terms to between three months and seven years. With respect to loans resulting from listings posted by Prosper borrower members prior to April 15, 2008, Prosper is the originating lender for licensing and regulatory purposes. All borrower loans resulting from listings posted on or after April 15, 2008 are funded by WebBank. After funding a loan, WebBank assigns the loan to Prosper, without recourse to WebBank, in exchange for the principal amount of the borrower loan. WebBank does not have any obligation to purchasers of the Notes. For all borrower loans, listings are posted without our obtaining any documentation of the borrower's ability to afford the loan. In limited instances, we verify the income, employment, occupation or other information provided by Prosper borrower members in listings. This verification is normally done after the listing has already been created and bidding is substantially completed and, therefore, the results of our verification are not reflected in the listings. 25-------------------------------------------------------------------------------- Table of Contents Our Operating History We incorporated in Delaware in March 2005 and launched our public website, www.prosper.com on February 13, 2006. As of September 30, 2010, our platform has facilitated 35,099 borrower loans since our launch. From October 16, 2008 until July 10, 2009, we temporarily stopped accepting lender members' commitments, which significantly slowed the ramp up of our operations, resulting in a negative impact on our cash flow and liquidity, due to a decrease in loan origination volume. We made significant changes to the operation of our lending platform that became effective on July 10, 2009, and on July 13, 2009, we began accepting new commitments from our lender members on our platform. Prior to October 16, 2008, we purchased loans from WebBank and then sold and assigned the loans to the lender members who bid on the listings for those loans. Since July 10, 2009, we retain the loans and issue new securities, the Notes, to the winning lenders. Our obligation to repay the Notes is conditioned upon the repayment of the associated borrower loan. We expect to generate increased revenue from borrower transaction fees and non-sufficient funds fees and lender members' servicing fees. Over time, we expect that the number of borrowers and lender members and the volume of borrower loans originated through our platform will increase. We have a limited operating history and have incurred net losses since our inception. Our net loss was $2,223,016 and $7,494,302 for the three and nine months ending September 30, 2010, respectively. The net loss for the three and nine months ending September 30, 2009 was $2,238,138 and $7,726,455, respectively. We earn revenues primarily from borrower transaction fees, non-sufficient funds fees and lender member service fees. At this stage of our development, we have funded our operations primarily with proceeds from equity financings, which are described below under "Liquidity and Capital Resources." Our operating plan calls for a continuation of the current strategy of increasing transaction volume to increase revenue until we reach profitability and become cash-flow positive, which we do not expect to occur before the close of 2010. In addition, our 2010 operating plan calls for continued investment in the development of our website, loan servicing platform, loan scoring and marketing efforts before we reach profitability. Our historical financial results and this discussion reflect the structure of our lending platform and our operations both prior to and after July 10, 2009. For a discussion of the effect of our new structure on our financial statements, see "Borrower Loans and Payment Dependent Notes" under "Critical Accounting Policies and Estimates" below. Trends and Uncertainties The Peer to Peer lending industry remains a very innovative and unique industry that is still in its infancy. We are vulnerable to legislative or regulatory developments that may impact our business model in a positive or negative manner. For example, we continue to discuss with the SEC how federal securities law and evolving staff positions impact the manner in which we operate our platform. We will continue to monitor legislative and regulatory developments that we may encounter in the future in order to better respond to effects it may have on our business platform. Critical Accounting Policies and Estimates Management's discussion and analysis of our financial condition and consolidated results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the related disclosures. Prosper bases its estimates on historical experience and on various other assumptions that Prosper believes to be reasonable under the circumstances. Actual results could differ from those estimates. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this quarterly report. 26-------------------------------------------------------------------------------- Table of Contents Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results. While all decisions regarding accounting policies are important, we believe that the following policies could be considered critical. These critical policies relate to fair value measurement, borrower loans and Payment Dependent Notes, servicing rights, repurchase obligation, revenue recognition, stock-based compensation, and income taxes. Fair Value Measurement Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820 Fair Value Measurements and Disclosures on January 1, 2008 we determine the fair values of our financial instruments based on the fair value hierarchy established in that standard, 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. We use various valuation techniques 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, we determine fair value using assumptions that we believe a market participant would use in pricing the asset or liability. The Company's financial instruments consist principally of cash and cash equivalents, restricted cash, receivables, borrower loans, servicing rights, accounts payable and accrued liabilities, Borrower Payment Dependent Notes and long-term debt. The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their carrying values because of their short term nature. For additional information and discussion, see Note 2 and Note 4 to the consolidated financial statements included elsewhere in this report. Borrower Loans and Payment Dependent Notes On July 13, 2009, we implemented our new operating structure and began issuing Notes. The post registration operating structure resulted in Prosper purchasing loans from WebBank, and holding the loans until maturity. Prosper issues new securities, the Notes, to the winning lenders. Prosper's obligation to repay the Notes is conditioned upon the repayment of the associated borrower loan owned by Prosper. As a result of these changes, Prosper carries the borrower loans and the Notes on its balance sheet as assets and liabilities, respectively. In conjunction with our new operating structure that became effective July 13, 2009, we adopted the provisions of ASC Topic 825. ASC Topic 825 Financial Instruments permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We apply the provisions of ASC Topic 825 to the borrower loans and Notes issued subsequent to July 13, 2009 on an instrument by instrument basis. We did not apply the provisions of ASC Topic 825 to loans issued prior to July 13, 2009. The aggregate fair value of the borrower loans and Notes are reported as separate line items in the assets and liabilities sections of the consolidated balance sheet using the methods described in ASC Topic 820. We determine the fair value of the borrower loans and Notes in accordance with the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As observable market prices are not available for the borrower loans and Notes we hold or for similar assets and liabilities, we believe the borrower loans and Notes should be considered Level 3 financial instruments under ASC Topic 820. ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 27-------------------------------------------------------------------------------- Table of Contents In a hypothetical transaction as of the measurement date, we believe that differences in the principal marketplace in which the loans are originated and the principal marketplace in which we might offer those loans may result in differences between the originated amount of the loans and their fair value as of the transaction date. Changes in fair value of the borrower loans and Notes subject to the provisions of ASC Topic 820 are recognized in earnings, and fees and costs associated with the origination or acquisition of borrower loans are recognized as incurred. Prosper estimates the fair value of the borrower loans and Notes using a discounted cash flow methodology based upon a set of valuation assumptions Prosper believes market participants would use for similar assets and liabilities. The main assumptions used to value the borrower loans and Notes include default rates, discount rates applied to each credit tranche/grade, prepayment rates, and recovery rates. For borrower loans and Notes issued after July 13, 2009, we used the following average assumptions to determine the fair value as of September 30, 2010: Monthly prepayment rate speed 1.50% Recovery rate 4.86% Discount rate * 27.59% Weighted Average Default Rate 7.82% * This is the weighted average discount rate among all of Prosper's credit grades Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at September 30, 2010 for borrower loans and Notes are presented in the following table: Payment Borrower Dependent Loans Notes Discount rate assumption: 27.59 % 27.59 % Decrease in fair value and income (loss) to earnings from: 100 basis point increase $ (217,800 ) $ 214,900 200 basis point increase (388,000 ) 382,800 Increase in fair value and income (loss) to earnings from: 100 basis point decrease $ 130,400 $ (128,500 ) 200 basis point decrease 308,500 (304,200 ) Default rate assumption: 7.82 % 7.82 % Decrease in fair value and income (loss) to earnings from: 10% higher default rates $ (88,000 ) $ 97,000 20% higher default rates (185,600 ) 202,700 Increase in fair value and income (loss) to earnings from: 10% lower default rates $ 113,000 $ (120,600 ) 20% lower default rates 216,500 (232,700 ) Overall, if the fair value of the borrower loans decrease or increase due to any changes in our assumptions, there will also be a corresponding decrease or increase in the fair value of the linked Notes. As a result, the effect on Prosper's earnings of adverse changes in key assumptions is mitigated. However, the impact of these changes in fair value could have a material adverse impact on lender member's investments in the Notes. As we receive scheduled payments of principal and interest on the borrower loans we will in turn make principal and interest payments on the Notes. These principal payments will reduce the carrying value of the borrower loans and Notes. If we do not receive payments on the borrower loans, we are not obligated to and will not make payments on the Notes. The fair value of a Note is approximately equal to the fair value of the corresponding borrower loan, less the 1.0% service fee. If the fair value of the borrower loan decreases due to our expectation of both the rate of default of the loan and the amount of loss in the event of default, there will also be a corresponding decrease in the fair value of the Note (an unrealized gain related to the Note and an unrealized loss related to the borrower loan). 28-------------------------------------------------------------------------------- Table of Contents For additional information and discussion, see Note 2 and Note 4 to the consolidated financial statements included elsewhere in this report. Servicing Rights We account for our servicing rights under the fair value measurement method of reporting in accordance with ASC Topic 860, Transfers and Servicing. Under the fair value method, we measure servicing rights at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. We estimate the fair value of the servicing rights as it relates to loans originated prior to July 13, 2009, using a discounted cash flow model to project future expected cash flows based upon a set of valuation assumptions that we believe market participants would use for similar rights. The primary assumptions we use for valuing our servicing rights include prepayment speeds, default rates, cost to service, profit margin, and discount rate. We review these assumptions to ensure that they remain consistent with the market conditions. Inaccurate assumptions in valuing servicing rights could affect our results of operations. For additional information and discussion, see Note 2 and Note 3 to the consolidated financial statements included elsewhere in this report. Repurchase Obligation We are obligated to indemnify lenders and repurchase the Notes sold to the lenders in the event of violation of the applicable federal/state/local lending laws or verifiable identify theft. Our limited operating history, the lack of industry comparables and the potential to impact financial performance make the repurchase obligation a critical accounting policy. We accrue a provision for the repurchase obligation when the Notes are sold to the lender members in an amount considered appropriate to reserve for our repurchase obligation related to the Notes in the event of violation of the applicable federal/state/local lending laws or verifiable identify theft. The repurchase obligation is evaluated at least once a quarter and represents an estimate based on the rate of historical repurchases as a percentage of originations (which generally occur within six to nine months of origination). The repurchase obligation includes a judgmental management adjustment due to our limited operating history, changes in current economic conditions, the risk of new and as yet undetected fraud schemes, origination unit and dollar volumes, and the lack of industry comparables. At September 30, 2010 and December 31, 2009, we have recorded a repurchase obligation of $71,001 and $40,001, respectively. For the three months ended September 30, 2010 we received $813 in recoveries, and for the three months ended September 30, 2009 we repurchased loans and Notes of $6,211, net of recoveries. For the nine months ended September 30, 2010 we received $4,183 in recoveries and made no loan repurchases and for the nine months ended September 30, 2009, the Company repurchased loans and Notes of $30,787, net of recoveries. The overall decrease in the number of repurchases is due in large part by the Company's increased efforts in identifying and preventing various fraud schemes. Although we believe our fraud controls have resulted in a lower incidence of fraud in 2010, as compared to prior years, our controls are largely based on experience from past fraud attempts. Accordingly, future repurchase and repayment obligations could vary significantly from our estimates. 29-------------------------------------------------------------------------------- Table of Contents Revenue Recognition The Company recognizes revenue in accordance with ASC Topic 605, Revenue Recognition. Under ASC Topic 605, Prosper recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price of the services is fixed and determinable and collectability is reasonably assured. Agency Fees From our relaunch in July of 2009 until July 2010, borrowers with a Prosper Rating of AA were charged an agency fee of 0.5% of the aggregate principal balance of the loan with no minimum fee and borrowers with a Prosper Rating of A through HR were charged an agency fee of 3% of the aggregate principal balance of the loan or $50, whichever was greater. In July of 2010, we implemented a new fee structure, under which borrowers with a Prosper Rating of AA are charged an agency fee of 0.5% of the aggregate principal balance of the loan with no minimum fee, borrowers with a Prosper Rating of A or B are charged an agency fee of 3.0% of the aggregate principal balance of the loan or $75, whichever is greater, and borrowers with a Prosper Rating of C through HR are charged an agency fee of 4.5% of the aggregate principal balance of the loan or $75, whichever is greater. Agency fees are charged by WebBank and we receive amounts equal to these fees as compensation for our marketing and underwriting activities. Servicing Fees Loan servicing revenue includes loan servicing fees and non-sufficient funds fees on loans originated prior to October 16, 2008. Loan servicing fees are accrued daily based on the current outstanding loan principal balance of (a) borrower loan(s), but are not recognized until payment is received due to uncertainty of collection of borrower loan payments. Currently, we charge servicing fees at an annualized rate of 1.0% of the outstanding principal balance of a Prosper borrower member's loan, which we deduct from each lender member's share of borrower loan payments. Overtime, we expect that the servicing fees that we receive will ultimately decrease to zero as the loans originated prior to October 16, 2008 mature. We charge a non-sufficient funds fee to borrowers on the first failed payment of each billing period. Non-sufficient funds fees are charged to the borrower and collected and recognized immediately. Our procedures generally require the automatic debiting of borrower member bank accounts by automated clearing house (ACH) transfer, although we allow payment by check and bank draft. We charge a non-sufficient funds fee to a borrower member to cover the cost we incur if an automatic payment fails and is rejected by the borrower member's bank, for example if there is an insufficient balance in the bank account or if the account has been closed or otherwise suspended. If an automatic payment fails we make up to two additional attempts to collect; however, there is no additional fee charged to the borrower if these attempts fail. We retain the entire amount of the non-sufficient funds fee, which is currently $15.00 per initial payment failure, or such lesser amount required by law, to cover our costs. Interest Income (expense) on Borrower Loans Receivable & Payment Dependent Notes We recognize interest income on our borrower loans using the accrual method based on the stated interest rate to the extent that we believe it to be collectable. We record interest expense on the corresponding Note based on the contractual interest rate. Stock-Based Compensation We account for stock-based compensation for employees using fair-value based accounting in accordance with ASC Topic 718, Compensation - Stock Compensation. ASC Topic 718 requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes model to determine the fair value of stock options granted to employees. The stock-based compensation expense related to awards that are expected to vest is amortized over the vesting term of the stock-based award, which is generally four years. 30-------------------------------------------------------------------------------- Table of Contents Expected forfeitures of unvested options are estimated at the time of grant and reduce the recognized stock-based compensation expense. The forfeiture rate is estimated based on historical experience and revised on a quarterly basis. The significant assumptions used in the calculation of stock based compensation are discussed in detail in Note 2 to our consolidated financial statements included elsewhere in this report. We use the Black-Scholes model to estimate the value of options granted to non-employees at each vesting date to determine the appropriate charge to stock-based compensation. The volatility of common stock was based on comparative company volatility. The Black-Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility. Because Prosper's equity awards have characteristics significantly different from those of traded options, the changes in the subjective input assumptions can materially affect the fair value estimate. Income Taxes ASC Topic 740, Income Taxes provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets. We will continue to evaluate the realizability of the deferred tax assets on a quarterly basis. Results of Operations Our results of operations for the three and nine months ended September 30, 2010 and 2009, together with the percentage change between periods, are set forth below. Prosper Marketplace, Inc. Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, 2010 2009 Change from prior period As % of As % of $ Increase / sales sales (Decrease) % Revenues Agency fees $ 191,831 $ 67,348 $ 124,483 185 % Loan servicing fees 42,250 121,875 (79,625 ) (65 %) Interest income (expense) on Borrower Loans and Borrower Payment Dependent Notes, net 123,720 2,659 121,061 4553 % Rebates and promotions 3,251 - 3,251 n/a 361,052 191,882 169,170 88 % Cost of Revenues Cost of services (265,485 ) (74 %) (152,428 ) (79 %) (113,057 ) 74 % Provision for loan and Note repurchases 813 0 % 1,767 1 % (954 ) (54 %) Total revenues,net 96,380 41,221 55,159 134 % Operating expenses Compensation and benefits 1,177,175 326 % 1,131,676 590 % 45,499 4 % Marketing and advertising 103,036 29 % 167,435 87 % (64,399 ) (38 %) Depreciation and amortization 143,044 40 % 150,315 78 % (7,271 ) (5 %) General and administrative Professional services 702,540 195 % 593,722 309 % 108,818 18 % Facilities and maintenance 159,097 44 % 160,868 84 % (1,771 ) (1 %) Other 215,705 60 % 126,297 66 % 89,408 71 % Total expenses 2,500,597 2,330,313 170,284 7 % Loss before other income (expense) (2,404,217 ) (2,289,092 ) (115,125 ) 5 % Other income (expense) Interest Income 4,782 1 % 3,434 2 % 1,348 39 % Change in fair value on Borrower Loans and Borrower Payment Dependent Notes, net 163,836 45 % 39,133 20 % 124,703 319 % Loss on impairment of fixed assets - 0 % (1,189 ) (1 %) 1,189 (100 %) Other income 12,583 3 % 9,576 5 % 3,007 31 % Total other income 181,201 50,954 130,247 256 % Loss before income taxes (2,223,016 ) (2,238,138 ) 15,122 (1 %) Income taxes - 0 % - 0 % - n/a Net Loss $ (2,223,016 ) $ (2,238,138 ) $ 15,122 (1 %) 31-------------------------------------------------------------------------------- Table of Contents Prosper Marketplace, Inc. Consolidated Statements of Operations (Unaudited) Nine Months Ended September 30, 2010 2009 Change from prior period As % of As % of $ Increase / sales sales (Decrease) % Revenues Agency fees $ 512,101 $ 68,273 $ 443,828 650 % Loan servicing fees 142,870 446,754 (303,884 ) (68 %) Interest income (expense) on Borrower Loans and Borrower Payment Dependent Notes, net 178,020 2,659 175,361 6595 % Rebates and promotions (16,617 ) - (16,617 ) n/a 816,374 517,686 298,688 58 % Cost of Revenues Cost of services (668,708 ) (82 %) (376,803 ) (73 %) (291,905 ) 77 % Provision for loan and Note repurchases (26,817 ) (3 %) 26,273 5 % (53,090 ) (202 %) Total revenues, net 120,849 167,156 (46,307 ) (28 %) Operating expenses Compensation and benefits 3,430,904 420 % 3,825,649 739 % (394,745 ) (10 %) Marketing and advertising 487,337 60 % 233,633 45 % 253,704 109 % Depreciation and amortization 421,208 52 % 447,791 86 % (26,583 ) (6 %) General and administrative Professional services 2,111,524 259 % 2,154,715 416 % (43,191 ) (2 %) Facilities and maintenance 478,709 59 % 500,468 97 % (21,759 ) (4 %) Other 1,130,345 138 % 824,635 159 % 305,710 37 % Total expenses 8,060,027 7,986,891 73,136 1 % Loss before other income (expense) (7,939,178 ) (7,819,735 ) (119,443 ) 2 % Other income (expense) Interest Income 9,111 1 % 39,452 8 % (30,341 ) (77 %) Change in fair value on Borrower Loans and Borrower Payment Dependent Notes, net 397,644 49 % 39,133 8 % 358,511 916 % Loss on impairment of fixed assets (3,179 ) (0 %) (41,704 ) (8 %) 38,525 (92 %) Other income 41,300 5 % 56,399 11 % (15,099 ) (27 %) Total other income 444,876 93,280 351,596 377 % Loss before income taxes (7,494,302 ) (7,726,455 ) 232,153 (3 %) Income taxes - 0 % - 0 % - n/a Net Loss $ (7,494,302 ) $ (7,726,455 ) $ 232,153 (3 %) Revenues Agency Fees Agency fees for the three and nine months ended September 30, 2010, were $191.8 thousand and $512.1 thousand, respectively, representing an increase of $124.5 thousand and an increase of $443.8 thousand, as compared to $67.3 thousand for the three months ended September 30, 2009 and $68.3 thousand nine months ended September 30, 2009. The significant increase in agency fees for the three and nine months ended September 30, 2010 is due to the fact the Company was not originating any new loans from October 2008 through July of 2009, except for 13 loans originated in the three and six months ended June 30, 2009 when Prosper briefly re-opened in the State of California from April 28, 2009 to May 8, 2009. These loans were funded by Prosper and no Notes were sold to California residents. Prosper originated 1,270 and 4,052 loans in the three and nine months ended September 30, 2010, respectively. Loan Servicing Fees For the three and nine months ended September 30, 2010, loan servicing fees were $42.3 thousand and $142.9 thousand, respectively, representing a decrease of $79.6 thousand and $303.9 thousand, as compared to $121.9 thousand for the three months ended September 30, 2009, and $446.8 thousand for the nine months ended September 30, 2009. The decrease in loan servicing fees is attributed primarily to the overall decrease in the outstanding principal balance of loans serviced from the comparable prior year periods. 32-------------------------------------------------------------------------------- Table of Contents Interest Income on Borrower Loans and Payment Dependent Notes Gross interest income earned and gross interest expense incurred were $945.8 thousand and $822.1 thousand, respectively for the three months ended September 30, 2010, resulting in net interest income of $123.7 thousand. Gross interest income earned and gross interest expense incurred for the nine month ended September 30, 2010 were approximately $2.0 million and $1.9 million, netting to $178.0 thousand in interest income. Gross interest income earned and gross interest expense incurred were $13.3 thousand and $10.6 thousand, respectively for the three and nine months ended September 30, 2009, resulting in net interest income of $2.7 thousand. As we did not implement our new operating structure until July 13, 2009, gross interest income earned and gross interest expense incurred for the three and nine months ended September 30, 2009 were identical. Over time, we expect that revenues and expenses related to borrower loans and Notes will increase as we grow our platform. Cost of Revenues Cost of Services Our cost of services are comprised primarily of credit bureau fees, payments to strategic partners, collection expenses, the change in fair value of servicing rights, referral program fees for certain partners and other expenses directly related to loan funding and servicing. Cost of service expenses were $265.5 thousand and $668.7 thousand for the three and nine months ended September 30, 2010, respectively, an increase of 74% and 77%, as compared to $152.4 thousand for the three months ended September 30, 2009, and $376.8 thousand for the nine months ended September 30, 2009. During 2010, we had an overall increase in our cost of services due to the fact that we were operating in a quiet period for the first and second quarter of 2009 and did not incur expenses related to our loan origination activities. Specifically, there was a significant increase in credit bureau fees incurred in 2010 as we were subject to minimum monthly fees under our contract through the first six months of 2009. In addition, we were not yet incurring expenses related to our secondary market trading partner which did not launch until July 2009, and we were also subject to an increase in strategic partnership fees related to a renegotiation of contractual terms. During 2010, the Company carried out new lender and borrower focused promotional programs in order to increase volume. Loan and Note Repurchases Judgments in our favor have led to recoveries during the period which correspond to certain loan repurchases. For the three and nine months ended September 30, 2010, we received recoveries on prior repurchased loans of approximately $813 and $4.2 thousand, respectively. For the three and nine months ended September 30, 2009, we recorded recoveries on prior repurchase losses of approximately $1.8 thousand and $6.3 thousand, respectively. There were no repurchased loans for the nine months ended September 30, 2010, as compared to repurchase losses of $37.1 thousand for the nine months ended September 30, 2009. We continue to devote a significant amount of attention to fraud prevention and will continue to implement fraud control procedures to maintain a low level of repurchased loans. Other Income (Expense) Interest Income Interest income on cash and cash equivalents was $4.8 thousand and $9.1 thousand for the three and nine months ended September 30, 2010, an increase of 39% and a decrease of 77% as compared to $3.4 thousand and $39.5 thousand for the three and nine months ended September 30, 2009, respectively. The increase in interest income for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009 was primarily attributable to higher average cash balances in the third quarter of 2010 related to the Series D funding which closed in April 2010. The decrease in interest income for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009, was primarily attributable to lower average monthly cash balances into the beginning of second quarter of 2010. 33-------------------------------------------------------------------------------- Table of Contents Change in Fair Value on Borrower Loans and Payment Dependent Notes, net Under the methods described in ASC Topic 820, Fair Value Measurements and Disclosures, we elected to account for unrealized gains or losses on the borrower loans and borrower payment dependent notes on a fair value basis. These amounts are included as a component of other income (expense) in our consolidated statement of operations. The total fair value adjustment was $1.7 million and $2.1 million for the borrower loans and Notes, respectively, resulting in a net unrealized gain of $397.6 thousand for the nine months ended September 30, 2010. The total fair value adjustment was $58.7 thousand and $222.5 thousand for the borrower loans and Notes, respectively, resulting in a net unrealized gain of $163.8 thousand for the three months ended September 30, 2010. Impairment of Fixed Assets During the first quarter of 2009 and second quarter of 2010, management made the decision to discontinue the development of one of our planned software development projects. The software assets previously capitalized in 2008 and in the first quarter of 2010 were deemed to be impaired in accordance with ASC Topic 360. An impairment charge of $40,515, encompassing the amount capitalized in 2008, as well as small disposals of obsolete computer software is included as a component of other income (expense) in our consolidated statement of operations for the nine months ended September 30, 2009. An impairment charge of $3,179, encompassing the amount capitalized in the first quarter of 2010, is included as a component of other income (expense) in our consolidated statements of operations for the three and nine months ended September 30, 2010. Other Income Other income consists primarily of credit referral fees, where partner companies pay us an agreed upon amount for referrals of customers from our website. Other income was $12.6 thousand and $41.3 thousand for the three and nine months ended September 30, 2010, respectively, an increase of 31% and a decrease of 27% as compared to $9.6 thousand and $56.4 thousand for the three and nine months ended September 30, 2009. The increase in other income for the three months ended September 30, 2009 to the three months ended September 30, 2010 was due to the addition of a number of new partners that represented an increase in credit referral volume. The decrease in other income for the nine months ended from September 30, 2009 to the nine months ended September 30, 2010 was primarily due to a slight decline in the amount of volume for credit referral partners through the first two quarters of 2010 and the renegotiation of contract pricing terms for a significant credit referral partner in February of 2010. Three Months Ended September 30, Change from prior period 2010 2009 $ Increase / Unaudited Unaudited (Decrease) % Operating expenses Compensation and benefits $ 1,177,175 $ 1,131,676 $ 45,499 4 % Marketing and advertising 103,036 167,435 (64,399 ) (38 %) Depreciation and amortization 143,044 150,315 (7,271 ) (5 %) General and administrative Professional services 702,540 593,722 108,818 18 % Facilities and maintenance 159,097 160,868 (1,771 ) (1 %) Other 215,705 126,297 89,408 71 % Total expenses $ 2,500,597 $ 2,330,313 $ 170,284 7 % 34-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, Change from prior period 2010 2009 $ Increase / Unaudited Unaudited (Decrease) % Operating expenses Compensation and benefits $ 3,430,904 $ 3,825,649 $ (394,745 ) (10 %) Marketing and advertising 487,337 233,633 253,704 109 % Depreciation and amortization 421,208 447,791 (26,583 ) (6 %) General and administrative Professional services 2,111,524 2,154,715 (43,191 ) (2 %) Facilities and maintenance 478,709 500,468 (21,759 ) (4 %) Other 1,130,345 824,635 305,710 37 % Total expenses $ 8,060,027 $ 7,986,891 $ 73,136 1 % Operating Expenses Compensation and benefits were $1.2 million and $1.1 million for the three months ended September 30, 2010 and 2009, respectively, a $45.5 thousand or 4% increase. This slight increase was due to normal salary and wage increases and employee relocation expenses, which were partially offset by a decrease in vacation-, sick-, and holiday-related expenses as well as an increase in the amount of salaries that we capitalized related to the development of internal use software. Compensation and benefits were $3.4 million and $3.8 million for the nine months ended September 30, 2010 and 2009, respectively, a $394.7 thousand or 10% decrease. The decreases were predominantly due to employee reductions through voluntary and involuntary terminations, which in turn decreased salaries and wages and related payroll expenses. In addition, there was a decrease in stock-based compensation expense as well as an increase in the amount of salaries that we capitalized related to the development of internal use software during the nine months ended September 30, 2010. Marketing and advertising costs consist primarily of search engine marketing, online and offline campaigns, marketing promotions, affiliate marketing, public relations and direct mail marketing. Marketing and advertising costs were $103.0 thousand and $167.4 thousand for the three months ended September 30, 2010 and 2009, a decrease of $64.4 thousand or 38%. This decrease was primarily due to a decrease in offline marketing spend, which was partially offset by a slight increase in our affiliate programs and lender promotional campaigns. Marketing and advertising costs were $487.3 thousand and $233.6 thousand for the nine months ended September 30, 2010 and 2009, an increase of $253.7 thousand or 109%. The increase in marketing and advertising expenditures for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009 resulted from the fact that we were operating in a quiet period during the first half of 2009. During the first nine months of 2010, we have increased our marketing spend to attract borrowers and increase investments by our lender members. Depreciation and amortization expense was $143.0 thousand for the three months ended September 30, 2010, a decrease of $7.3 thousand or 5% as compared to $150.3 thousand for the three months ended September 30, 2009. Depreciation and amortization expense was $421.2 thousand for the nine months ended September 30, 2010, a decrease of $26.6 thousand or 6% as compared to $447.8 thousand for the three months ended September 30, 2009. These decreases were primarily due to assets becoming fully depreciated during the period, however these decreases were partially offset by the capitalization of various internal use software development projects placed in service during 2010. 35-------------------------------------------------------------------------------- Table of Contents General and Administrative Expenses Professional service expenses are comprised of legal expenses, audit and accounting fees, and consulting services. For the three months ended September 30, 2010, professional expenses were $702.5 thousand, an increase of $108.8 thousand or 18% as compared to $593.7 thousand for the three months ended September 30, 2009. We incurred higher legal fees associated with the class action lawsuit as discussed in Note 12, and increased audit and tax fees, however these increases were partially offset by a decrease in consulting expenses. For the nine months ended September 30, 2010, professional expenses were approximately $2.1 million, a decrease of $43.2 thousand or 2% as compared to approximately $2.2 million for the nine months ended September 30, 2009. Overall for the nine months ended September 30, 2010, we incurred substantially decreased legal fees related to our registration statement, however these decreases were partially offset by an increase in legal fees associated with our class action lawsuit and an increase in consulting services and accounting and tax related fees as compared to the nine months ended September 30, 2009. Facilities and maintenance expenses consist primarily of rents paid for our corporate office lease and data co-location facility, office expenses, hardware and software maintenance and support costs and equipment and software costs that did not meet capitalization criteria. Facilities and maintenance expenses for the three months ended September 30, 2010 were $159.1 thousand, which is a marginal decrease from expenses of $160.9 thousand for the three months ended September 30, 2009. Facilities and maintenance expenses for the nine months ended September 30, 2010 were $478.7 thousand, which represents a decrease of $21.8 thousand, as compared to $500.5 thousand for the nine months ended September 30, 2009. The overall decline in facilities and maintenance expenses is due to a reduction in software costs that did not meet capitalization criteria, and software maintenance and support costs which were partially offset by an increase in data backup servicing expenses during the period. Other general and administrative expenses consist of bank service charges, NASAA state penalty settlement expenses, travel and entertainment, taxes and licenses, communications costs, interest expense related to our convertible promissory notes and other miscellaneous expenses. For the three months ended September 30, 2010, other general administrative expenses were $215.7 thousand, an increase of $89.4 thousand or 71% as compared to $126.3 thousand for the three months ended September 30, 2009. The increase in other general administrative expenses from the three months ended September 30, 2009 to the three months ended September 30, 2010 was primarily due to the increase in bank service charges which stem from our increased ACH volumes and increased external recruiting fees. In addition to the expenses noted above, the company incurred expenses related to the renewal of our state securities registrations or qualifications, as well as state security registration payments, in which we were inadvertently late in filing applications to renew our registrations or qualifications in several states. For the nine months ended September 30, 2010, other general administrative expenses were $1.1 million, an increase of $305.7 thousand or 37% as compared to $824.6 thousand for the nine months ended September 30, 2009. The increase in general administrative expenses from the nine months ended September 30, 2009 to the nine months ended September 30, 2010 was primarily due to the additional interest expense that we incurred in connection with the convertible promissory notes issued in 2009 and in the first four months of 2010 as discussed in Note 5 of our consolidated financial statements, increases in travel and entertainment expenses, licensing fees, expenses related to surety bonds required for lending activity in certain states and increased insurance fees related to our director and officer insurance policies. These increases were partially offset by a decrease in NASAA state penalty settlement expenses as discussed in Note 12 and a decrease in EDGAR printing and filing services during the process of getting our registration statement declared effective by the SEC. 36-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We have incurred operating losses since our inception and we anticipate that we will continue to incur net losses through the end of 2010. We had negative cash flows from operations of $7.3 million and $7.6 million for the nine months ended September 30, 2010 and 2009, respectively. Additionally, since our inception through September 30, 2010, we have an accumulated deficit of $48.1 million. To date, we have financed our operations with proceeds primarily from the sale of equity securities. We are dependent upon raising additional capital or debt financing to fund our current operating plan. Failure to obtain sufficient debt and equity financings and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve our business objectives and continue as a going concern. Further, an unfavorable outcome of the class action lawsuit at the high end of the range could hinder our ability to continue operations, absent other extenuating circumstances. There can be no assurances as to the availability or terms upon which the required financing and capital might be available, however we believe that our current cash position is sufficient to meet our current liquidity needs. Net cash used in operating activities was $7.3 million and $7.6 million for the nine months ended September 30, 2010 and 2009, respectively. Net cash used in operating activities was used to fund ongoing operations such as headcount cost, legal and accounting services, marketing expenses and cost of service expenses. The anticipated increase in origination revenue is expected to reduce our on-going cash requirements. Net cash used in investing activities for the nine months ended September 30, 2010 was $13.3 million which consisted of $18.6 in million borrower loans originations offset by $5.6 million in borrower loan principal repayments and purchases of property and equipment of $324.4 thousand. Net cash provided by financing activities for the nine months ended September 30, 2010 was $26.4 million which consisted of proceeds from the issuance of convertible preferred stock of $11.3 million net of $275.9 thousand paid for stock issuance costs, proceeds from the issuance of Borrower Payment Dependent Notes of $18.6 million offset by $5.4 million in repayment of Borrower Payment Dependent Notes, proceeds from the issuance of promissory notes of $2.5 million offset by repayments of promissory notes of $323.6 thousand, and proceeds from the exercise of fully vested stock options of $6.5 thousand. In 2006, we entered into a non-interest bearing promissory note in the amount of $380,000 for the purchase of the "Prosper.com" domain name. As of September 30, 2010 the remaining principal balance remaining on the note was $300,000. We paid a principal payment in the amount of $20,000 in June 2010 with the remaining principal amount of $300,000 due in September 2011. On November 10, 2009, the Company and QED Fund I, L.P., a Delaware limited partnership ("QED"), entered into a Note and Warrant Purchase Agreement (the "QED Purchase Agreement"), pursuant to which, we issued to QED a Convertible Promissory Note (the "QED Note") dated as of November 10, 2009. The QED Note had a principal amount of $1,000,000. Interest on the QED Note accrued at a per annum rate of 15.0%. In connection with the consummation of the Series D Financing, the QED Note and all accrued interest thereunder was converted into Series D preferred stock equal to principal and accrued interest of $1,064,521 on the QED Note, plus $300,000 which represented consideration for QED's agreement to convert the QED Note prior to its maturity date. In connection with the QED Purchase Agreement, we also issued to QED a fully vested warrant (the "QED Warrant") to purchase 164,178 shares of our common stock at an exercise price of $0.56 per share. The QED Warrant is exercisable any time from the date of issuance and will expire on November 10, 2014. The Company allocated the QED Note proceeds to the QED Note and QED Warrants based on their relative fair values. The relative fair value attributable to the QED Warrant is $37,740, which was recorded as a discount to the QED Note and a corresponding credit to additional paid-in capital. The remaining debt discount of $34,595 was fully amortized to interest expense upon the conversion of the QED Note. 37-------------------------------------------------------------------------------- Table of Contents On February 1, 2010, we entered into a Note and Warrant Purchase Agreement (the "February Bridge Purchase Agreement") with certain of our existing investors, pursuant to which, we issued and sold to such investors a series of Convertible Promissory Notes (the "February Bridge Notes") in the aggregate principal amount of $2,000,000. Interest on the February Bridge Notes accrued at a per annum rate of 15.0%. In connection with the consummation of the Series D financing, the principal and accrued interest of $2,060,822 under the February Bridge Notes were converted into Series D preferred stock. In connection with the February Bridge Purchase Agreement, we issued to the February Bridge Note purchasers fully vested warrants (the "February Bridge Warrants") to purchase an aggregate of 328,356 shares of our Common Stock at an exercise price of $0.56 per share. The February Bridge Warrants are exercisable any time from the date of issuance and will expire on February 1, 2015. We allocated the February Bridge Note proceeds to the convertible February Bridge Note and February Bridge Warrants based on their relative fair values. The relative fair value attributable to the February Bridge Warrants is $96,625, which was recorded as a discount to the February Bridge Note and a corresponding credit to additional paid-in capital. The debt discount of $96,625 was fully amortized to interest expense upon the conversion of the February Bridge note. On March 15, 2010, we entered into a Note Option Agreement (the "Larsen Option Agreement") with Christian A. Larsen, our Chairman and Chief Executive Officer as well as one of our principal stockholders, pursuant to which, Mr. Larsen granted the Company an option (the "Option") to sell him an aggregate principal amount of up to $300,000 of unsecured Convertible Promissory Notes (the "Larsen Bridge Notes"), in $100,000 increments. On March 22, 2010, we exercised the Option in full and sold to Mr. Larsen, Larsen Bridge Notes in the aggregate principal amount of $300,000. Interest on the Larsen Bridge Notes accrued at a per annum rate of 15.0%. Principal and accrued interest of $303,575 was paid in a single payment on April 19, 2010. On April 1, 2010, we entered into a Note Purchase Agreement with certain of our existing investors, pursuant to which, we issued and sold an additional series of unsecured Convertible Promissory Notes (the "April Bridge Notes"), dated as of April 1, 2010, in the aggregate principal amount of $250,000. Interest on the April Bridge Notes accrued at a per annum rate of 15.0%. All principal and accrued interest of $251,541 was converted into Series D preferred stock. On April 15, 2010, we entered into a Stock Purchase Agreement with certain new investors and certain of our existing investors pursuant to which, we issued and sold 20,340,705 shares of the Company's Series D preferred stock for an aggregate purchase price of $14.7 million. We have assessed the contingent liability related to prior sales of loans on the platform and have determined that the occurrence of the contingency is reasonably possible but not probable and that contingent liability ranges from $0 in the event the company prevails to a maximum of $53.3 million, which represents the remaining outstanding principal amount of $8.6 million and loans charged off of $44.7 million as of September 30, 2010. For more information, see Note 12 of our consolidated financial statements located elsewhere in this report. Since our inception, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. Income Taxes We incurred no income tax provision for the three and nine months ended September 30, 2010 and 2009. Given our history of operating losses and inability to achieve profitable operations, it is difficult to accurately forecast how results will be affected by the realization and use of net operating loss carry forwards. ASC Topic 740, Income Taxes provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets. We will continue to evaluate the realizability of the deferred tax assets on a quarterly basis. Off-Balance Sheet Arrangements As of September 30, 2010, we have not engaged in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities. 38-------------------------------------------------------------------------------- Table of Contents Additional Information about the Prosper Marketplace Loan Platform Prosper Rating Each listing is assigned a Prosper Rating. The Prosper Rating is a letter that indicates the level of risk associated with a listing and corresponds to an estimated average annualized loss rate range, or loss rate, for the listing. This rating system allows Prosper to maintain consistency when assigning a rating to the listing. There are currently seven Prosper Ratings, but this, as well as the associated loss may change over time as the marketplace dictates. The Prosper Ratings that were in place as of September 30, 2010 and the associated estimated loss ranges associated with them are as follows: Prosper Rating Est. Avg. Annual Loss Rate AA 0.00% - 1.99 % A 2.00% - 3.99% B 4.00% - 5.99% C 6.00% - 8.99% D 9.00% - 11.99% E 12.00% - 14.99% HR >=15.00% The loss rate is based on the historical performance of Prosper borrower loans with similar characteristics and is determined by two scores: (1) a custom Prosper score, discussed below, and (2) a credit score obtained from a credit reporting agency (currently, Experian's Scorex PLUS score). The use of these two scores determines a base loss rate for each listing. This base loss rate is subject to adjustment based on additional factors, such as whether the borrower has previsouly received a loan on our platform. These adjustments result in an estimated loss rate, which then determines the Prosper Rating. Recent Loan Originations The table below shows loan volume and average lender yield by Prosper Rating for originations from July 13, 2009 to September 30, 2010. July 13, 2009 - September 30, 2010 Originations as of September 30, 2010 Weighted Prosper Average Average Rating Number Amount Loan Size Lender Yield AA 836 $ 5,295,489 $ 6,334 8.37 % A 1,331 6,942,332 5,216 9.48 % B 408 2,803,706 6,872 13.89 % C 977 3,798,742 3,888 20.37 % D 1,185 4,476,583 3,778 25.74 % E 590 1,712,117 2,902 31.53 % HR 759 2,416,660 3,184 31.33 % Total 6,086 $ 27,445,629 $ 4,510 17.18 % 39-------------------------------------------------------------------------------- Table of Contents Historical Performance The following four tables show loan performance through September 30, 2010 by Prosper Rating and loan age. Loans originated prior to 2009 were not assigned a Prosper Rating; however, in order to view performance on a comparable basis, loans originated prior to 2009 were retroactively assigned a Prosper Rating based upon their applicable listing characteristics. The "No Rating" category includes loans with a credit score of less than 640 as well as loans for or which we could not generate a Prosper Rating because the credit variables needed to determine the rating were not available. The table below shows 31-120 day past due delinquency rates for loans originated prior to July 13, 2009. We consider loans more than 30 days past due to be severely delinquent due to the significant decrease in the likelihood of receiving future payment once a loan has missed two payments. Unit Delinquency Rate by Cycle for Loans Originated Prior to July 13, 2009 31+ Days Past Due / Number Loans Outstanding as of September 30, 2010 Prosper Rating Age in Months: AA A B C D E HR No Rating 1 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 2 0.28 % 0.33 % 0.00 % 0.43 % 0.30 % 0.66 % 0.90 % 2.44 % 3 0.29 % 0.51 % 0.00 % 0.80 % 0.81 % 1.00 % 2.43 % 4.79 % 4 0.50 % 0.70 % 0.33 % 1.54 % 1.75 % 1.00 % 4.18 % 7.72 % 5 0.32 % 0.81 % 0.68 % 1.80 % 2.13 % 2.22 % 5.74 % 8.70 % 6 0.33 % 0.83 % 0.69 % 2.29 % 2.69 % 2.76 % 6.97 % 9.16 % 7 0.34 % 0.94 % 1.06 % 2.98 % 2.80 % 3.66 % 7.87 % 9.12 % 8 0.71 % 1.45 % 1.44 % 3.42 % 2.97 % 3.59 % 8.35 % 9.08 % 9 0.86 % 1.59 % 1.48 % 3.34 % 3.70 % 3.68 % 8.81 % 9.14 % 10 0.64 % 1.43 % 1.53 % 3.45 % 3.60 % 4.55 % 8.78 % 9.48 % 11 0.40 % 1.37 % 1.57 % 3.68 % 3.91 % 5.25 % 8.57 % 9.55 % 12 0.41 % 1.83 % 2.00 % 4.06 % 4.68 % 5.16 % 8.55 % 9.19 % 13 0.57 % 2.10 % 2.48 % 3.89 % 5.49 % 4.45 % 9.35 % 9.04 % 14 0.44 % 1.94 % 2.55 % 3.91 % 4.86 % 5.34 % 9.78 % 8.84 % 15 0.15 % 1.75 % 1.77 % 4.10 % 4.24 % 5.89 % 9.52 % 8.83 % 16 0.31 % 2.04 % 2.26 % 5.01 % 4.29 % 5.84 % 9.56 % 8.71 % 17 0.66 % 1.99 % 3.79 % 5.30 % 3.85 % 4.46 % 8.86 % 8.19 % 18 1.38 % 2.41 % 2.46 % 5.64 % 4.06 % 3.69 % 9.11 % 8.29 % 19 1.62 % 1.95 % 3.00 % 3.90 % 4.26 % 4.28 % 9.18 % 8.33 % 20 1.52 % 2.14 % 2.06 % 3.04 % 4.38 % 4.08 % 8.26 % 8.44 % 21 1.18 % 2.50 % 3.24 % 2.91 % 4.75 % 3.89 % 8.26 % 8.17 % 22 1.66 % 2.59 % 4.57 % 3.71 % 4.42 % 3.79 % 8.61 % 7.89 % 23 1.94 % 2.71 % 4.09 % 4.55 % 4.39 % 4.99 % 8.46 % 7.50 % 24 0.95 % 3.40 % 3.14 % 4.62 % 3.81 % 6.91 % 8.64 % 7.66 % 25 1.87 % 2.91 % 2.84 % 4.56 % 4.22 % 7.23 % 8.80 % 7.52 % 26 1.74 % 2.62 % 4.92 % 4.78 % 4.28 % 5.84 % 8.42 % 8.07 % 27 2.07 % 2.84 % 2.78 % 4.53 % 5.86 % 4.96 % 7.72 % 7.79 % 28 2.06 % 2.49 % 3.19 % 3.70 % 5.15 % 5.88 % 8.31 % 8.02 % 29 1.03 % 3.96 % 0.00 % 3.97 % 4.32 % 5.88 % 7.43 % 7.93 % 30 0.00 % 3.38 % 1.47 % 3.15 % 4.48 % 7.19 % 7.66 % 7.89 % 31 0.81 % 3.66 % 3.77 % 3.66 % 4.94 % 4.46 % 6.73 % 7.62 % 32 0.91 % 3.14 % 8.70 % 4.76 % 5.18 % 5.32 % 6.78 % 7.57 % 40-------------------------------------------------------------------------------- Table of Contents The table below shows 31-120 day past due delinquency rates for loans originated from July 13, 2009 to September 30, 2010. We have included actual historical delinquency rates compared to estimated delinquency rates for borrower loans originated after July 13, 2009, as shown below. We consider loans more than 30 days past due to be severely delinquent due to the significant decrease in the likelihood of receiving future payment once a loan has missed two payments. Unit Delinquency Rate by Cycle for Loans Originated From July 13, 2009 31+ Days Past Due / Number Loans Outstanding as of September 30, 2010 Prosper Rating AA A B C D E HR Age in Months: Actual Expected Actual Expected Actual Expected Actual Expected Actual Expected Actual Expected Actual Expected 1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2 0.27% 0.00% 0.24% 0.00% 0.00% 0.00% 0.54% 0.00% 0.65% 0.00% 0.43% 0.00% 1.36% 0.00% 3 0.31% 0.28% 0.36% 0.52% 0.00% 0.78% 0.95% 1.11% 2.16% 1.48% 2.18% 1.79% 2.29% 4.37% 4 0.17% 0.50% 0.60% 0.95% 1.30% 1.43% 1.74% 2.07% 3.19% 2.76% 2.79% 3.32% 4.93% 8.00% 5 0.38% 0.71% 0.90% 1.38% 1.96% 2.07% 2.45% 3.01% 4.02% 4.00% 3.46% 4.79% 4.32% 11.39% 6 0.67% 0.72% 1.38% 1.39% 2.89% 2.08% 3.36% 3.02% 4.42% 4.00% 4.51% 4.80% 5.25% 11.42% 7 0.53% 0.72% 1.69% 1.39% 1.52% 2.08% 3.77% 3.03% 4.71% 4.01% 4.57% 4.81% 6.69% 11.43% 8 0.98% 0.72% 1.20% 1.39% 0.93% 2.09% 2.66% 3.03% 4.64% 4.02% 4.95% 4.82% 7.27% 11.46% 9 1.17% 0.72% 1.20% 1.40% 0.00% 2.09% 2.33% 3.04% 6.88% 4.03% 5.56% 4.83% 8.72% 11.49% 41-------------------------------------------------------------------------------- Table of Contents The following table shows cumulative average annualized dollar loss rates for loans originated prior to July 13, 2009. Cumulative Average Annual Loss % for Loans Originated Prior to July 13, 2009 as of September 30, 2010 Prosper Rating Age in Months: AA A B C D E HR N/A 1 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 2 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.02 % 3 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.02 % 4 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.01 % 5 -0.01 % 0.30 % 0.00 % 0.02 % 0.28 % 1.51 % 1.73 % 2.75 % 6 0.32 % 0.61 % 0.00 % 2.05 % 1.21 % 1.57 % 4.44 % 5.95 % 7 0.28 % 0.80 % 0.00 % 3.01 % 2.64 % 1.75 % 6.53 % 9.67 % 8 0.25 % 0.90 % 0.00 % 3.52 % 3.07 % 2.74 % 9.04 % 12.24 % 9 0.37 % 1.17 % 0.13 % 4.22 % 3.86 % 4.15 % 11.45 % 14.63 % 10 0.83 % 1.43 % 0.87 % 6.42 % 4.61 % 4.84 % 13.65 % 16.15 % 11 1.13 % 1.55 % 0.81 % 6.89 % 5.40 % 6.57 % 15.76 % 17.83 % 12 1.61 % 1.92 % 1.07 % 7.02 % 5.85 % 7.13 % 17.64 % 19.14 % 13 1.68 % 2.26 % 1.46 % 8.40 % 6.66 % 9.21 % 18.60 % 20.22 % 14 1.60 % 2.31 % 1.65 % 9.09 % 7.49 % 9.56 % 19.56 % 21.24 % 15 1.59 % 2.37 % 1.69 % 9.35 % 8.46 % 9.87 % 20.64 % 21.81 % 16 2.08 % 2.87 % 2.26 % 9.92 % 8.95 % 10.47 % 21.37 % 22.39 % 17 2.01 % 3.01 % 2.66 % 10.11 % 9.39 % 11.90 % 22.52 % 22.82 % 18 1.95 % 3.15 % 3.60 % 10.58 % 9.63 % 12.12 % 23.10 % 23.08 % 19 1.90 % 3.32 % 3.66 % 11.50 % 9.63 % 12.74 % 23.45 % 23.29 % 20 2.17 % 3.52 % 4.45 % 12.17 % 9.75 % 13.18 % 24.10 % 23.41 % 21 2.37 % 3.69 % 4.56 % 12.49 % 10.01 % 13.02 % 24.53 % 23.66 % 22 2.72 % 3.72 % 4.48 % 12.36 % 10.29 % 13.03 % 24.91 % 24.06 % 23 2.88 % 3.76 % 4.91 % 12.45 % 10.51 % 13.33 % 25.10 % 24.20 % 24 2.84 % 3.84 % 5.01 % 12.46 % 10.50 % 13.43 % 25.31 % 24.35 % 25 3.10 % 4.05 % 5.08 % 12.49 % 10.59 % 13.29 % 25.58 % 24.41 % 26 3.11 % 4.14 % 5.38 % 12.63 % 10.80 % 13.38 % 25.69 % 24.58 % 27 3.09 % 4.16 % 5.52 % 12.91 % 10.77 % 13.78 % 25.90 % 24.63 % 28 3.12 % 4.21 % 5.68 % 12.90 % 10.91 % 13.86 % 26.09 % 24.74 % 29 3.36 % 4.25 % 5.66 % 12.86 % 11.00 % 13.82 % 26.17 % 24.79 % 30 3.44 % 4.28 % 5.83 % 12.90 % 11.05 % 13.86 % 26.20 % 24.93 % 31 3.43 % 4.27 % 5.82 % 12.91 % 11.09 % 13.83 % 26.25 % 25.01 % 32 3.43 % 4.33 % 5.82 % 12.89 % 11.11 % 13.87 % 26.29 % 25.12 % 42-------------------------------------------------------------------------------- Table of Contents The following table shows cumulative average annualized dollar loss rates for loans originated from July 13, 2009 to September 30, 2010. Cumulative Average Annual Loss % for Loans Originated From July 13, 2009 as of September 30, 2010 Prosper Rating AA A B C D E HR Age in Months: Actual Expected Actual Expected Actual Expected Actual Expected Actual Expected Actual Expected Actual Expected 1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 4 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 5 0.93% 0.44% 0.00% 0.88% 0.00% 1.33% 0.08% 2.01% 0.00% 2.71% 0.00% 3.43% 1.35% 9.03% 6 0.82% 0.73% 0.00% 1.45% 0.00% 2.20% 1.87% 3.30% 0.66% 4.43% 0.00% 5.59% 1.99% 14.23% 7 0.75% 0.93% 0.04% 1.86% 0.00% 2.81% 1.77% 4.22% 1.45% 5.64% 2.35% 7.11% 3.40% 17.85% 8 0.70% 1.09% 0.21% 2.17% 1.71% 3.27% 1.89% 4.90% 2.42% 6.55% 3.24% 8.24% 4.39% 20.51% 9 0.98% 1.21% 0.35% 2.41% 1.64% 3.63% 2.42% 5.43% 2.60% 7.26% 3.09% 9.12% 4.21% 22.56% Historical Information About Prosper Borrower Members and Outstanding Borrower Loans From November 2005 through July 12, 2009, we facilitated 29,013 borrower loans with an average original principal amount of $6,174 and an aggregate original principal amount of $179,137,624. As of September 30, 2010, 19.2% of these borrower loans were current, 44.7% were paid in full, 0.3% were 16 to 30 days past due, 1.4% were more than 30 days past due, and 34.1% had defaulted. A borrower loan is considered to have defaulted when it is more than 120 days past due or has been discharged in bankruptcy. Of the 29,013 borrower loans 12,964 loans, or 45%, had been greater than 15 days past due at any time, 11,875 loans, or 41%, had been more than 30 days past due at any time, 11,078 or 38%, had been more than 60 days past due at any time. Of these 29,013 loans, a total of 77 loans with an aggregate original principal amount of $577,402 (0.3% of total) were repurchased by Prosper due to identification theft or operational issues. The defaulted loans as of September 30, 2010 were comprised of 9,893 borrower loans, equaling a total net defaulted amount of $44,825,319 for loans originated prior to July 13, 2009. Of these 9,893 defaulted loans, 1,072 were loans in which the borrowers had filed for bankruptcy, equaling $5,301,077 in net defaulted amount. 43-------------------------------------------------------------------------------- Table of Contents The following table presents additional aggregated information as of September 30, 2010 regarding delinquencies, defaults and borrower payments, grouped by Prosper Rating, for all loans originated on our website from November 2005 through July 12, 2009. With respect to delinquent borrower loans, the table shows the entire amount of the principal remaining due (not just that particular payment) as of September 30, 2010. Loan Originations November 2005 - July 12th, 2009 (as of September 30, 2010) Total Loan Originations Current Loans 16-30 Days Past Due Origination Outstanding Origination Outstanding Prosper Rating Number Amount Number Amount Principal Number Amount Principal AA 1,148 5,610,741 266 1,598,355 376,480 1 1,000 299 A 1,241 6,315,414 408 2,197,654 518,944 1 4,500 1,781 B 319 2,254,565 92 622,307 138,402 - - - C 1,448 11,287,831 505 3,686,493 861,296 8 85,700 29,876 D 2,048 14,156,042 715 4,684,567 1,174,583 10 67,600 16,242 E 622 3,750,560 225 1,257,378 318,920 - - - HR 6,914 67,881,305 1,639 13,854,161 3,101,654 29 243,198 54,006 N/A 1 15,273 67,881,166 1,731 5,440,310 1,382,210 36 135,550 42,255 29,013 179,137,624 5,581 33,341,225 7,872,488 85 537,548 144,459 avg loan size: $ 6,174 percent of total 19.2 % 18.6 % 0.3 % 0.3 % Paid In Full 31+ Days Past Due Defaulted 2 Origination Origination Outstanding Origination Net Charged Off Prosper Rating Number Amount Number Amount Principal Number Amount Principal AA 840 3,647,432 2 9,989 4,501 37 345,965 199,583 A 717 3,480,810 11 63,300 21,789 101 563,400 327,536 B 191 1,340,258 4 47,000 11,374 32 245,000 146,812 C 651 4,840,286 30 208,991 49,319 245 2,395,261 1,595,808 D 898 6,316,894 41 261,448 80,014 381 2,817,733 1,894,639 E 244 1,404,657 13 101,700 38,429 139 985,825 663,897 HR 2,411 22,766,997 136 1,239,644 375,701 2,687 29,565,105 20,595,053 N/A 7,007 32,772,004 181 563,863 186,412 6,271 28,697,887 19,401,991 12,959 76,569,338 418 2,495,935 767,538 9,893 65,616,177 44,825,319 percent of total 44.7 % 42.7 % 1.4 % 1.4 % 34.1 % 36.6 % Repurchased Default due to Delinquency: Origination Prosper Rating Number Amount 8,821 $ 39,524,242 AA 2 8,000 A 3 5,750 B - - Default due to Bankruptcy3 : C 9 71,100 1,072 $ 5,301,077 D 3 7,800 E 1 1,000 HR 12 212,200 N/A 47 271,552 77 577,402 percent of total 0.3 % 0.3 % 1 includes loans with Credit Score<640 or insufficient credit data to determine Prosper Rating 2 includes all loans >120 days past due 3 Only includes loans where the bankruptcy notification date is prior to the date the loan became 121 days past due. If we were notified of a bankruptcy after the loan reached 121 days past due, it is included in the "Default due to Delinquency" totals. 44-------------------------------------------------------------------------------- Table of Contents From July 13, 2009 through September 30, 2010, Prosper facilitated 6,086 borrower loans with an average original principal amount of $4,510 and an aggregate original principal amount of $27,445,629. As of September 30, 2010, 88.2% of those borrower loans were current or had not reached their first billing cycle and 7.9% were paid in full, 0.4% were 16 to 30 days past due, 2.0% were more than 30 days past due, and 1.6% had defaulted. A borrower loan is considered to have defaulted when it is more than 120 days past due, the borrower has filed a bankruptcy or the loan has been discharged in bankruptcy. Of these 6,086 borrower loans 347 loans, or 6%, have been greater than 15 days past due at any time, 254 loans, or 4%, have been more than 30 days past due at any time, 176 or 3%, are more than 60 days past due at any time. There were no loans originated during this period that were repurchased by Prosper due to identification theft or operational issues. The defaulted loans as of September 30, 2010 were comprised of 97 borrower loans, equaling a total net defaulted amount of $384,496 for loans originated from July 13, 2009. Of these 97 defaulted loans, 10 were loans in which the borrowers had filed for bankruptcy, equaling $37,704 in net defaulted amount. The following table presents additional aggregated information as of September 30, 2010, grouped by the Prosper Rating, for all loans originated on our website from July 13, 2009 through September 30, 2010. Loan Originations July 13, 2009 - September 30, 2010 (as of September 30, 2010) Total Loan Originations Current Loans 16-30 Days Past Due Outstanding Outstanding Prosper Rating Number Amount Number Origination Amount Principal Number Origination Amount Principal AA 836 $ 5,295,489 722 $ 4,714,703 $ 3,855,775 - $ - $ - A 1,331 6,942,332 1,208 6,405,565 5,268,932 5 42,400 36,120 B 408 2,803,706 381 2,644,916 2,297,340 - - - C 977 3,798,742 845 3,157,705 2,606,929 7 30,800 24,753 D 1,185 4,476,583 1,032 3,941,638 3,482,164 6 22,100 19,725 E 590 1,712,117 519 1,531,336 1,370,075 - - - HR 759 2,416,660 660 2,092,059 1,871,671 6 19,153 17,002 6,086 $ 27,445,629 5,367 $ 24,487,922 $ 20,752,887 24 $ 114,453 $ 97,600 avg loan size: $ 4,510 percent of total 88.2 % 89.2 % 0.4 % 0.4 % Paid In Full 31+ Days Past Due Defaulted 1 Outstanding Net Charged Off Prosper Rating Number Origination Amount Number Origination Amount Principal Number Origination Amount Principal AA 107 $ 522,386 2 $ 6,400 $ 5,703 5 $ 52,000 $ 47,410 A 95 417,568 12 43,400 37,153 11 33,399 29,929 B 20 123,240 2 5,050 4,383 5 30,500 21,669 C 84 419,087 26 83,250 75,453 15 107,900 100,659 D 89 309,065 29 104,200 95,328 29 99,580 94,504 E 39 92,931 18 46,650 42,676 14 41,200 30,814 HR 45 162,548 30 80,100 74,075 18 62,800 59,512 479 $ 2,046,825 119 $ 369,050 $ 334,771 97 $ 427,379 $ 384,496 percent of total 7.9 % 7.4 % 2.0 % 1.3 % 1.6 % 1.6 % Repurchased Default due to Delinquency: Prosper Rating Number Origination Amount 87 $ 346,793 AA - $ - A - - B - - Default due to Bankruptcy2 : C - - 10 $ 37,704 D - - E - - HR - - - $ - percent of total 0.0 % 0.0 % 1 includes all loans >120 days past due 2 Only includes loans where the bankruptcy notification date is prior to the date the loan became 121 days past due. If we were notified of a bankruptcy after the loan reached 121 days past due, it is included in the "Default due to Delinquency" totals. 45-------------------------------------------------------------------------------- Table of Contents The following table presents aggregate information as of September 30, 2010 regarding the results of our collection efforts for loans originated prior to July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating. For purposes of this portfolio analysis, we have excluded the 77 loans that Prosper repurchased due to identity theft or operational issues. Gross Aggregate Gross Amount Principal Gross Amount Aggregate Collected on Balance of Recovered on Loans In Origination Amount Sent to Accounts sent to Number of Loans Loans Loans Net Aggregate Prosper Rating Collections Amount Collections Collections Charged-off Charged-Off Charged-Off Charge-Off AA 50 $ 419,454 $ 27,433 $ 20,213 37 $ 203,892 $ 4,309 $ 199,583 A 137 764,133 49,555 40,480 101 351,565 24,029 327,536 B 41 320,800 21,214 3,949 32 150,001 3,189 146,812 C 314 2,991,377 202,531 110,725 245 1,666,582 70,774 1,595,808 D 491 3,631,501 252,089 164,048 381 1,959,680 65,041 1,894,639 E 169 1,171,724 84,547 53,080 139 689,033 25,136 663,897 HR 3,070 33,422,704 2,426,488 1,584,481 2,687 21,277,375 682,323 20,595,053 NA 7,132 32,433,596 2,459,331 1,929,409 6,271 20,519,879 1,117,889 19,401,991 Totals 11,404 $ 75,155,290 $ 5,523,187 $ 3,906,386 9,893 $ 46,818,007 $ 1,992,688 $ 44,825,319 The following table presents aggregate information, as of September 30, 2010 regarding the results of our collection efforts for loans originated after July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating. Gross Gross Amount Aggregate Collected on Principal Gross Amount Aggregate Amount Accounts sent Balance of Recovered on Loans In Origination Sent to to Number of Loans Loans Loans Net Aggregate Prosper Rating Collections Amount Collections Collections Charged-off Charged-Off Charged-Off Charge-Off AA 11 $ 69,900 $ 4,687 $ 1,582 5 $ 47,410 $ - $ 47,410 A 34 116,924 7,622 969 11 29,929 - 29,929 B 10 53,550 3,725 342 5 21,977 308 21,669 C 50 223,650 17,240 4,228 15 100,659 - 100,659 D 77 262,080 21,418 6,265 29 94,969 465 94,504 E 39 110,845 9,700 2,892 14 31,172 358 30,814 HR 65 193,150 16,904 6,365 18 60,559 1,048 59,512 NA - - - - 0 - - - Totals 286 $ 1,030,099 $ 81,296 $ 22,643 97 $ 386,675 $ 2,178 $ 384,496 [Miss 46-------------------------------------------------------------------------------- Table of Contents |