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You should rely only on statements made in our prospectus dated July 13, 2009 and in this report in determining whether to purchase Notes and not on any statements or information contained in two recent articles discussing Prosper and the operation of its platform.Information about Prosper was published in an April 28, 2009 article in The Wall Street Journal entitled “Relaunched: Prosper has Opened Its Market to Financial Institutions” and an August 28, 2009 article in BusinessWeek entitled “Peer-to-Peer Lending for Banks, Too?” The articles discussed the anticipated re-launch of our platform by our wholly owned subsidiary, Prosper Marketplace CA, Inc., or “Prosper CA,” pursuant to an exemption from the registration requirements provided by Section 3(a)(11) of the Securities Act. The offering of borrower payment dependent notes was limited solely to lenders residing in California, Prosper ceased offering notes pursuant to this exemption on May 8, 2009 and no notes were sold to lender members pursuant to this offering. The articles principally focused on the offering of borrower payment dependent notes, which were dependent for payment on pre-existing loans listed by financial institutions registered with Prosper. Prosper is not offering notes dependent for payment on payments we receive on pre-existing loans listing by financial institutions in our prospectus. The articles also discussed historical rates of return and default risks that are not included in our prospectus and did not disclose many of the related risks and uncertainties described in our prospectus. As a result, you should not rely on the information contained in these articles and only on the information contained in our prospectus and in this report in making your investment decision. You should carefully evaluate all of the information in this report, including the risks described in this section and throughout the report.
On March 30, 2010, the Company entered into a Letter of Intent for the private placement of shares of the Company’s Series D Preferred Stock for an aggregate purchase price between $13.3 million and $15.8 million, including approximately $3.3 million from conversions of outstanding principal and interest on promissory notes due to existing investors, a minimum of $3.0 million from outside investors and a minimum of $7.0 million in additional investments from existing investors. The terms of this agreement are still subject to closing, which the Company expects to happen no later than April 15, 2010.
We have incurred operating losses since our inception and we anticipate that we will continue to incur net losses for a number of years as we grow our business. For the years ended December 31, 2009 and 2008, we had negative cash flows from operations of $9.8 million and $9.9 million, respectively. Additionally, since our inception through December 31, 2009, we have an accumulated deficit of $40.6 million. We have financed our operations, to date, primarily with proceeds from the sale of equity securities. At December 31, 2009, we had approximately $0.6 million in unrestricted cash and cash equivalents. We are dependent upon raising additional capital or debt financing to fund our current operating plan. Our 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 Prosper’s ability to continue its operations, absent other extenuating circumstances. Further, we can provide no assurances as to the availability or terms upon which the required financing and capital might be available. The Company has assessed the contingent liability related to prior sales of loans on the platform and has 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 $70.5 million which represents the remaining outstanding principal amount of $28.9 million and loans charged off of $41.6 million as of December 31, 2009 as discussed in “Business-Legal Proceedings” and directly above.
For the year ended December 31, 2009 compensation and benefits were $5.0 million, a decrease of $1.2 million or 20% as compared to $6.2 million for the year ended December 31, 2008. The decreases were predominantly due to employee reductions through voluntary and involuntary termination which in turn decreased salaries and wages, related taxes and benefits expense. There were also reductions in the amount of contract labor used by the Company as well as decreases in stock based compensation expense.
On March 15, 2010, we entered into a Note Option Agreement (the “Option Agreement”) with Christian A. Larsen, its Chairman and Chief Executive Officer, 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 Convertible Promissory Notes, in $100,000 increments. We may exercise the Option, in whole or in part, in a single or multiple closings, at any time on or before March 31, 2010. Interest on the notes accrues at a per annum rate of 15.0%. All principal and accrued interest under the notes are due in a single payment on April 30, 2010. If, prior to the maturity date, Prosper consummates a preferred stock financing for an aggregate purchase price of $5,000,000 or more, Mr. Larsen will have an option to have his note paid in full or converted into shares of the preferred stock sold pursuant to such financing at the per share purchase price for such financing. Prosper’s obligations under the notes are unsecured. In addition to being Prosper’s Chairman and Chief Executive Officer, Mr. Larsen is also a stockholder of Prosper and a member of its Board of Directors.
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 December 31, 2009 the remaining principal balance remaining on the note was $320,000. $20,000 is due in June 2010 with the remaining principal amount of $300,000 will be due in June 2011.
QuoteOn March 15, 2010, we entered into a Note Option Agreement (the “Option Agreement”) with Christian A. Larsen, its Chairman and Chief Executive Officer, 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 Convertible Promissory Notes, in $100,000 increments. We may exercise the Option, in whole or in part, in a single or multiple closings, at any time on or before March 31, 2010. Interest on the notes accrues at a per annum rate of 15.0%. All principal and accrued interest under the notes are due in a single payment on April 30, 2010. If, prior to the maturity date, Prosper consummates a preferred stock financing for an aggregate purchase price of $5,000,000 or more, Mr. Larsen will have an option to have his note paid in full or converted into shares of the preferred stock sold pursuant to such financing at the per share purchase price for such financing. Prosper’s obligations under the notes are unsecured. In addition to being Prosper’s Chairman and Chief Executive Officer, Mr. Larsen is also a stockholder of Prosper and a member of its Board of Directors.
MENSCH
Mr. Denend was granted 50,000 stock option awards on June 16, 2009 with an exercise price of $0.56, which are subject to terms and conditions of the 2005 Stock Option Plan as set forth below. As noted above, Mr. Denend resigned as our Chief Technology Officer as of March 19, 2010.
With the exception of Edward Giedgowd and Sachin Adarkar, our current executive officers and directors and 5% shareholders have bid on and purchased loans originated through the platform from time to time in the past, and may do so in the future. As of December 31, 2009, these parties had facilitated the funding of $1,184,447 in loans through the platform. Christian Larsen has purchased loans in an aggregate amount of $453,948; James Breyer has purchased loans in an aggregate amount of $251,796; Robert Kagle has purchased loans in an aggregate amount of $186,525; and management and other affiliates have purchased loans in an aggregate amount of $292,178. The loans were obtained on terms and conditions that were not more favorable than those obtained by other lenders. Of the total aggregate amount of loans purchased by executive officers, directors, and affiliates since inception through December 31, 2009, approximately $151,000 or 13% of principal has been charged off, as compared to approximately $56,519,368 or 31.6% of principal charged off for all loans originated since inception through December 31, 2009.
Employees As of December 31, 2009, we employed thirty-four full-time employees. Of these employees: ·10 were in network and engineering; ·8 were in customer services, which includes the employees who conduct our collection activities; ·7 were in legal and finance; ·5 were in marketing; and ·4 were in general and administration.
