Pagaya Technologies .(PGY) - 2023 Q2 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations Company Overview Pagaya's AI and data network connects financial service providers, customers, and investors, enhancing creditworthiness and expanding financial product access - Pagaya utilizes an AI and data network to enhance financial product accessibility and improve creditworthiness assessments, addressing outdated manual processes in the financial services industry[3][4] - The company's solution benefits Partners by increasing customer application approvals, driving revenue growth, and reducing customer acquisition costs; benefits customers through enhanced access to financial products; and benefits investors by providing exposure to AI-originated assets[5] Recent Developments Pagaya acquired Darwin Homes, reduced workforce by 20% for $30M savings, extended a key agreement, and plans a $75M preferred share issuance - Pagaya completed the acquisition of Darwin Homes, Inc. on January 5, 2023, making Darwin a wholly-owned subsidiary[7][8] - On January 18, 2023, Pagaya announced a workforce reduction of approximately 20% across its Israel and U.S. offices, expecting to achieve approximately $30 million in annualized cost savings[9][10] - The Letter Agreement with Radiance Star Pte. Ltd. was extended by three years to June 1, 2028, maintaining the same terms, including the issuance of 2,640,000 warrants[11] - Pagaya entered into a Preferred Share Purchase Agreement on April 14, 2023, to issue and sell 60,000,000 Series A Preferred Shares for an aggregate purchase price of $75 million to Oak HC/FT Partners V, L.P. and its affiliates, pending shareholder approval[12][14] Emerging Growth Company Status Pagaya qualifies as an 'emerging growth company' under the JOBS Act, benefiting from reporting exemptions and electing an extended transition for new accounting standards - Pagaya qualifies as an 'emerging growth company' under the JOBS Act, benefiting from exemptions including auditor attestation requirements and reduced executive compensation disclosures[18] - The company has elected not to opt out of the extended transition period for new or revised financial accounting standards, meaning it will adopt them at the same time as private companies, which may impact comparability with other public companies[19] - Pagaya will remain an emerging growth company until the earlier of: (i) the last day of the fiscal year following the fifth anniversary of June 22, 2022, (ii) annual total gross revenue of at least $1.235 billion, (iii) being deemed a large accelerated filer (market value of ordinary equity held by non-affiliates exceeds $700 million), or (iv) issuing more than $1 billion in non-convertible debt securities during the prior three-year period[20] Foreign Private Issuer Exemptions As a 'foreign private issuer,' Pagaya benefits from distinct SEC reporting requirements, including less frequent filings and exemptions from Regulation FD and Section 16 - Pagaya reports as a 'foreign private issuer' under U.S. SEC rules, allowing it to file annual reports on Form 20-F within 120 days after the fiscal year-end and furnish reports on Form 6-K for certain disclosures[22] - The company is exempt from Regulation FD, SEC rules on proxy solicitation, and Section 16 reporting and 'short-swing' profit recovery provisions for its officers, directors, and principal shareholders[22] Our Economic Model Pagaya's economic model is driven by Network Volume, generating revenue from AI and contract fees, interest, and investments, with Production Costs tied to volume and significant R&D - Pagaya's primary revenue source is Network Volume, which consists of assets originated by Partners with AI assistance and acquired by Financing Vehicles[24] - Revenue streams include Network AI fees (AI integration and capital markets execution fees), contract fees (management, performance), interest income from risk retention holdings, and investment income[24][25][26] - Production Costs, which compensate Partners for asset acquisition and origination, are highly correlated to Network Volume. Other significant expenses include headcount, technology overhead, and research and development[27][28] Key Factors Affecting Our Performance Pagaya's performance is shaped by partner retention, new partner adoption, AI advancements, funding availability, asset performance, and macroeconomic conditions - Pagaya has retained 100% of its Partners since inception in 2016, with Partners experiencing approximately 3 times growth in network-enabled originations between the 3rd and 12th month of onboarding[30] - In 2022, Pagaya onboarded 6 new Partners, including Klarna and Ally Financial, which contributed approximately $650 million of Network Volume in 2022 and 20% of total Network Volume in Q1 2023[31] - Improvements to Pagaya's AI technology benefit from a flywheel effect, with a continually increasing base of training data. Since inception, approximately $1.3 trillion in application volume has been evaluated by the network[33] - The availability of funding from investors is critical, with approximately $16 billion raised since 2019, but is subject to market conditions and the performance of AI-originated assets[35][36] - Macroeconomic conditions (e.g., rising interest rates, inflation, bank failures) can impact consumer demand, Partner origination ability, funding availability, and operating costs, though they also provide data for AI improvement[37] Key Operating Metrics Network Volume is Pagaya's key operating metric, directly influencing revenue and reflecting scale, increasing 12% year-over-year to $1.85 billion in Q1 2023 - Network Volume is considered a key operating metric, serving as a proxy for overall scale and reach, directly influencing revenue generation[41] Network Volume (Three Months Ended March 31) | Metric | 2023 ($ in millions) | 2022 ($ in millions) | % Change | | :------------- | :------------------- | :------------------- | :------- | | Network Volume | $1,850 | $1,650 | 12% | Components of Results of Operations Pagaya's results include network AI, contract, interest, and investment income, offset by Production, R&D, sales, and G&A expenses, with other income/loss and noncontrolling interests impacting net income - Revenue is generated from network AI fees (AI integration and capital markets execution), contract fees (administration, management, performance), interest income from risk retention holdings and cash balances, and investment income from ownership interests in Financing Vehicles[43][44][45][46] - Costs and operating expenses include Production Costs (primarily for asset transfer from Partners to Financing Vehicles), research and development (for network and AI technology), sales and marketing (for Partner and investor management), and general and administrative (for executive, finance, legal, and administrative functions)[47][48][50][51][52] - Other Income (loss), net, primarily consists of changes in the fair value of warrant liabilities and non-recurring items like impairment of investments. Income tax expense is affected by Israeli tax benefits and the geographical mix of taxable income. Net income attributable to noncontrolling interests accounts for the portion of consolidated VIEs' net income not attributable to Pagaya[53][54][55] Results of Operations - Three Months Ended March 31, 2023 and 2022 Pagaya's Q1 2023 net loss increased to $(61.0) million, driven by higher Production Costs and a significant credit-related impairment, despite 9% revenue growth Key Financial Results (Three Months Ended March 31) | Metric | 2023 ($ in thousands) | 2022 ($ in thousands) | Change ($ in thousands) | % Change | | :----------------------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Total Revenue and Other Income | 186,638 | 170,534 | 16,104 | 9% | | Total Costs and Operating Expenses | 211,614 | 180,546 | 31,068 | 17% | | Operating Income (Loss) | (24,976) | (10,012) | (14,964) | (149)% | | Other income (loss), net | (66,980) | 313 | (67,293) | NM | | Net Loss Attributable to Pagaya Tech Ltd. | (60,971) | (18,272) | (42,699) | (234)% | | Basic and Diluted Net Loss Per Share | (0.09) | (0.12) | 0.03 | 25% | - Revenue from fees increased by $16.9 million (11%) to $175.3 million, driven by a $9.4 million increase in Network AI fees due to 12% growth in Network Volume, and a $7.5 million increase in contract fees[62] - Production costs increased by $32.8 million (36%) to $125.1 million, primarily due to growth in Network Volume and changes in asset class composition[67] - Other income (loss), net, shifted from a $0.3 million income to a $67.0 million loss, mainly due to a $68.3 million net credit-related impairment loss on certain investments[72] - Net income attributable to noncontrolling interests decreased by $46.4 million (530%) to a loss of $(37.7) million, driven by net losses in consolidated VIEs associated with risk retention holdings, including a $41.9 million credit-related impairment loss[74] Reconciliation of Non-GAAP Financial Measures Pagaya uses Adjusted Net Income (Loss) and Adjusted EBITDA as non-GAAP measures to show ongoing operations and profitability, with both metrics decreasing in Q1 2023 - Adjusted Net Income (Loss) and Adjusted EBITDA are non-GAAP measures used to highlight results from ongoing operations and underlying profitability, excluding non-cash or unpredictable items[76][80][81] Adjusted Non-GAAP Financial Measures (Three Months Ended March 31) | Metric | 2023 ($ in thousands) | 2022 ($ in thousands) | | :----------------------- | :-------------------- | :-------------------- | | Adjusted Net Income (Loss) | (11,015) | 4,106 | | Adjusted EBITDA | 2,048 | 4,397 | - Adjusted Net Income (Loss) decreased from $4.1 million in Q1 2022 to $(11.0) million in Q1 2023, while Adjusted EBITDA decreased from $4.4 million to $2.0 million over the same period[79] Liquidity and Capital Resources Pagaya faces net losses and a deficit, with cash at $316.8 million, but expects sufficient liquidity for 12 months via existing cash, a $167.5 million credit facility, $300 million equity financing, and a $75 million preferred share agreement Liquidity Overview | Metric | March 31, 2023 ($ in millions) | December 31, 2022 ($ in millions) | | :---------------------- | :----------------------------- | :-------------------------------- | | Net Loss (attributable) | (61.0) | (18.3) | | Accumulated Deficit | 475.2 | 414.2 | | Cash, Cash Equivalents | 316.8 | 337.1 | | Shareholders' Equity | 527.9 | N/A | - Pagaya's primary liquidity requirements are to finance risk retention, invest in R&D, and attract/retain employees, with strategic investments planned to support business growth[87] - The company expects existing cash and PIPE investment proceeds to be sufficient for working capital and capital expenditures for at least the next 12 months, but acknowledges risks from market conditions and access to funding[88][89] - Pagaya has access to a $167.5 million Revolving Credit Facility, a committed equity financing agreement with B. Riley Principal Capital II for up to $300 million in Class A Ordinary Shares, and a $75 million Series A Preferred Share Purchase Agreement to raise additional capital[90][96][102] - The likelihood of warrant holders exercising their warrants for cash is dependent on the market price of Class A Ordinary Shares exceeding $11.50 per share, with potential proceeds of up to $169.6 million[93][94] Cash Flow Pagaya's Q1 2023 saw increased net cash used in operating activities by $20.9 million and investing activities by $55.7 million, offset by a $74.0 million increase in net cash from financing Summarized Consolidated Cash Flow (Three Months Ended March 31) | Activity | 2023 ($ in thousands) | 2022 ($ in thousands) | Change ($ in thousands) | % Change | | :---------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Net cash used in operating | (23,673) | (2,823) | (20,850) | (739)% | | Net cash used in investing | (99,665) | (43,918) | (55,747) | (127)% | | Net cash provided by financing | 103,024 | 29,042 | 73,982 | 255% | - The increase in net cash used in operating activities was mainly due to an $89.1 million increase in net loss, partially offset by a $71.0 million increase in non-cash charges, primarily a credit impairment[105] - The increase in net cash used in investing activities was primarily due to a $47.7 million increase in the purchase of investments in loans and securities[107] - The increase in net cash provided by financing activities was driven by an $80.0 million increase in proceeds from the revolving credit facility and a $19.0 million increase related to noncontrolling interests, partially offset by a $26.9 million decrease from secured borrowing[108] Indebtedness Pagaya's indebtedness includes a $167.5 million Revolving Credit Facility, with $95.0 million drawn and continued access post-SVB closure, plus 5% credit risk retention in securitization vehicles - Pagaya entered into a 3-year Senior Secured Revolving Credit Facility for an initial principal amount of $167.5 million on September 2, 2022[110] - As of March 31, 2023, $95.0 million was drawn, $20.0 million in letters of credit were issued, and $52.5 million of borrowing capacity remained available under the Revolving Credit Facility, with Pagaya in compliance with all covenants[116] - Following the closure of Silicon Valley Bank (SVB) in March 2023, the Credit Agreement obligations were transferred to Silicon Valley Bridge Bank, National Association (SVBBNA), ensuring continued access to the facility[116][117][119] - Pagaya sponsors securitization vehicles to purchase loans from Partners and retains at least 5% of the credit risk of issued securities to comply with risk retention regulatory requirements[121] Recent Accounting Pronouncements The adoption of ASU No. 2016-13 (Topic 326) regarding credit losses on financial instruments did not materially impact Pagaya's consolidated financial statements - The adoption of ASU No. 2016-13 (Topic 326), related to credit losses on financial instruments, did not materially impact Pagaya's consolidated financial statements[123] Critical Accounting Policies and Estimates Detailed information on Pagaya's significant accounting policies and their effects on financial condition and results of operations is available in the Annual Report on Form 20-F - Detailed information on Pagaya's significant accounting policies and their effects on financial condition and results of operations can be found in the audited consolidated financial statements in the Annual Report on Form 20-F[125] Quantitative and Qualitative Discussions of Market Risk Pagaya is exposed to credit, liquidity, and interest rate risks through investments and securitization markets, with no material changes in market risk exposure as of March 31, 2023 - Pagaya is exposed to market risks, including credit, liquidity, and interest rate risks, through investments in loans and securities and access to securitization markets[127] - As of March 31, 2023, there have been no material changes in the company's exposure to market risk compared to December 31, 2022[127]