Pagaya Technologies .(PGY) - 2022 Q4 - Annual Report

Introduction Introduces Pagaya Technologies Ltd., clarifying the report's reliance on statistical data and management estimates, subject to inherent uncertainties - References to 'we,' 'us,' 'our,' 'our business,' 'the Company,' and 'Pagaya' refer to Pagaya Technologies Ltd. and its consolidated subsidiaries[23] - The Annual Report includes statistical, market, and industry data from publicly available information and independent industry publications, as well as estimates, projections, and forecasts prepared by management, all of which are subject to inherent uncertainties and risks[24] Selected Definitions Provides a glossary of key terms and acronyms used throughout the annual report, essential for understanding the company's operations, financial instruments, and regulatory context - Network Capital refers to the total capital currently invested in assets originated by Partners with the assistance of Pagaya's AI technology and network, plus capital committed by asset investors available for new asset acquisition[59] - Network Volume refers to the gross dollar amount of assets originated by Partners with the assistance of Pagaya's AI technology and acquired by Financing Vehicles[60] - Partners are financial institutions (banks, peer-to-peer lending networks, online marketplaces, non-bank finance companies, fintechs, etc.) that utilize Pagaya's AI technology and network to assist in creating and originating credit and other assets[72] - Financing Vehicles include funds managed or advised by Pagaya or its affiliates, securitization vehicles sponsored or administered by Pagaya or its affiliates, and other similar vehicles[52] Special Note Regarding Forward-Looking Statements Highlights that the report contains forward-looking statements subject to substantial risks and uncertainties, cautioning readers not to rely solely on them - Forward-looking statements include expectations concerning business outlook, productivity, operational improvements, capital investments, market conditions, economic performance, and future financial performance[92] - Important factors that could cause actual results to differ materially include changes in interest rates, market conditions, capital availability, AI technology performance, competition, regulatory changes, and the ability to retain key employees[95][97] - The company undertakes no obligation to revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, except as required by law[96] Risk Factor Summary Summarizes the principal risks that could significantly and negatively affect Pagaya's business, prospects, financial conditions, or operating results - Key operational risks include rapid growth, potential adverse impacts from a recent workforce reduction, heavy dependence on AI technology, reliance on a limited number of Partners, and challenges in raising capital from asset investors[100] - Economic conditions such as interest rates, rising inflation, and instability in the banking system can adversely affect the business and the performance of Financing Vehicles, especially since AI technology has not been extensively tested during economic down-cycles[100][101] - Technological and data-related risks involve the inability to continuously improve AI technology, potential for unintentional bias or discrimination in AI, difficulties in protecting intellectual property, and reliance on Partners' borrower data and third-party data[101][102] - Regulatory and legal risks include potential litigation, regulatory actions, consumer complaints, compliance issues, challenges to the 'true lender' status of Partners, and the evolving political and regulatory framework for AI technology[102] - Risks specific to Single Family Rental (SFR) operations include challenges in integrating Darwin Homes, dependence on general economic and real estate conditions, and issues related to tenant selection, defaults, and compliance with rental laws[102] Part I Provides comprehensive information about Pagaya, including key details, risk factors, business overview, operational and financial review, and corporate information Item 1. Identity of Directors, Senior Management and Advisers States that information regarding the identity of directors, senior management, and advisers is not applicable for this report - Item 1 is marked 'Not applicable'[105] Item 2. Offer Statistics and Expected Timetable States that information regarding offer statistics and expected timetable is not applicable for this report - Item 2 is marked 'Not applicable'[106] Item 3. Key Information Provides crucial information about the company, including its capitalization, indebtedness, and a comprehensive discussion of risk factors A. [Reserved] States that sub-item A is reserved and not applicable - Sub-item A is marked 'Not applicable'[107] B. Capitalization and Indebtedness States that sub-item B is not applicable for this report - Sub-item B is marked 'Not applicable'[108] C. Reasons for the Offer and Use of Proceeds States that sub-item C is not applicable for this report - Sub-item C is marked 'Not applicable'[109] D. Risk Factors Discusses various risk factors that could significantly and negatively affect Pagaya's business, operations, and financial performance Net Losses Attributable to Pagaya Technologies Ltd. | Year | Net Loss (in millions) | | :--- | :--------------------- | | 2022 | $(302.3) | | 2021 | $(91.2) | - The company is a rapidly growing company with a relatively limited operating history, making future performance predictions difficult and exposing it to increased risks and uncertainties[113][114] - A 20% workforce reduction was announced on January 18, 2023, to streamline operations and achieve near-to-medium term priorities, but it may not result in anticipated savings or efficiencies and could disrupt business[121][122] - The business is highly dependent on its AI technology; if it fails to improve, contains errors, or is ineffective, it could adversely affect growth prospects, business, financial condition, and results of operations[139] - A significant portion of revenue relies on a limited number of Partners, and the ability to raise capital from asset investors at competitive rates is a vital component of the products offered[142][145] - Expansion into new markets like real estate and credit cards carries substantial risks, as the AI technology has not been extensively tested in these areas and may not perform as well as in existing consumer markets[154][157] - The industry is highly competitive, with larger competitors possessing more diversified products, broader Partner/investor bases, and lower-cost funding, which could lead to price reductions, reduced margins, or loss of revenues for Pagaya[161][162][163] - Regulators, such as the CFPB and FTC, have expressed concerns that certain AI technology may lead to unintentional bias or discrimination in automated credit analysis, potentially subjecting the company to legal or regulatory liability and reputational harm[206][207] - The dual-class structure of Pagaya Ordinary Shares concentrates voting power with the Founders (approximately 77.6% of the total voting power as of March 31, 2023), effectively limiting other shareholders' ability to influence important determinations and transactions[268][269] - The company and its Partners are subject to a variety of complex federal, state, and local laws related to consumer protection, lending, data protection, and investment advisory services; non-compliance could result in regulatory action, litigation, or monetary payments[277][279] - There is a risk that obligations originated by Partners utilizing Pagaya's network could be successfully challenged on the basis that the Partner was not the 'true lender,' potentially rendering such obligations unenforceable or subjecting the company to penalties[314][319] - The company's operations in Israel expose it to risks related to political, economic, and military conditions in the region, as well as potential disruptions from military reserve duty for employees and differences in Israeli corporate law[342][347][348] - The price of Class A Ordinary Shares and public warrants has been and may continue to be volatile due to various factors, including market and industry changes, analyst comments, and actions by shareholders or short sellers[370][373][375] - Future issuances of Class A Ordinary Shares, including under equity incentive plans or through committed equity financing, could dilute the interest of existing shareholders and potentially reduce the market price of the shares