What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 221 added, 139 removed, 564 unchanged (39% of the section changed)

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• our plans for and our ability to successfully maintain our diversified funding strategy, including warehouse facilities, loan sales and securitization transactions;

• our ability to realize the expected benefits from the reduction in workforce and other streamlining measures announced in February and May 2023;

• our expectation regarding the transfer of certain loans receivable;

• our ability to realize the expected benefits from the reduction in workforce and other streamlining measures announced in February and

• our expectations regarding our costs and seasonality;

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• our ability to maintain or expand our relationships with our current partners, including bank partners, and our plans to acquire additional partners using our Lending as a Service model;

• our ability to provide an attractive and comprehensive user experience through our recently launched mobile application, the Oportun Mobile App, and further our position as a leading fintech;

• our ability to provide an attractive and comprehensive user experience through our recently launched mobile application, the Oportun Mobile App, and further our position as a leading fintec h;

• our ability to maintain the terms on which we lend to our borrowers;

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• our ability to attract, integrate and retain qualified employees;

• the effect of macroeconomic conditions on our business, including the impact of the ongoing COVID-19 pandemic, rising interest rates and recession or slowing growth;

• the effect of macroeconomic conditions on our business, including the impact of rising interest rates and recession or slowing growth;

• our ability to effectively manage and expand the capabilities of our contact centers, outsourcing relationships and other business operations abroad;

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We qualify all of our forward-looking statements by these cautionary statements.

We are a digital banking platform that puts our members’ financial goals within reach.

With intelligent borrowing, savings, budgeting, and spending capabilities, we empower members with the confidence to build a better financial future .

We are a mission-driven fintech that puts our members’ financial goals within reach.

With intelligent borrowing, savings, and budgeting capabilities, we empower members with the confidence to build a better financial future .

By intentionally designing our products to help solve the financial health challenges facing a majority of people in the U.S., we believe our business is well positioned for significant growth in the future.

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and tailored to each member's goals to make achieving financial health automated.

Our financial products allow us to meet our members where they are and assist them with their overall financial health, resulting in opportunities to present multiple relevant products to our members.

Our financial products allow us to meet our members where they are and assist them with their overall financial health, resulting in opportunities to present multiple relevant products to our

Our credit products include personal loans, secured personal loans and credit cards.

Our digital banking products include automated

savings, digital banking, long-term investing and retirement savings.

Consumers are able to become members and access our products through our digital banking app — the Oportun Mobile app — and the Oportun.com website, which are our primary channels for onboarding and serving members.

Our personal loan products are also available over the phone or through 360 retail locations, which includes 160 of our Lending as a Service partner locations.

Our digital banking products include automated savings, long-term investing and retirement savings.

Consumers are able to become members and access our products through our Oportun Mobile App and the Oportun.com website, which are our primary channels for onboarding and serving members.

As of July 31, 2023, our personal loan products are also available over the phone or through our 167 Oportun retail locations, and at 74 of our Lending as a Service partner locations.

Credit Products

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We charge fixed interest rates on our loans, which vary based on the amount disbursed and applicable state law, with a cap of 36% annual percentage rate (“APR”) in all cases.

As of March 31, 2023, for all active loans in our portfolio and at time of disbursement, the weighted average term and APR at origination was 39 months and 32.1%, respectively.

The average loan size for loans we originated during the three months ended March 31, 2023 was $4,290.

As of June 30, 2023, for all active loans in our portfolio and at time of disbursement, the weighted average term and APR at origination was 40 months and 32.3%, respectively.

The average loan size for loans we originated during the three months ended June 30, 2023 was $4,101.

Our loans do not have prepayment penalties or balloon payments, and typically range in size from $300 to $10,000 with terms of 12 to 54 months.

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As part of our underwriting process, we verify income for all applicants and only approve loans that meet our ability-to-pay criteria.

As of March 31, 2023, we originate unsecured personal loans in 11 states through state licenses and in 31 through our partnership with Pathward, N.A.

As of June 30, 2023, we originate unsecured personal loans in 6 states through state licenses and in 36 through our partnership with Pathward, N.A.

(formerly known as MetaBank, N.A.).

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Our secured personal loans range in size from $2,525 to $18,500 with terms ranging from 24 to 64 months.

The average loan size for secured personal loans we originated during the three months ended March 31, 2023 was $7,654.

As of March 31, 2023, for all active loans in our portfolio and at time of disbursement, the weighted average term and APR at origination was 50 months and 28.2%, respectively.

The average loan size for secured personal loans we originated during the three months ended June 30, 2023 was $7,486.

As of June 30, 2023, for all active loans in our portfolio and at time of disbursement, the weighted average term and APR at origination was 51 months and 28.3%, respectively.

As part of our underwriting process, we evaluate the collateral value of the vehicle, verify income for all applicants and only approve loans that meet our ability-to-pay criteria.

Our secured personal loans are currently offered in California, Texas, Florida, Arizona and New Jersey and we are in the process of considering expansion into other states.

Credit Cards - We lau nched Oportun® Visa® Credit Card, issued by WebBank, Member FDIC, in December 2019, and offer credit cards in 45 states as of March 31, 2023 .

Credit Cards - We lau nched Oportun® Visa® Credit Card, issued by WebBank, Member FDIC, in December 2019, and offer credit cards in 44 states as of June 30, 2023 .

Credit lines on our credit cards range in size from $300 to $3,000 with an APR between 24.9% to 29.9%.

The average APR of the outstanding credit card receivables was 29.8% as of March 31, 2023 .

The average credit line for credit cards activated during the three months ended March 31, 2023 was $827.

The average APR of the outstanding credit card receivables was 29.8% as of June 30, 2023 .

The average credit line for credit cards activated during the three months ended June 30, 2023 was $876.

Digital Banking Products

Savings – Our Savings product is designed to understand a member’s cash flows and save a calculated amount on a regular basis to effortlessly achieve savings goals.

Savings and Investing – Our Savings product is designed to understand a member’s cash flows and save a calculated amount on a regular basis to effortlessly achieve savings goals.

Our savings product utilizes mac hine learning to analyze a member’s transaction activity and build forecasts of the member’s future cash flows to make small, frequent savings decisions according to the member’s financial goals in a personalized manner.

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Since 2015, we have helped members save more than $9.6 billion.

Direct – Our Direct product offers a full checking account, through a bank partner, that intelligently organizes and budgets a member’s money across bills, savings, and spending.

The bank account with a brain™, Direct, leverages the same A.I.

engine used for our savings product to automatically identify and organize recurring bills and guides spending to ensure members' savings goals are met, and that members know exactly what they can safely spend.

This is on top of what members can expect from a traditional checking account, including a physical and virtual debit card to use for purchases and ATM withdrawals and checks.

Investing and Retirement – Our investment and retirement products are a longer-term savings solution via an A.I.-driven portfolio allocation into low-cost investments based upon risk-tolerance.

Our long-term investment solutions automatically allocates our members' savings into low-cost risk-adjusted portfolios held in brokerage accounts or tax-advantaged IRAs.

Since 2020, our members have invested $73.2 million into long-term goals through low-cost ETF portfolios.

Our investment products are a longer-term savings solution via an A.I.-driven portfolio allocation into low-cost investments based upon risk-tolerance.

Our long-term investment solutions automatically allocate our members' savings into low-cost risk-adjusted portfolios held in brokerage accounts or tax-advantaged IRAs.

Since 2020, our members have invested more than $79.8 million into long-term goals through low-cost ETF portfolios.

The investment products include a general investing account and a retirement account for our members’ longer term goals, utilizing smart recommendations to invest savings in risk-adjusted portfolios.

The funds in these savings, checking, investing and retirement accounts are owned by members of our digital banking products and are not the assets of the Company.

The funds in these savings and investing accounts are owned by our members and are not the assets of the Company.

Therefore, these funds are not included in the Condensed Consolidated Balance Sheets (Unaudited) .

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Beyond our core direct-to-consumer lending business, we believe that we can leverage our proprietary credit scoring and underwriting model to partner with other consumer brands and expand our member base.

With our Lending as a Service model, our partner markets loans and enters borrower applications into our system and Oportun underwrites, originates, and services the loans.

Our first Lending as a Service strategic partner was DolEx Dollar Express, Inc.

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In October of 2021, we launched another Lending as a Service partnership with Barri Financial Group in select locations.

In January 2022, we announced our first all-digital Lending as a Service partnership with Sezzle, a leading provider of Buy Now Pay Later (“BNPL”) financing options which launched in the first quarter of 2023.

We recently re-launched our Lending as a Service program with a new streamlined Lead Generation program through which we are able to offer loans through our existing channels by phone, online, or in our retail locations.

Oportun originates, underwrites, and services the loan.

Through this new program, we believe we will be able to offer our Lending as a Service Lead Generation program to additional partners with a much faster lead-to-market time while expanding our membership base with a true Oportun service experience.

In January 2022, we announced our first all-digital Lending as a Service partnership with Sezzle, a leading provider of Buy Now Pay Later financing options which launched in the first quarter of 2023.

Oportun is now available as a checkout option, through Sezzle, for larger purchases which we believe will allow us to reach more new members.

We believe we will be able to offer Lending as a Service to additional partners, and expand our membership base.

Capital Markets Funding

To fund our growth at a low and efficient cost, we have built a diversified and well-established capital markets funding program, which allows us to partially hedge our exposure to rising interest rates or credit spreads by locking in our interest expense for up to three years.

Over the past eight years, we have executed 20 bond offerings in the asset-backed securities market, the last 17 of which include tranches that have been rated investment grade.

We have issued two- and three-year fixed rate bonds which have provided us committed capital to fund future loan originations at a fixed Cost of Debt.

Over the past eight years, we have executed 20 bond offerings in the asset-backed securities market, the last 17 of which include tranches that have been rated

investment grade.

We have generally issued two- and three-year fixed rate bonds which have provided us committed capital to fund future loan originations at a fixed Cost of Debt.

In higher interest rate environments we may consider issuing amortizing bonds.

Workforce Optimization and Streamlining Operations

On February 9, 2023 and on May 8, 2023, we announced that we are taking a series of personnel and other cost saving measures to reduce expenses and streamline efficiency, including reducing the size of our corporate staff by 10% and 19%, respectively.

On February 9, 2023 and on May 8, 2023, we announced a series of personnel and other cost saving measures to reduce expenses and streamline efficiency, including reducing the size of our corporate staff by 10% and 19%, respectively.

These measures have resulted in the reduction of our corporate staff by approximately 28% in 2023.

In relation to these and other personnel related activities, we incurred non-recurring, pre-tax charges of $6.8 million in the first quarter of 2023 and expect to incur non-recurring, pre-tax charges of approximately $8.0 million in the second quarter of 2023.

In relation to these and other personnel related activities, the income statement impact of $8.4 million and $15.2 million was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2023, respectively.

These reductions are anticipated to result in annualized run-rate savings of $126.0 to $136.0 million.

During the first quarter of 2022, we made the decision to close an additional 27 retail locations in April 2022 and reduce a portion of the workforce who manage and operate these retail locations.

The income statement impact of $0.2 million was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2022 .

We routinely evaluate the balance of investment and productivity of our retail locations.

During the second quarter of 2023, we made the decision to close 32 retail locations and reduce a portion of the workforce who manage and operate these retail locations.

In the second quarter of 2023, we incurred $0.2 million in expenses related to these additional retail location closures and estimate remaining expenses of $0.2 million to be recognized in the third quarter of 2023.

In addition, we have also recognized $0.8 million related to severance and benefits related to the store closures in the second quarter of 2023 which represents all severance and benefit related costs to be incurred as a result of these store closures.

The income statement impact of $1.0 million was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2023.

During the first quarter of 2022, we made the decision to close 27 retail locations in April 2022 and reduce a portion of the workforce who manage and operate these retail locations.

The income statement impact of $1.5 million and $2.1 million was recorded through General, administrative and other on the Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2022, respectively .

These amounts included expenses related to the retail location closures and all severance and benefits-related costs.

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As of or for the Three Months

Ended March 31,

Ended June 30,

As of or for the Six Months

Ended June 30,

(in thousands of dollars) 2023 2022 2023 2022

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30+ Day Delinquency Rate

5.3 % 4.3 % 5.3 % 4.3 %

Annualized Net Charge-Off Rate

12.5 % 8.6 % 12.3 % 8.6 %

Return on Equity (13.1) % (5.7) % (46.9) % 11.8 %

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Member growth is generally an indicator of future revenue, but is not directly correlated with revenue, since not all Members who sign up for one of our products fully utilize or continue to use our products.

Members as of March 31, 2023 grew to 1.9 million, as compared to 1.7 million as of March 31, 2022.

Members as of June 30, 2023 grew to 2.0 million, as compared to 1.8 million as of June 30, 2022.

This increase was due to the success in our marketing efforts.

New members seeking our personal loan and credit card products are discovering and also activating the Savings product via the Oportun Mobile App.

Products refers to the aggregate number of personal loans and/or credit card accounts that our Members have had or been approved for that have been originated by us or through one of our bank partners.

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We view Products as an indicator of the effectiveness of our member acquisition efforts and multiproduct adoption.

Products as of March 31, 2023 grew to 2.1 million as compared to 1.8 million as of March 31, 2022.

Products as of June 30, 2023 grew to 2.2 million as compared to 1.9 million as of June 30, 2022.

This increase was due to growth in both our credit products and our digital banking products.

Aggregate Originations

Aggregate Originations decreased to $408.0 million for the three months ended March 31, 2023 from $800.1 million for the three months ended March 31, 2022, representing a 49.0% decrease.

Aggregate Originations decreased to $485.1 million for the three months ended June 30, 2023 from $878.2 million for the three months ended June 30, 2022, representing a 44.8% decrease.

The decrease is primarily driven by a decrease in the number of loans originated .

We originated 100,122 and 228,728 loans for the three months ended March 31, 2023 and 2022, respectively.

We originated 117,940 and 241,256 loans for the three months ended June 30, 2023 and 2022, respectively.

The decrease is primarily due to actions taken to focus lending towards existing members to improve credit outcomes and lower marketing spend.

Further, given macroeconomic factors, such as inflation, our borrowers are facing higher costs for food, fuel and rent.

In July 2022, we took numerous actions to improve the credit performance on newly originated loans, including significantly tightening our underwriting standards for all borrowers.

The decrease in number of loans originated was partially offset by growth in average loan size due to a focus on returning members.

Aggregate Originations decreased to $893.1 million for the six months ended June 30, 2023 from $1,678.3 million for the six months ended June 30, 2022, representing a 46.8% decrease.

The decrease is primarily driven by a decrease in the number of loans originated .

We originated 218,062 and 469,984 loans for the six months ended June 30, 2023 and 2022, respectively.

The increase is primarily due to actions taken to focus lending towards existing members to improve credit outcomes and lower marketing spend.

Further, given macroeconomic factors, such as inflation, our borrowers are facing higher costs for food, fuel and rent.

In July 2022, we took numerous actions to improve the credit performance on newly originated loans, including significantly tightening our underwriting standards for all borrowers.

The decrease in number of loans originated was partially offset by growth in average loan size due to a focus on returning members.

30+ Day Delinquency Rate

Our 30+ Day Delinquency Rate was 5.5% and 4.5% as of March 31, 2023 and 2022, respectively.

Our 30+ Day Delinquency Rate was 5.3% and 4.3% as of June 30, 2023 and 2022, respectively.

The increase reflects the higher mix of first-time borrowers and the return to pre-pandemic underwriting criteria in late 2021 and early 2022.

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Annualized Net Charge-Off Rate

Annualized Net Charge-Off Rate for the three months ended March 31, 2023 and 2022 was 12.1% and 8.6%, respectively.

Annualized Net Charge-Off Rate for the three months ended June 30, 2023 and 2022 was 12.5% and 8.6%, respectively.

Annualized Net Charge-Off Rate for the six months ended June 30, 2023 and 2022 was 12.3% and 8.6%, respectively.

The increase is primarily driven by growth in originations to a higher mix of first-time borrowers in 2021 and the first half of 2022.

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As the average life of our loans is only one year, we expect the back book to become less impactful on our losses by the end of 2023.

We anticipate our Annualized Net Charge-Off Rate will decline during 2023 as our back book of loans amortize down.

If macroeconomic conditions do not worsen, we anticipate our Annualized Net Charge-Off Rate will decline during 2023 as our back book of loans amortize down.

Return on Equity and Adjusted Return on Equity

For the three months ended March 31, 2023 and 2022, Return on Equity was (82.5)% and 29.5%, respectively and Adjusted Return on Equity was (71.3)% and 34.1% respectively.

The decreases in Return on Equity and Adjusted Return on Equity were primarily due to lower net income and Adjusted Net Income.

Net income and Adjusted Net Income were lower due to higher credit losses, higher cost of funds and decreased fair value of our loan portfolio as a result of higher loss and discount rate assumptions.

For the three months ended June 30, 2023 and 2022, Return on Equity was (13.1)% and (5.7)%, respectively, and Adjusted Return on Equity was 2.0% and 2.3%, respectively, For the six months ended June 30, 2023 and 2022, Return on Equity was (46.9)% and 11.8%, respectively, and Adjusted Return on Equity was (34.4)% and 18.2%, respectively.

The decreases in Return on Equity for the three and six months ended were primarily due to lower net income.

Net income was lower primarily due to higher credit losses and higher cost of funds, partially offset by increased revenue and decreased operating expenses for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022.

The decrease in Adjusted Return on Equity for the three and six months ended June 30, 2023 was primarily due to lower Adjusted Net Income.

Adjusted Net Income was lower primarily due to increased fair value of our asset-backed notes, higher credit losses, and higher cost of funds, partially offset by increased revenue and decreased operating expenses for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022.

For a reconciliation of Return on Equity to Adjusted Return on Equity, see “Non–GAAP Financial Measures.”

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Consistent with our charge-off policy, we evaluate our loan portfolio and charge a loan off at the earlier of when the loan is determined to be uncollectible or when loans are 120 days contractually past due and charge-off a credit card account when it is 180 days contractually past due.

*Numbers shown reflect year-to-date amounts for the three months ended March 31, for the indicated fiscal year.

*Numbers shown reflect year-to-date amounts for the six months ended June 30, for the indicated fiscal year.

In addition to monitoring our loss and delinquency performance on an owned portfolio basis, we also monitor the performance of our loans by the period in which the loan was disbursed, generally years or quarters, which we refer to as a vintage.

We calculate net lifetime loan loss rate by vintage as a percentage of original principal balance.

Net lifetime loan loss rates equal the net lifetime loan losses for a given year through March 31, 2023 divided by the total origination loan volume for that year.

Net lifetime loan loss rates equal the net lifetime loan losses for a given year through June 30, 2023 divided by the total origination loan volume for that year.

The below chart and table show our net lifetime loan loss rate for each annual vintage of our personal loan product since we began lending in 2006, excluding loans originated from July 2017 to August 2020 under a loan program for borrowers who did not meet the qualifications for our core loan origination program.

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Dollar weighted average original term for vintage in months 9.3 9.9 10.2 11.7 12.3 14.5 16.4 19.1 22.3 24.2 26.3 29.0 30.0 32.0 33.3 37.8

Net lifetime loan losses as of March 31, 2023 as a percentage of original principal balance 7.7% 8.9% 5.5% 6.4% 6.2% 5.6% 5.6% 6.1% 7.1% 8.0% 8.2% 9.8% 10.7% 8.0%* 11.0%* 0.0%*

Outstanding principal balance as of March 31, 2023 as a percentage of original amount disbursed —% —% —% —% —% —% —% —% —% —% —% —% 1.3% 9.5% 40.1% 90.7%

Net lifetime loan losses as of June 30, 2023 as a percentage of original principal balance 7.7% 8.9% 5.5% 6.4% 6.2% 5.6% 5.6% 6.1% 7.1% 8.0% 8.2% 9.8% 10.7% 8.3%* 12.8%* 2.7%*

Outstanding principal balance as of June 30, 2023 as a percentage of original amount disbursed —% —% —% —% —% —% —% —% —% —% —% —% 0.8% 6.1% 31.3% 80.0%

* Vintage is not yet fully mature from a loss perspective.

Results of Operations

The following tables and related discussion set forth our Condensed Consolidated Statements of Operations (Unaudited) for each of the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

The following tables and related discussion set forth our Condensed Consolidated Statements of Operations (Unaudited) for each of the three and six months ended June 30, 2023 and 2022.

Three Months Ended June 30, Six Months Ended June 30,

(in thousands of dollars) 2023 2022 2023 2022

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Interest expense 41,448 17,104 80,445 30,781

Total net increase (decrease) in fair value (215,710) 3,971

Total net decrease in fair value (106,490) (63,484) (322,200) (59,513)

Net revenue 118,625 145,214 123,430 350,228

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Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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Interest Income.

Total interest income increased by $45.4 million, or 23.6%, from $192.2 million for the three months ended March 31, 2022 to $237.6 million for the three months ended March 31, 2023.

The increase is primarily attributable to growth in our Average Daily Principal Balance from $2.4 billion for the three months ended March 31, 2022 to $3.1 billion for the three months ended March 31, 2023 , an increase of 27.2% .

The increase is partially offset by a decrease in portfolio yield of 92 basis points in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 driven by lower originations and origination fees due to our tightening of credit underwriting standards and focusing lending towards existing and returning members in the second half of 2022.

Total interest income increased by $32.8 million, or 15.8%, from $207.7 million for the three months ended June 30, 2022 to $240.5 million for the three months ended June 30, 2023.

This increase was primarily attributable to growth in our Average Daily Principal Balance, which increased from $2.58 billion for the three months ended June 30, 2022 to $2.99 billion for the three months ended June 30, 2023, an increase of 16.2%.

The increase was partially offset by a decrease in portfolio yield of 10 basis points in the three months ended June 30, 2023 compared to the three months ended June 30, 2022 driven by lower originations and origination fees due to our tightening of credit underwriting standards and focusing lending towards existing and returning members in the second half of 2022.

Existing and returning members generally receive lower APRs, but historically have lower loss rates compared to new members.

Total interest income increased by $78.2 million, or 19.6%, from $399.9 million for the six months ended June 30, 2022 to $478.1 million for the six months ended June 30, 2023.

This increase was primarily attributable to growth in our Average Daily Principal Balance, which increased from $2.50 billion for the six months ended June 30, 2022 to $3.03 billion for the six months ended June 30, 2023, an increase of 21.5%.

The increase was partially offset by a decrease in portfolio yield of 51 basis points in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 driven by lower originations and origination fees due to our tightening of credit underwriting standards and focusing lending towards existing and returning members in the second half of 2022.

Existing and returning members generally receive lower APRs, but historically have lower loss rates compared to new members.

Non-interest income.

Total non-interest income decreased by $0.6 million, or 2.6%, from $22.5 million for the three months ended March 31, 2022 to $21.9 million for the three months ended March 31, 2023.

This decrease is primarily due to lower gain on loans sold of $4.4 million under our whole loan sale programs due to lower volume of whole loan sales, partially offset by $3.4 million attributable to interest earned on neobanking deposit accounts.

Total non-interest income increased by $8.0 million, or 43.8%, from $18.1 million for the three months ended June 30, 2022 to $26.1 million for the three months ended June 30, 2023.

This increase is primarily due to $6.4 million increase in interest earned on neobanking deposit accounts, $3.9 million increase in documentation fees on the Pathward retained loans, $2.3 million increase related to our gain on loan sales, partially offset by $2.8 million decrease in servicing revenue, and $2.2 million decrease in subscription revenue.

Total non-interest income increased by $7.4 million, or 18.1%, from $40.6 million for the six months ended June 30, 2022 to $48.0 million for the six months ended June 30, 2023.

This increase is primarily due to $11.4 million increase in interest earned on neobanking deposit accounts, $4.3 million increase in documentation fees on the Pathward retained loans, partially offset by $4.0 million decrease in subscription revenue, $3.1 million decrease in servicing revenue and $2.0 million lower gain on loans sold under our whole loan sale programs.

See Note 2, Summary of Significant Accounting Policies , and Note 12, Revenue , of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further discussion on our interest income, non-interest income and revenue.

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Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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Interest Expense.

Interest expense increased by $25.3 million, or 185.1%, from $13.7 million for the three months ended March 31, 2022 to $39.0 million for the three months ended March 31, 2023.

We financed approximately 93.1% of our loans receivable through debt for the three months ended March 31, 2023, as compared to 89.5% for the three months ended March 31, 2022, and our Average Daily Debt Balance increased from $2.2 billion to $2.9 billion for the three months ended March 31, 2023, an increase of 32.4%.

Interest expense increased by $24.3 million, or 142.3%, from $17.1 million for the three months ended June 30, 2022 to $41.4 million for the three months ended June 30, 2023.

$20.9 million of the increase was driven by a 301 bps increase in interest rate.

$3.4 million of the increase was due to an increase in our Average Daily Debt Balance.

Our Average Daily Debt Balance increased from $2.32 billion for the three months ended June 30, 2022 to $2.78 billion for the three months ended June 30, 2023, an increase of 19.8%.

We financed approximately 92.9% of our loans receivable through debt for the three months ended June 30, 2023, as compared to 90.1% for the three months ended June 30, 2022.

Our Cost of Debt has increased due to increases in interest rates and wider credit spreads on our new asset-backed securitization issuances.

Interest expense increased by $49.7 million, or 161.3%, from $30.8 million for the six months ended June 30, 2022 to $80.4 million for the six months ended June 30, 2023.

$43.1 million of the increase was driven by a 298 bps increase in interest rate.

$6.6 million of the increase was due to an increase in our Average Daily Debt Balance.

Our Average Daily Debt Balance increased slightly from $2.24 billion for the six months ended June 30, 2022 to $2.82 billion for the six months ended June 30, 2023, an increase of 25.8%.

We financed approximately 93.0% of our loans receivable through debt for the six months ended June 30, 2023, as compared to 89.8% for the six months ended June 30, 2022.

Our Cost of Debt has increased due to increases in interest rates and wider credit spreads on our new asset-backed securitization issuances.

We expect our interest expense to increase as our asset-backed notes issued at lower interest rates amortize and are replaced with more expensive current funding.

See Note 8, Borrowings , in the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further information on our Interest expense and our Secured Financing and asset-backed notes.

Total net increase (decrease) in fair value

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Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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(18,907) (14,133) (4,774) * (56,076) 1,724 (57,800)

Total net increase (decrease) in fair value $ (215,710) $ 3,971 $ (219,681) *

Total net decrease in fair value $ (106,490) $ (63,484) $ (43,006) * $ (322,200) $ (59,513) $ (262,687) *

Percentage of total revenue:

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* Not meaningful

(1) The fair value mark on loans sold shown for the three months ended March 31, 2023 includes $37.2 million related to the cumulative fair value mark on the loans sold in other loans sales Q1 2023.

The fair value mark on loans sold shown for the three months ended March 31, 2022 also includes $15.9 million related to the cumulative fair value mark on the loans sold in the 2022-1 transaction.

(1) The fair value mark on loans sold shown for the three and six months ended June 30, 2023 includes $(18.9) million related to the cumulative fair value mark on the loans sold in other loans sales in Q2 2023.

The fair value mark on loans sold shown for the six months ended June 30, 2023 also includes $(37.2) million related to the cumulative fair value mark on the loans sold in other loans sales in Q1 2023.

The fair value mark on loans sold shown for the three and six months ended June 30, 2022 includes $(14.1) million related to the cumulative fair value mark on loans sold in the Q2 2022 Loan Sales.

The fair value mark on loans sold shown for the six months ended June 30, 2022 also includes $15.9 million related to the cumulative fair value mark on the loans sold in the 2022-1 transaction.

This fair value mark on loans sold represents the life-to-date mark-to-market adjustment for the loans sold and is presented separately for the loans sold to assist in reconciling to our non-GAAP measure, Adjusted EBITDA.

For details regarding the Q1 2023 other loan sales and the 2022-1 transaction, refer to Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.

For details regarding the Q2 2023, Q1 2023 and Q2 2022 other loan sales and the 2022-1 transaction, refer to Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.

Net increase (decrease) in fair value.

Net decrease in fair value for the three months ended March 31, 2023 was $215.7 million.

This amount represents a total fair value mark-to-market decrease of $84.5 million on Loans Receivable at Fair Value and asset-backed notes, and $91.6 million of charge-offs, net of recoveries on Loans Receivable at Fair Value.

The total fair value mark-to-market adjustment consists of a $37.3 million mark-to-

market adjustment on Loans Receivable at Fair Value due to (a) an increase in remaining cumulative charge-offs from 10.38% as of December 31, 2022 to 11.72% as of March 31, 2023, (b) a decrease in average life from 1.00 years as of December 31, 2022 to 0.96 years as of March 31, 2023, partially offset by (c) a decrease in the discount rate from 11.48% as of December 31, 2022 to 11.07% as of March 31, 2023.

The $(48.9) million mark-to-market adjustment on asset-backed notes is due to increasing prices on our asset-backed notes due to lower medium-term interest rates and tighter spreads.

The total net increase (decrease) in fair value includes a $37.2 million and a $15.9 million adjustment related to the fair value mark on loans sold as part of the structured and other loan sales for the three months ended March 31, 2023 and March 31, 2022, respectively.

In 2023, we expect to continue to see volatility in the fair value as a result of macroeconomic conditions.

Net decrease in fair value for the three months ended June 30, 2023 was $106.5 million.

This amount represents a total fair value mark-to-market increase of $7.8 million, and $93.5 million of charge-offs, net of recoveries on Loans Receivable at Fair Value.

The total fair value mark-to-market adjustment consists of a $14.2 million mark-to-market adjustment on Loans Receivable at Fair Value due to (a) an increase in the discount rate from 11.07% as of March 31, 2023 to 11.10% as of June 30, 2023, partially offset by (b) a decrease in remaining cumulative charge-offs from 11.72% as of March 31, 2023 to 11.35% as of June 30, 2023.

The $12.6 million mark-to-market adjustment on asset-backed notes is due to lower medium-term interest rates and tighter spreads.

The total net increase (decrease) in fair value for the three months ended June 30, 2023 and June 30, 2022 also includes a $(18.9) million and ($14.1) million adjustment related to the fair value mark on the loans sold as part of the other loans sales for the three months ended June 30, 2023 and June 30, 2022, respectively.

Net decrease in fair value for the six months ended June 30, 2023 was $322.2 million.

This amount represents a total fair value mark-to-market decrease of $(76.7) million, and $185.1 million of charge-offs, net of recoveries on Loans Receivable at Fair Value.

The total fair value mark-to-market adjustment consists of a $23.1 million mark-to-market reduction on Loans Receivable at Fair Value due to (a) an increase in remaining cumulative charge-offs from 10.38% as of December 31, 2022 to 11.35% as of June 30, 2023, (b) a decrease in average life from 1.00 years as of December 31, 2022 to 0.96 years as of June 30, 2023, partially offset by (c) a decrease in the discount rate from 11.48% as of December 31, 2022 to 11.10% as of June 30, 2023.

The $(61.5) million mark-to-market adjustment on asset-backed notes is due to lower medium-term interest rates and tighter spreads.

The total net increase (decrease) in fair value for the six months ended June 30, 2023 and June 30, 2022 includes $(56.1) million and $1.7 million in adjustments related to the fair value mark on loans sold as part of the structured and other loan sales for the six months ended June 30, 2023 and June 30, 2022, respectively.

Through the remainder of 2023, we expect to continue to see volatility in fair value primarily as a result of macroeconomic conditions.

Charge-offs, net of recoveries

Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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Charge-offs, net of recoveries.

Our Annualized N et Charge-Off Rate increased to 12.1% for the three months ended March 31, 2023 from 8.6% for the three months ended March 31, 2022.

Net Charge-offs for the three months ended March 31, 2023 increased primarily due to a higher mix of first-time borrowers in 2021 and the first half of 2022.

Our Annualized Net Charge-Off Rate increased to 12.5% and 12.3% for the three and six months ended June 30, 2023, respectively, from 8.6% and 8.6% for the three and six months ended June 30, 2022, respectively.

Net charge-offs for the three months and six months ended June 30, 2023 increased primarily due to a higher mix of first-time borrowers in 2021 and the first half of 2022.

In response to this increase, we tightened our credit underwriting standards and focused lending towards existing and returning members to improve credit outcomes in the second half of 2022.

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Technology and facilities expense is the largest segment of our operating expenses, representing the costs required to build and maintain our A.I.-enabled digital platform, and consisting of three components.

The first component comprises costs associated with our technology, engineering, information security, cybersecurity, platform development, maintenance, and end user services, including fees for software licenses, consulting, legal and other services as a result of our efforts to grow our business, as well as personnel expenses.

The first component comprises costs associated with our technology, engineering, information security, cybersecurity, platform development, maintenance, and end user services, including fees for consulting, legal and other services as a result of our efforts to grow our business, as well as personnel expenses.

The second component includes rent for retail and corporate locations, utilities, insurance, telephony costs, property taxes, equipment rental expenses, licenses and fees and depreciation and amortization.

1 unchanged sentence

Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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Technology and facilities.

Technology and facilities expense increased by $7.7 million, or 15.6%, from $49.2 million for the three months ended March 31, 2022 to $56.9 million for the three months ended March 31, 2023.

The increase is primarily due to a $3.7 million increase in salaries and benefits due to the increase in headcount, $3.1 million increased depreciation commensurate with growth in internally developed software, and a $2.3 million increase in service costs related to higher usage of software and cloud services.

These increases were offset by $2.2 million lower expenses due to the capitalization of internally developed software, lower stock compensation expense and reduction in utility costs in 2023 compared to 2022.

Technology and facilities expense increased by $2.3 million, or 4.4%, from $52.8 million for the three months ended June 30, 2022 to $55.1 million for the three months ended June 30, 2023.

The increase is primarily due to $2.8 million higher expenses due to lower capitalization of internally developed software costs related to fewer employees working on software development as a result of our workforce optimization efforts, and $2.0 million increased depreciation commensurate with growth in our internally developed software balance compared to prior year.

These increases were offset by $1.4 million lower expenses incurred for temporary contractors to supplement staffing related to new product investment and $0.9 million decrease in salaries, benefits and stock compensation due to the decrease in headcount following our workforce optimization efforts.

Technology and facilities expense increased by $10.0 million, or 9.8%, from $102.0 million for the six months ended June 30, 2022 to $112.0 million for the six months ended June 30, 2023.

The increase is primarily due to $5.1 million increased depreciation commensurate with growth in our internally developed software balance, $4.1 million increase in salaries and benefits due to the increase in headcount prior to our workforce optimization efforts, $3.1 million increase in service costs related to higher usage of software and cloud services, and $2.3 million higher expenses due to lower capitalization of internally developed software costs related to fewer employees working on software development as a result of our workforce optimization efforts.

These increases were offset by $1.5 million lower expenses incurred for temporary contractors to supplement staffing related to new product investment and $3.1 million lower expenses due to lower stock compensation expense, reduction in utility costs in 2023 compared to 2022 and other expenses.

We expect our technology and facilities expense may increase in 2023 compared to 2022 due to increased depreciation related to internally developed software and increased service costs due to higher usage of software and cloud services.

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Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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Sales and marketing.

Sales and marketing expense to acquire our customers decreased by $15.4 million, or 44.5%, from $34.5 million for the three months ended March 31, 2022 to $19.2 million for the three months ended March 31, 2023.

Our decrease in marketing spend during the three months ended March 31, 2023 was $13.7 million across various marketing channels, including direct mail and digital advertising.

Sales and marketing expenses to acquire our customers decreased by $13.2 million, or 40.7%, from $32.4 million for the three months ended June 30, 2022 to $19.2 million for the three months ended June 30, 2023.

Our decrease in marketing spend during the three months ended June 30, 2023 was $9.6 million across various marketing channels, including direct mail and digital advertising.

We decreased marketing spend as we shifted our strategy to focus lending towards existing and returning members to improve credit outcomes.

The decrease was also attributable to a $1.4 million decrease related to outsourcing and professional fees.

As a result of our decrease in number of loans originated during the three months ended March 31, 2023, our CAC increased by 27.2%, from $151 the three months ended March 31, 2022 to $192 for the three months ended March 31, 2023.

The decrease was also attributable to a $2.5 million decrease related to outsourcing and professional fees and $1.4 million decrease in salaries and benefits due to the decrease in headcount following our efforts to streamline operations.

As a result of our decrease in number of loans originated during the three months ended June 30, 2023, our CAC increased by 21.6% as compared to the three months ended June 30, 2022.

Sales and marketing expenses to acquire our customers decreased by $28.5 million, or 42.6%, from $66.9 million for the six months ended June 30, 2022 to $38.4 million for the six months ended June 30, 2023 .

Our decrease in marketing spend during the six months ended June 30, 2023 was $23.2 million across various marketing channels, including direct mail and digital advertising.

We decreased marketing spend as we shifted our strategy to focus lending towards existing and returning members to improve credit outcomes.

The decrease was also attributable to a $3.9 million decrease related to outsourcing and professional fees and $1.9 million decrease in salaries and benefits due to the decrease in headcount following our efforts to streamline operations.

As a result of our decrease in number of loans originated during the six months ended June 30, 2023, our CAC increased by 23.9% as compared to the six months ended June 30, 2022.

We expect our sales and marketing expense to decrease in 2023 compared to 2022 as we maintain focus on our strategy to improve credit outcomes by focusing lending towards existing and returning members.

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Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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Percentage of total revenue 11.5 % 17.1 % 12.9 % 16.9 %

Personnel expense increased by $1.4 million, or 3.9%, from $35.9 million for the three months ended March 31, 2022 to $37.3 million for the three months ended March 31, 2023, primarily driven by increase in U.S headcount prior to the plan announced on February 9, 2023 to reduce headcount and streamline operations.

Personnel expense decreased by $7.9 million, or 20.4%, from $38.6 million for the three months ended June 30, 2022 to $30.8 million for the three months ended June 30, 2023, primarily driven by the workforce optimization announced in February and May 2023.

Personnel expense decreased by $6.5 million, or 8.7%, from $74.6 million for the six months ended June 30, 2022 to $68.1 million for the six months ended June 30, 2023, primarily driven by the workforce optimization announced in February and May 2023.

We expect our personnel expense to decrease in 2023 compared to 2022 as a result of the reduction in headcount due to actions taken in February and May 2023 .

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Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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Outsourcing and professional fees.

Outsourcing and professional fees decreased by $0.5 million, or 3.7%, from $14.3 million for the three months ended March 31, 2022 to $13.8 million for the three months ended March 31, 2023 .

The decrease is primarily attributable to a $0.8 million decrease in credit report expenses due to the decline in loan application volume.

Outsourcing and professional fees decreased by $7.3 million, or 42%, from $17.2 million for the three months ended June 30, 2022 to $9.9 million for the three months ended June 30, 2023.

The decrease is primarily attributable to $2.8 million lower debt financing fees not present in current year, $2.1 million decrease in professional service costs related to credit card programs and other consulting services, $1.5 million decrease related to 58% decline in contact center full-time equivalents ("FTEs") as a result of decrease in demand for new applications and a shift to in-house call services, and $0.7 million decrease in credit report expenses due to the decline in loan application volume.

Outsourcing and professional fees decreased by $7.8 million, or 25%, from $31.5 million for the six months ended June 30, 2022 to $23.7 million for the six months ended June 30, 2023.

The decrease is primarily attributable to $2.8 million lower debt financing fees not present in current year, $2.2 million decrease in professional service costs related to credit card programs and other consulting services, $1.5 million decrease in credit report expenses due to the decline in loan application volume, and $1.4 million decrease related to 58% decline in contact center FTEs as a result of decrease in demand for new applications and a shift to in-house call services.

We expect our outsourcing and professional fees to decrease in 2023 compared to 2022 as a result of our continued focus on strong expense discipline and streamlining operations.

3 unchanged sentences

Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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General, administrative and other.

General, administrative and other expense increased by $5.8 million, or 43.4%, from $13.4 million for the three months ended March 31, 2022 to $19.2 million for the three months ended March 31, 2023, primarily due to the establishment of a $6.8 million reserve related to the headcount reduction announced in February 2023.

General, administrative and other expense increased by $4.2 million, or 25%, from $16.9 million for the three months ended June 30, 2022 to $21.1 million for the three months ended June 30, 2023, primarily due to the establishment of a $7.4 million reserve related to the workforce optimization announced in May 2023.

This increase was partially offset by $2.4 million decrease in legal expenses, and $1.2 million decrease in travel expenses.

General, administrative and other expense increased by $10.0 million, or 33%, from $30.3 million for the six months ended June 30, 2022 to $40.3 million for the six months ended June 30, 2023, primarily due to the establishment of a $14.2 million reserve related to the workforce optimization announced in February and May 2023.

These increases were partially offset by $2.6 million decrease in legal expenses, and $1.4 million decrease in travel expenses.

We expect our general, administrative and other expense to decrease in 2023 compared to 2022 as a result of our continued focus on strong expense discipline.

1 unchanged sentence

federal, state and foreign income taxes, if any.

For the periods ended March 31, 2023 and 2022, we recognized tax expense (benefit) attributable to U.S.

For the periods ended June 30, 2023 and 2022, we recognized tax expense (benefit) attributable to U.S.

federal, state and foreign income taxes.

Three Months Ended

Period-to-period Change Six Months Ended

Period-to-period Change

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Effective tax rate 14.7 % 27.7 % 26.4 % 18.9 %

Income tax expense .

Income tax expense decreased by $51.4 million or 428.5%, from an expense of $12.0 million for the three months ended March 31, 2022 to a benefit of $39.4 million for the three months ended March 31, 2023, resulting from the generation of tax credits, and having lower pretax income for the three months ended March 31, 2023 .

Income tax expense (benefit).

Income tax benefit decreased by $0.9 million or 27%, from $3.5 million for the three months ended June 30, 2022 to $2.6 million benefit for the three months ended June 30, 2023, primarily resulting from having lower income and discrete tax expense associated with stock-based compensation for the three months ended June 30, 2023.

Income tax expense decreased by $50.5 million or 595%, from $8.5 million for the six months ended June 30, 2022 to $42.0 million benefit for the six months ended June 30, 2023, primarily resulting from the generation of tax credits and having a lower pretax income for the six months ended June 30, 2023 .

See Note 2, Summary of Significant Accounting Policies , and Note 13, Income Taxes , of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for further discussion on our income taxes.

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Remaining cumulative charge-offs is the expected net principal charge-offs over the remaining life of the loans and credit cards, divided by the outstanding principal balance.

For personal loans, the discount rate is the sum of the interest rate and the credit spread.

The interest rate is based upon the interpolated treasury curve rate that corresponds to the average life.

The credit spread is based upon the credit spread implied by the loan purchase price at the time loans are sold, updated for observable changes in the fixed income markets, which serve as a proxy for how a potential loan buyer would adjust their yield requirements relative to the originally agreed price.

For credit cards, the discount rate is the sum of our weighted average cost of funds and the spread implied by the personal loan discount rate.

An implied spread is calculated by subtracting the weighted average borrowing cost of the Personal Loan Warehouse from the personal loan discount rate.

This spread is then added to the weighted average borrowing cost of the Credit Card Warehouse to arrive at a discount rate for credit cards.

For personal loans and credit card, the discount rate is determined by using the Weighted Average Capital Cost (WACC), which was calculated using the Capital Asset Pricing Model (CAPM) method, also considering several components of financing, debt and equity.

It is also possible to estimate the fair value of our loans using a simplified calculation.

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Three Months Ended

Mar 31, 2023 Dec 31, 2022 Sep 30, 2022 Jun 30, 2022 Mar 31, 2022

Jun 30, 2023 Mar 31, 2023 Dec 31, 2022 Sep 30, 2022 Jun 30, 2022

Weighted average portfolio yield over the remaining life of the loans 30.02 % 29.78 % 29.50 % 29.90 % 30.27 %

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• We believe it is useful to exclude the impact of interest expense associated with the Company's Corporate Financing, as we view this expense as related to our capital structure rather than our funding.

• We believe it is useful to exclude the impact of certain non-recurring charges, such as expenses associated with any litigation reserve, our workforce optimization expenses, impairment charges, acquisition and integration related expenses and debt amendment costs because

these items do not reflect ongoing business operations.

• We believe it is useful to exclude the impact of certain non-recurring charges, such as expenses associated with our workforce optimization, acquisition and integration related expenses and other non-recurring charges because these items do not reflect ongoing

business operations.

Other non-recurring charges include litigation reserve, impairment charges, debt amendment and warrant amortization costs related to our Corporate Financing facility.

• We also reverse origination fees for Loans Receivable at Fair Value, net.

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Components of Fair Value Mark-to-Market Adjustment (in thousands)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Fair value mark-to-market adjustment on loans receivable at fair value (1)

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Total fair value mark-to-market adjustment $ 7,821 $ 11,749 $ (76,697) $ 52,690

(1) The fair value mark-to-market adjustment on loans receivable at fair value shown for the three months ended March 31, 2023 excludes $37.2 million related to the cumulative fair value mark on the loans sold in other loan sales in Q1 2023.

The fair value mark-to-market adjustment on loans receivable at fair value shown for the three months ended March 31, 2022 also excludes $15.9 million related to the cumulative fair value mark on the loans sold in the 2022-1 transaction.

The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(1) The fair value mark-to-market adjustment on loans receivable at fair value shown for the three and six months ended June 30, 2023 excludes $(18.9) million related to the cumulative fair value mark on the loans sold in other loan sales in Q2 2023.

The fair value mark-to-market adjustment on loans receivable at fair value shown for the six months ended June 30, 2023 excludes $(37.2) million related to the cumulative fair value mark on the loans sold in other loan sales in Q1 2023.

The fair value mark-to-market adjustment on loans receivable at fair value shown for the three and six months ended June 30, 2022 excludes $(14.1) million related to the cumulative fair value mark on the loans sold in other loan sales in Q2 2022.

The fair value mark-to-market adjustment on loans receivable at fair value shown for the six months ended June 30, 2022 also excludes $15.9 million related to the cumulative fair value mark on the loans sold in the 2022-1 transaction.

The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

Adjusted EBITDA (in thousands)

2023 2022 2023 2022

Net income (loss) $ (14,899) $ (9,157) $ (116,989) $ 36,506

1 unchanged sentence

Interest on corporate financing (1)

8,852 — 14,929 —

Depreciation and amortization 10,805 8,788 21,227 16,101

1 unchanged sentence

Workforce optimization expenses

8,408 1,488 15,226 1,697

Acquisition and integration related expenses 7,198 6,944 14,178 14,231

1 unchanged sentence

Other non-recurring charges (1)

580 2,450 3,089 2,750

Fair value mark-to-market adjustment (7,821) (11,749) 76,697 (52,690)

5 unchanged sentences

• We believe it is useful to exclude the impact of income tax expense, as reported, because historically it has included irregular tax items that do not reflect our ongoing business operations.

Other non-recurring charges include litigation reserve, impairment charges, debt amendment and warrant amortization costs related to our Corporate Financing facility.

• We believe it is useful to exclude stock-based compensation expense because it is a non-cash charge.

• We include the impact of normalized statutory income tax expense by applying the income tax rate noted in the table.

The following table presents a reconciliation of net income to Adjusted Net Income (Loss) for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The following table presents a reconciliation of net income to Adjusted Net Income (Loss) for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

Adjusted Net Income (Loss) (in thousands)

2023 2022 2023 2022

Net income (loss) $ (14,899) $ (9,157) $ (116,989) $ 36,506

2 unchanged sentences

Workforce optimization expenses

8,407 1,488 15,226 1,697

Acquisition and integration related expenses 7,198 6,944 14,178 14,231

Other non-recurring charges (1)

580 2,450 3,089 2,750

Adjusted income (loss) before taxes 3,099 5,139 (117,627) 77,378

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(1) Certain prior-period financial information has been reclassified to conform to current period presentation.

(2) Income tax rate for the three months ended March 31, 2023 and 2022 is based on a normalized statutory rate.

(2) Income tax rate for the three and six months ended June 30, 2023 and 2022 is based on a normalized statutory rate.

Adjusted Earnings (Loss) Per Share (“Adjusted EPS”)

Adjusted Earnings (Loss) Per Share is a non-GAAP financial measure that allows management, investors and our Board to evaluate the operating results, operating trends and profitability of the business in relation to diluted adjusted weighted-average shares outstanding.

The following table presents a reconciliation of diluted EPS to Adjusted EPS for the three months ended March 31, 2023 and 2022.

The following table presents a reconciliation of Diluted EPS to Diluted Adjusted EPS for the three and six months ended June 30, 2023 and 2022.

For the reconciliation of net income to Adjusted Net Income (Loss), see the immediately preceding table “Adjusted Net Income (Loss).”

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands, except share and per share data) 2023 2022 2023 2022

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We believe Adjusted Return on Equity is an important measure because it allows management, investors and our Board to evaluate the profitability of the business in relation to stockholders' equity and how efficiently we generate income from stockholders' equity.

The following table presents a reconciliation of Return on Equity to Adjusted Return on Equity as of and for the three months ended March 31, 2023 and 2022.

The following table presents a reconciliation of Return on Equity to Adjusted Return on Equity as of and for the three and six months ended June 30, 2023 and 2022.

For the reconciliation of net income to Adjusted Net Income (Loss), see the immediately preceding table “Adjusted Net Income (Loss).”

As of or for the Three Months Ended March 31,

As of or for the Three Months Ended June 30, As of or for the Six Months Ended June 30,

(in thousands) 2023 2022 2023 2022

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Adjusted Operating Efficiency

We define Adjusted Operating Efficiency as total operating expenses adjusted to exclude stock-based compensation expense and certain non-recurring charges such as expenses associated with any litigation reserve, our workforce optimization expenses, impairment charges, acquisition and integration related expenses and debt amendment costs divided by total revenue.

We define Adjusted Operating Efficiency as total operating expenses adjusted to exclude stock-based compensation expense and certain non-recurring charges such as expenses associated with our workforce optimization, acquisition and integration related expenses and other non-recurring charges divided by total revenue.

Other non-recurring charges include litigation reserve, impairment charges, and debt amendment costs related to our Corporate Financing facility.

We believe Adjusted Operating Efficiency is an important measure because it allows management, investors and our Board to evaluate how efficiently we manage costs relative to revenue.

The following table presents a reconciliation of Operating Efficiency to Adjusted Operating Efficiency for the three months ended March 31, 2023 and 2022:

As of or for the Three Months Ended March 31,

The following table presents a reconciliation of Operating Efficiency to Adjusted Operating Efficiency for the three and six months ended June 30, 2023 and 2022:

As of or for the Three Months Ended June 30, As of or for the Six Months Ended June 30,

(in thousands) 2023 2022 2023 2022

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Our material cash requirements relate to funding our lending activities, our debt service obligations, our operating expenses, and investments in the long-term growth of the company.

During the three months ended March 31, 2023, available liquidity increased primarily due to the amendment and upsizing of our Corporate Financing facility and draws under our PLW facility.

During the six months ended June 30, 2023, available liquidity increased primarily due to draws under our PLW facility, the amendment and upsizing of our Corporate Financing facility and our asset-backed borrowings at amortized cost.

We generally target liquidity levels to support at least twelve months of our expected net cash outflows, including new originations, without access to our Corporate Financing facility or equity markets.

1 unchanged sentence

Future decreases in cash flows from operations resulting from delinquencies, defaults, losses, would decrease the cash available for the capital uses described above.

In addition to the $25.0 million that may be available under the second amendment to the Corporate Financing facility dated March 10, 2023, and the associated warrants, we may incur additional indebtedness or issue equity in order to meet our capital spending and liquidity requirements, as well as to fund growth opportunities that we may pursue.

We may incur additional indebtedness or issue equity in order to meet our capital spending and liquidity requirements, as well as to fund growth opportunities that we may pursue.

Cash and cash flows

The following table summarizes our cash and cash equivalents, restricted cash and cash flows for the periods indicated:

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands) 2023 2022

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Operating Activities

Our net cash provided by operating activities was $76.8 million and $38.6 million for the three months ended March 31, 2023 and 2022, respectively.

Cash flows from operating activities primarily include net income or losses adjusted for (i) non-cash items included in net income or loss, including depreciation and amortization expense, goodwill impairment charges, fair value adjustments, net, origination fees for loans at fair value, net, gain on loan sales, stock-based compensation expense and deferred tax provision, net, (ii) originations of loans sold and held for sale, and proceeds from sale of loans and (iii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of

business due to the amount and timing of various payments.

Our net cash provided by operating activities was $179.4 million and $91.6 million for the six months ended June 30, 2023 and 2022, respectively.

proceeds from sale of loans and (iii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of various payments.

Investing Activities

Our net cash provided by (used in) investing activities was $(39.6) million and $(122.5) million for the three months ended March 31, 2023 and 2022, respectively.

Our net cash provided by (used in) investing activities was $(104.0) million and $(638.0) million for the six months ended June 30, 2023 and 2022, respectively.

Our investing activities consist primarily of loan originations and loan repayments.

Our net cash provided by (used in) investing activities for the three months ended March 31, 2023, includes $1.0 million of proceeds related to the Q1 2023 Loan Sale.

Our net cash provided by (used in) investing activities for the six months ended June 30, 2023, includes $1.7 million of proceeds related to the loans sold in other loan sales in Q1 2023 and Q2 2023.

Our net cash provided by (used in) investing activities for the six months ended June 30, 2022, includes $247.2 million of proceeds related to a structured loan sale in the first quarter 2022 and other loan sales in Q2 2022.

We invest in purchases of property and equipment and incur system development costs.

Purchases of property and equipment, and capitalization of system development costs may vary from period to period due to the timing of the expansion of our operations, the addition of employee headcount and the development cycles of our system development.

The change in our net cash provided by (used in) investing activities is due to disbursements on originations of loans increasing by $330.8 million while repayments of loan principal decreased by $3.2 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The change in our net cash provided by (used in) investing activities is due to disbursements on originations of loans increasing by $779.6 million while repayments of loan principal decreased by $6.0 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 and our proceeds from loan sales originated as held for investment decreased by $245.6 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Financing Activities

Our net cash provided by (used in) financing activities was $(39.1) million and $61.5 million for the three months ended March 31, 2023 and 2022, respectively.

For the three months ended March 31, 2023, net cash used in financing activities was primarily driven by borrowings under our PLW and Corporate Financing facility, partially offset by repayments of borrowings on our CCW and scheduled amortization payments on our Acquisition Financing facility and our Series 2019-A, Series 2022-2 and Series 2022-3 asset-backed notes.

For the three months ended March 31, 2022, net cash provided by financing activities was primarily driven by the borrowings under our Secured Financing facilities, partially offset by repayments of borrowings on our Secured Financing facilities and scheduled amortization payments on our Acquisition Financing facility.

Our net cash provided by (used in) financing activities was $(76.8) million and $487.3 million for the six months ended June 30, 2023 and 2022, respectively.

For the six months ended June 30, 2023, net cash used in financing activities was primarily driven by scheduled amortization payments on our Acquisition Financing facility, our Series 2019-A, Series 2021-A, Series 2022-2 and Series 2022-3 asset-backed notes, and repayments of borrowings on our CCW facility, partially offset by borrowings under our PLW facility, Corporate Financing facility, and our asset-backed borrowings at amortized cost.

For the six months ended June 30, 2022, net cash provided by financing activities was primarily driven the issuance of our Series 2022-A asset-backed securitization and the borrowings under our Secured Financing facilities and Acquisition Financing, partially offset by repayments of borrowings on our Secured Financing facilities and scheduled amortization payments on our Acquisition Financing facility.

Sources of Funds

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Asset-Backed Securitizations

As of March 31, 2023, we had $2.30 billion of outstanding asset-backed notes.

As of June 30, 2023, we had $2.12 billion of outstanding asset-backed notes.

For additional information, see Note 8 , Borrowings of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.

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Our ability to utilize our asset-backed securitization facilities as described herein is subject to compliance with various requirements including eligibility criteria for the loan collateral and covenants and other requirements.

As of March 31, 2023, we were in compliance with all covenants and requirements of all our asset-backed notes.

As of June 30, 2023, we were in compliance with all covenants and requirements of all our asset-backed notes.

Secured Financings

As of March 31, 2023 , we had Secured Financing facilities with warehouse lines of $720.0 million in the aggregate with undrawn capacity of $314.7 million.

As of June 30, 2023 , we had Secured Financing facilities with warehouse lines of $720.0 million in the aggregate with undrawn capacity of $231.8 million.

Our ability to utilize our Secured Financing facilities as described herein is subject to compliance with various requirements, including eligibility criteria for collateral, concentration limits for our collateral pool, and covenants and other requirements.

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At closing and as part of the Incremental Tranche A-1, we borrowed $20.8 million and borrowed an additional $4.2 million in Incremental Tranche A-2 loans on March 27, 2023.

Under the Amended Credit Agreement, we borrowed an additional $25.0 million of incremental term loans (the "Incremental Tranche B Loans" on May 5, 2023 and may borrow up to an additional amount of $25.0 million on an uncommitted basis (the “Incremental Tranche C Loans”) expected to be available, if provided by the applicable lenders, on or about June 23, 2023.

Under the Amended Credit Agreement, we borrowed an additional $25.0 million of incremental term loans (the "Incremental Tranche B Loans") on May 5, 2023 and an additional $25.0 million of incremental term loans (the “Incremental Tranche C Loans”) on June 30, 2023.

The term loan now bears interest at (a) an amount payable in cash equal to 1-month term SOFR plus 9.00% plus (b) an amount payable in cash or in kind, at our option, equal to 3.00%.

As of March 31, 2023, we were in compliance with all covenants and requirements on our outstanding debt and available credit.

As of June 30, 2023, we were in compliance with all covenants and requirements on our outstanding debt and available credit.

For more information regarding our Secured Financing facilities and Acquisition and Corporate Financing, see Note 8, Borrowings of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.

Asset-Backed Borrowings at Amortized Cost

On June 16, 2023, we entered into a forward flow whole loan sale agreement with an institutional investor.

Pursuant to this agreement, we have a commitment to sell up to $300.0 million of our personal loan originations over the next twelve months.

While the economics of this transaction are structured as a whole loan sale, the transfer of these loans receivable does not qualify as a sale for accounting purposes.

Accordingly, the related assets remain on our balance sheet and cash proceeds received are reported as a secured borrowing under the caption of asset-backed borrowings at amortized cost with related interest expense recognized over the life of the related borrowing.

As part of this agreement, during the three months ended June 30, 2023, we transferred loans receivable totaling $25.0 million.

Structured loan sales

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During the first quarter of 2023, we entered into agreements to sell certain populations of our personal loans and credit card receivables that had an aggregate unpaid principal balance, including unpaid interest and fees, of approximately $38.2 million.

Additionally, during the second quarter of 2023, we entered into agreements to sell certain populations of our personal loans and credit card receivables that had an aggregate unpaid principal balance, including unpaid interest and fees, of approximately $19.5 million.

For further information on these sales, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.

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Pursuant to this agreement, we have a commitment to sell a minimum of $2.0 million of our unsecured loan originations each month, with an option to sell an additional $4.0 million each month, over an approximately one-year period, subject to certain eligibility criteria.

The originations of loans sold and held for sale during the three months ended March 31, 2023 was $10.0 million.

The originations of loans sold and held for sale during the three and six months ended June 30, 2023 was $15.6 million and $25.7 million, respectively.

For further information on the whole loan sale transactions, see Note 5, Loans Held for Sale and Loans Sold of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report.

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The material cash requirements for our contractual and other obligations primarily include those related our outstanding borrowings under our asset-backed notes, Acquisition Financing and Secured Financing, corporate and retail leases, and purchase commitments for technology used in the business.

See Note 8, Borrowings and Note 15, Leases, Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for more information.

See Note 8, Borrowings and Note 15, Leases, Commitments and Contingencies of the Notes to the Condensed Consolidated Financial

Statements (Unaudited) included elsewhere in this report for more information.

Liquidity Risks

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On the Second Amendment Closing Date, the Company borrowed $20.8 million of Incremental Tranche A-1 Loans and borrowed an additional $4.2 million of Incremental Tranche A-2 Loans on March 27, 2023.

Under the Amended Credit Agreement, we borrowed an additional $25.0 million of Incremental Tranche B Loans on May 5, 2023 and may borrow up to an additional amount of $25.0 million Incremental Tranche C Loans, on an uncommitted basis, expected to be available if provided by the applicable lenders, on or about June 23, 2023.

We anticipate that we will likely draw down on the remaining incremental commitment amount, however, given its uncommitted nature there can be no assurance that we will be able to access such additional capital.

If our available cash balances are insufficient to

satisfy our liquidity requirements, we will seek additional debt or equity financing and we may have to take additional actions to decrease expenses, curtail the origination of loans, and our ability to continue to support our growth and to respond to challenges could be impacted.

Under the Amended Credit Agreement, we borrowed an additional $25.0 million of Incremental Tranche B Loans on May 5, 2023 and an additional amount of $25.0 million of Incremental Tranche C Loans on June 30, 2023.

If our available cash balances are insufficient to satisfy our liquidity requirements, we will seek additional debt or equity financing and we may have to take additional actions to decrease expenses, curtail the origination of loans, and our ability to continue to support our growth and to respond to challenges could be impacted.

In a rising interest rate environment, our ability to issue additional equity or incur debt may be impaired and our borrowing costs may increase.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis