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[Urbi_et_Orbi]

For those who may be interested:
http://sec.gov/Archives/edgar/data/1416265/000141626511000569/0001416265-11-000569-index.htm

Please feel free to snip and post any highlights or new, interesting info you come across.

[Urbi_et_Orbi]

Page 52.

Prosper’s administration of the automated bidding plan system and its new loan search tool could create additional liability for Prosper and such liability could be material

Our automated plan system allows lender members to create their own automated bidding plans.  By creating such a plan, a lender member can have bids placed automatically on her behalf on loan listings that meet loan criteria selected by her. In creating an automated bidding plan, the member can design these criteria herself, use a group of model criteria selected by Prosper, or customize one of those groups of model criteria as she sees fit.   Each automated bidding plan consists of a group of loan criteria, such as loan amount, minimum yield percentage, Prosper Rating, income and employment characteristics, group affiliations and debt-to-income ratio. This group of criteria is divided into sub-groups, each of which we refer to as a “slice”.  The specific loans on which the lender member bids through her automated bidding plan are determined by the criteria in each of her plan slices.  If a loan listing is posted that satisfies all of the criteria in any one of her plan slices, a bid will automatically be placed on the listing on her behalf.  Each automated plan expires on the earlier of thirty days after the plan was created or the first date on which all funds allocated to the plan by the lender member have been successfully bid. Since the re-launch of our platform in July 2009, approximately 57% of the bids made on our platform (measured in terms of dollar volume) have been made by members using automated plans as of March 31, 2011.

On July 6, 2011, we intend to replace our automated plan system with a new loan search tool.  Beginning on that date, lenders will no longer be able to create automated plans, but will instead be able to use the loan search tool to identify Notes that meet their investment criteria. A lender using the search tool will be asked to indicate (i) the Prosper Rating or Ratings she wishes to use as search criteria, (ii) the total amount she wishes to invest and (iii) the amount she wishes to invest per Note. The search tool will then compile a basket of Notes for her consideration that meet her search criteria.  If the supply of Notes that meet her criteria exceeds the total amount she wishes to invest, the search tool will select Notes for her basket based on the principle of first in, first out, i.e.,  the Note with the corresponding listing that was posted on our website earliest will be the first included in her basket, then the Note with the next oldest corresponding listing will be included, and so on, until the aggregate principal amount of Notes in her basket equals the amount she wishes to invest. If her search criteria include multiple Prosper Ratings, the search tool will divide her basket into equal portions, one portion representing each Prosper Rating selected. To the extent available Notes with these Prosper Ratings are insufficient to fill the lender’s order, the lender will be advised of this shortfall and given an opportunity either to reduce the size of her order or modify her search criteria to make her search more expansive.  See “About Prosper—How to Bid to Purchase Notes—Our Automated Plan System and Our New Loan Search Tool" in our prospectus dated July 14, 2011.

Since the Notes purchased through an automated plan or the loan search tool are the same as Notes purchased manually, they present the same risks of non-payment as all Notes that may be purchased on Prosper’s website.  For example, there is a risk that a loan identified through an automated plan or the loan search tool may become delinquent or default, and the estimated return and estimated loss for that loan individually, or the estimated loss or return for the plan or the basket of Notes selected by the search tool as a whole, may not accurately reflect the actual return or loss on such loan.  If this were to occur, a lender who purchases a Note through an automated plan or the loan search tool could pursue a claim against Prosper in connection with its representations regarding the performance of the loans bid upon through the plan or search tool.  An investor could pursue such a claim under various antifraud theories under federal and state securities law.  In addition, the SEC or an investor may take the position that the plans created pursuant to the automated bidding plan model involve the offer and sale of a separate security.  Since we did not register the automated bidding plans as separate securities, such a claim, if successful, could give investors who invested in Notes through such plans a rescission right under state or federal law and possibly subject us to civil fines or criminal penalties under federal or state law.  If such a theory was sustained, we could be liable for sales through automated bidding plans that take place prior to July 6, 2011. To date, no actions have been taken or threatened against us on this theory.  However, such actions could have a material adverse effect on our business.

We may face liability under state and federal securities law for statements in our prospectus and in other communications that could be deemed to be an offer to the extent that such statements are deemed to be false or misleading.
Loan listings and other borrower information available on our website as well as in our sales and listing reports are statements made in connection with the purchase and sale of securities that are subject to the antifraud provisions of the Exchange Act and the Securities Act.  In general, these liability provisions provide a purchaser of Notes with a right to bring a claim against Prosper for damages arising from any untrue statement of material fact or failure to state a material fact necessary to make any statements made not misleading.  Even though we have advised you of what we believe to be the material risks associated with an investment in the Notes, the SEC or a court could determine that we have not advised you of all of the material facts regarding an investment in the Notes, which could give you the right to rescind your investment and obtain damages, and could subject us to civil fines or criminal penalties in addition to any such rescission rights or damages.

[Xenon481]

Even with increased revenues, Prosper is bleeding money at a faster pace this year than they were last year.

Q2 2010 - Loss before other income: $2,787,434
Q2 2011 - Loss before other income: $2,837,560

1H 2010 - Loss before other income: $5,534,960
1H 2011 - Loss before other income: $5,934,838

That is a burn rate of just under ~$1,000,000 per month.

Prosper currently (as of June 30th, 2011) has cash on hand of $16,741,388.

At the most recent burn rate, that gives Prosper about 17 months (since June 30th, 2011) of operating time.  That gives them until some time around December of 2012. (Maybe December 21st, 2012?)  


Total Accumulated Deficit: $54,288,541


Prosper is paying (extrapolated from 1H numbers) ~$1.8million/yr more "Compensation and Benefits" in 2011 than 2010.

On January 26, 2011, the court issued a final statement of decision finding that Greenwich has a duty to defend the class action lawsuit, and requiring that Greenwich pay Prosper's past and future defense costs in the class action suit up to $2 million.  As of June 30, 2011, Greenwich made payments to Prosper in the amount of $1,896,844 to reimburse Prosper for the defense costs it had already incurred in the class action suit. This reimbursement is reflected in Other Income in our Statement of Operations. Greenwich is required to reimburse Prosper for up to an additional $103,156 in defense costs for the class action suit going forward.  Each such reimbursement will be due within 30 days of Prosper incurring any such costs and presenting the applicable invoice to Greenwich.  Greenwich is also required to pay Prosper pre-judgment interest on the defense costs incurred by Prosper in the class action suit prior to the Court’s decision.  The amount of this pre-judgment interest is $142,584.

So, Prosper's insurance is only required to pay Prosper up to $2,000,000 (+interest) in past and future costs against the class action and has already paid $1,896,844. Prosper is about to have to start paying for the defense costs out of its own pockets again very soon. And things are only just starting with the class action.


Edit: Nominating Thread to The Lobby.

[ira01]

On January 26, 2011, the court issued a final statement of decision finding that Greenwich has a duty to defend the class action lawsuit, and requiring that Greenwich pay Prosper's past and future defense costs in the class action suit up to $2 million.  As of June 30, 2011, Greenwich made payments to Prosper in the amount of $1,896,844 to reimburse Prosper for the defense costs it had already incurred in the class action suit. This reimbursement is reflected in Other Income in our Statement of Operations. Greenwich is required to reimburse Prosper for up to an additional $103,156 in defense costs for the class action suit going forward.  Each such reimbursement will be due within 30 days of Prosper incurring any such costs and presenting the applicable invoice to Greenwich.  Greenwich is also required to pay Prosper pre-judgment interest on the defense costs incurred by Prosper in the class action suit prior to the Court’s decision.  The amount of this pre-judgment interest is $142,584.

So, Prosper's insurance is only required to pay Prosper up to $2,000,000 (+interest) in past and future costs against the class action and has already paid $1,896,844. Prosper is about to have to start paying for the defense costs out of its own pockets again very soon. And things are only just starting with the class action.

That is very interesting (and quite distressing for Prosper).  As litigation of the class action kicks into high gear, Prosper could easily spend more than $100K a month on its attorneys' fees -- maybe much more.  That is going to pinch. 

Edit: Nominating Thread to The Lobby.

Second.

[Staneslav]

a

[Fred93]

Prosper is bleeding money at a faster pace this year than they were last year.

Q2 2010 - Loss before other income: $2,787,434
Q2 2011 - Loss before other income: $2,837,560

Does anyone have an idea for why the burn rate is going up?   

Eventually, it must come down. 

[ira01]

Ira, do you think this would put pressure on them to settle?

Certainly defense costs are a big factor in any settlement calculation.  Even if you think you are likely to win in the end, having to pay a huge amount of defense costs to get there encourages one to settle.  Here, though, the $2M limit on Prosper's insurance coverage certainly isn't a surprise to Prosper.  So one would think that Prosper would have wanted to settle before the free defense ends.  

I think that a problem with achieving settlement is that Prosper has huge conflicts of interest between what is good for the company and what is good for the individual defendants (who largely call the shots for the company).  For example, a settlement that imposed most of the costs on the individual defendants would clearly be good for the company -- but do you think that such a settlement is likely to be approved?  Perhaps Prosper has set up some sort of independent committee of directors without a personal stake in the litigation to make such decisions, but one could certainly reasonably wonder just how effective that would be.  For example, for whatever reason, the company continues to keep Chris Larsen as CEO and the public face of Prosper -- so do you think a settlement allocating 75% of the cost to Larsen personally is likely to pass muster, even if it would be a good deal for Prosper itself?

[ira01]

Prosper is bleeding money at a faster pace this year than they were last year.

Q2 2010 - Loss before other income: $2,787,434
Q2 2011 - Loss before other income: $2,837,560

Does anyone have an idea for why the burn rate is going up?  

Eventually, it must come down.  

I haven't looked at the numbers, but I imagine all those lender incentives were quite costly.

And no idea why employee compensation seems to have increased so much -- are there a bunch of new employees (and if so, what in the world are they doing), or are they paying everyone (or some high-paid people) a lot more?

[mothandrust]

And no idea why employee compensation seems to have increased so much -- are there a bunch of new employees (and if so, what in the world are they doing), or are they paying everyone (or some high-paid people) a lot more?

No idea? 

If they know they're going to lose a big court case that's going to bankrupt the company, wouldn't they try to drag the case out while using the time to pay out the assets of the company to themselves and their cronies?

[havastat]

When you subtract away the rebates, promotions, and costs of revenues, there's almost nothing left, only $136K in net revenues. This is only a few percent of expenses, while Lending Club's net revenues are more than an order of magnitude this amount and nearly half their expenses.

It looks like Prosper is putting virtually every dime that comes in back into promotions. So all the money for the additional salaries, marketing expenses, etc. as it tries to ramp up its business has to come directly out of cash burn.