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Fair Value of Financial Assets and Liabilities

12 Months Ended

Jun. 30, 2022

Fair Value of Financial Assets and Liabilities

Financial Assets and Liabilities Recorded at Fair Value

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2022 (in thousands):


	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money market funds	$	162,483	$	—	$	—	$	162,483
Certificates of deposit	—		16,026		—		16,026

Commercial paper	—		229,272		—		229,272
Government bonds - U.S.	—		58,541		—		58,541
Restricted cash:
Securities available for sale:
Certificate of deposit	—		300,390		—		300,390
Corporate bonds	—		368,671		—		368,671
Commercial paper	—		478,293		—		478,293
Government bonds:
Non-U.S.	—		17,955		—		17,955
U.S.	—		378,386		—		378,386
Securitization notes receivable and residual trust certificates	—		—		51,678		51,678
Total securities available for sale	—		1,543,695		51,678		1,595,373
Servicing assets	—		—		1,192		1,192
Derivative instruments	—		49,983		—		49,983
Total assets	$	162,483	$	1,897,517	$	52,870	$	2,112,870
Liabilities:
Servicing liabilities	$	—	$	—	$	2,673	$	2,673
Performance fee liability	—		—		1,710		1,710
Residual trust certificates, held by third-parties	—		—		377		377
Contingent consideration	—		—		23,348		23,348
Profit share liability	—		—		1,987		1,987
Total liabilities	$	—	$	—	$	30,095	$	30,095

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2021 (in thousands):


	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Money market funds	$	143,241	$	—	$	—	$	143,241
Restricted cash:
Securitization notes receivable and residual trust certificates	—		—		16,170		16,170
Servicing assets	—		—		2,349		2,349
Derivative instruments	—		2,880		—		2,880
Total assets	$	143,241	$	2,880	$	18,519	$	164,640
Liabilities:

Servicing liabilities	$	—	$	—	$	3,961	$	3,961
Performance fee liability	—		—		1,290		1,290
Residual trust certificates, held by third-parties	—		—		914		914
Contingent consideration	—		—		153,447		153,447
Profit share liability	—		—		2,464		2,464
Total liabilities	$	—	$	—	$	162,076	$	162,076

There were no transfers between levels during the periods ended June 30, 2022 and June 30, 2021.

Assets and Liabilities Measured at Fair Value on a Recurring Basis (Level 2)

Securities Available for Sale

As of June 30, 2022, we held marketable securities classified as available for sale. Management obtains pricing from one or more third-party pricing services for the purpose of determining fair value. Whenever available, the fair value is based on quoted bid prices as of the end of the trading day. When quoted prices are not available, other methods may be utilized including evaluated prices provided by third-party pricing services.

Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility in cash flows associated with our funding activities, arising from changes in interest rates. We do not employ derivatives for trading or speculative purposes.

As of June 30, 2022 and June 30, 2021, we used a combination of interest rate cap agreements and interest rate swaps to manage interest costs and the risk associated with variable interest rates. Neither the interest rate caps or the interest rate swaps have been designated as hedging instruments.

As of June 30, 2022 and June 30, 2021, the interest rate caps and interest rate swaps are in a net asset position, and classified as Level 2 within the fair value hierarchy, based on prices quoted for similar financial instruments in markets that are not active. The fair values are presented gross within other assets and offsetting collateral received by the counterparty is presented as a liability within accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of these financial instruments are reflected in other (expense) income, net, on the consolidated statements of operations and comprehensive loss.

Assets and Liabilities Measured at Fair Value on a Recurring Basis using Significant Unobservable Inputs (Level 3)

We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. Since our servicing assets and liabilities, performance fee liability, securitization notes and residual trust certificates, contingent consideration, and profit share liability do not trade in an active market with readily observable prices, we use significant unobservable inputs to measure fair value. This determination requires significant judgments to be made.

Servicing Assets and Liabilities

We sold loans with an unpaid balance of $7,149.0 million, $3,232.9 million, and $2,664.4 million for the years ended June 30, 2022, 2021, and 2020, respectively, for which we retained servicing rights.

As of June 30, 2022 and June 30, 2021, we serviced loans which we sold with a remaining unpaid principal balance of $4,504.5 million and $2,453.9 million, respectively.

We use discounted cash flow models to arrive at an estimate of fair value. Significant assumptions used in the valuation of our servicing rights are as follows:

Adequate Compensation

We estimate adequate compensation as the rate a willing market participant would require for servicing loans with similar characteristics as those in the serviced portfolio.

Discount Rate

Estimated future payments to be received under servicing agreements are discounted as a part of determining the fair value of the servicing rights. For servicing rights on loans, the discount rate reflects the time value of money and a risk premium intended to reflect the amount of compensation market participants would require.

Net Default Rate

We estimate the timing and probability of early loan payoffs, loan defaults and write-offs, thus affecting the projected unpaid principal balance and expected term of the loan, which are used to project future servicing revenue and expenses.

We earned $65.8 million, $24.7 million, and $14.8 million of servicing income for the year ended June 30, 2022, 2021, and 2020, respectively.

As of June 30, 2022 and June 30, 2021, the aggregate fair value of the servicing assets was measured at $1.2 million and $2.3 million, respectively, and presented within other assets on the consolidated balance sheets. As of June 30, 2022 and June 30, 2021, the aggregate fair value of the servicing liabilities was measured at $2.7 million and $4.0 million, respectively, and presented within accrued expenses and other liabilities on the consolidated balance sheets.

The following table summarizes the activity related to the aggregate fair value of our servicing assets during the years ended June 30, 2022 and June 30, 2021 (in thousands):


	Servicing Assets
	Year ended June 30,
	2022		2021
Fair value at beginning of period	$	2,349	$	2,132
Initial transfers of financial assets	2,899		2,915
Subsequent changes in fair value	(4,056)		(2,698)
Fair value at end of period	$	1,192	$	2,349

The following table summarizes the activity related to the aggregate fair value of our servicing liabilities during the years ended June 30, 2022 and June 30, 2021 (in thousands):


	Servicing Liabilities
	Year ended June 30,
	2022		2021
Fair value at beginning of period	$	3,961	$	1,540
Initial transfers of financial assets	15,617		8,794
Subsequent changes in fair value	(16,905)		(6,373)
Fair value at end of period	$	2,673	$	3,961

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of servicing assets and liabilities as of June 30, 2022:


	Unobservable Input	Minimum		Maximum		Weighted Average
Servicing assets	Discount rate	30.00	%	30.00	%	30.00	%
	Adequate compensation (1)	0.78	%	1.85	%	1.10	%
	Net default rate	0.59	%	50.59	%	1.59	%
Servicing liabilities	Discount rate	30.00	%	30.00	%	30.00	%
	Adequate compensation (1)	2.13	%	2.34	%	2.21	%
	Net default rate	9.03	%	24.44	%	13.81	%

(1)Estimated cost of servicing a loan as a percentage of unpaid principal balance

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of servicing assets and liabilities as of June 30, 2021:


	Unobservable Input	Minimum		Maximum		Weighted Average
Servicing assets	Discount rate	30.00	%	30.00	%	30.00	%
	Adequate compensation(1)	0.70	%	0.84	%	0.81	%
	Net default rate	0.53	%	0.95	%	0.64	%
Servicing liabilities	Discount rate	30.00	%	30.00	%	30.00	%
	Adequate compensation(1)	1.29	%	3.70	%	2.71	%
	Net default rate	0.80	%	8.42	%	7.12	%

(1)Estimated cost of servicing a loan as a percentage of unpaid principal balance

The following table summarizes the effect that adverse changes in estimates would have on the fair value of the servicing assets and liabilities given hypothetical changes in significant unobservable inputs (in thousands):


	June 30, 2022		June 30, 2021
Servicing assets
Net default rate assumption:
Net default rate increase of 25%	$	11	$	(7)
Net default rate increase of 50%	$	22	$	(15)
Adequate compensation assumption:
Adequate compensation increase of 25%	$	(3,513)	$	(2,006)
Adequate compensation increase of 50%	$	(7,026)	$	(4,011)
Discount rate assumption:
Discount rate increase of 25%	$	(57)	$	(4)
Discount rate increase of 50%	$	(109)	$	(1)
Servicing liabilities
Net default rate assumption:
Net default rate increase of 25%	$	(10)	$	(40)
Net default rate increase of 50%	$	(21)	$	(61)
Adequate compensation assumption:
Adequate compensation increase of 25%	$	6,139	$	3,060
Adequate compensation increase of 50%	$	12,278	$	6,119
Discount rate assumption:
Discount rate increase of 25%	$	(50)	$	(137)
Discount rate increase of 50%	$	(98)	$	(263)

Performance Fee Liability

In accordance with our agreements with our originating bank partners, we pay a fee for each loan that is fully repaid by the consumer, due at the end of the period in which the loan is fully repaid. We recognize a liability upon the purchase of a loan for the expected future payment of the performance fee. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of the liability are reflected in other (expense) income, net, on the consolidated statements of operations and comprehensive loss.

The following table summarizes the activity related to the fair value of the performance fee liability during the years ended June 30, 2022 and June 30, 2021 (in thousands):


	Performance Fee Liability
	Year ended June 30,
	2022		2021
Fair value at beginning of period	$	1,290	$	875
Purchases of loans	1,764		1,372
Settlements Paid	(418)		—
Subsequent changes in fair value	(926)		(957)
Fair value at end of period	$	1,710	$	1,290

Significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability are the discount rate, refund rate, and default rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability as of June 30, 2022:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	10.00%	10.00%	10.00%
Refund rate	4.50%	4.50%	4.50%
Default rate	1.78%	3.10%	2.42%

Level 3 fair value measurement of the performance fee liability as of June 30, 2021:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	10.00%	10.00%	10.00%
Refund rate	4.50%	4.50%	4.50%
Default rate	1.78%	2.83%	1.80%

Residual Trust Certificates Held by Third-Parties in Consolidated VIEs

Refer to Note 12. Securitization and Variable Interest Entities for a description of the 2020-Z2 securitization trust. Residual trust certificates held by third-party investor(s) are measured at fair value, using a discounted cash flow model, and presented within accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of the liability are reflected in other (expense) income, net, on the consolidated statements of operations and comprehensive loss.

The following table summarizes the activity related to the fair value of the residual trust certificates held by third-parties during the years ended June 30, 2022 and June 30, 2021 (in thousands):


	Year ended June 30,
	2022		2021
Fair value at beginning of period	$	914	$	—
Initial transfer of financial assets	—		1,622
Repayments	(908)		(508)
Subsequent changes in fair value	371		(200)
Fair value at end of period	$	377	$	914

Significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties are the discount rate, loss rate, and prepayment rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties as of June 30, 2022 and June 30, 2021:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	10.00%	10.00%	10.00%
Loss rate	0.75%	0.75%	0.75%
Prepayment rate	8.00%	8.00%	8.00%

The following table summarizes the effect that adverse changes in estimates would have on the fair value of the securitization residual certificates held by third-party investor(s) given hypothetical changes in significant unobservable inputs (in thousands):


	June 30, 2022		June 30, 2021
Discount rate assumption:
Discount rate increase of 25%	$	(6)	$	(21)
Discount rate increase of 50%	$	(11)	$	(42)
Loss rate assumption:
Loss rate increase of 25%	$	(8)	$	(28)
Loss rate increase of 50%	$	(16)	$	(56)
Prepayment rate assumption:
Prepayment rate decrease of 25%	$	(2)	$	(10)
Prepayment rate decrease of 50%	$	(3)	$	(20)

Retained Beneficial Interests in Unconsolidated VIEs

As of June 30, 2022, the Company held notes receivable and residual trust certificates with an aggregate fair value of $51.7 million in connection with the 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 securitizations, which are unconsolidated securitizations. The balances correspond to the 5% economic risk retention the Company is required to maintain as the securitization sponsor. Refer to Note 12. Securitization and Variable Interest Entities for a further description of the 2021-Z1, 2021-Z2, 2022-X1and 2022-Z1 securitization trusts.

These assets are measured at fair value using a discounted cash flow model, and presented within securities available for sale at fair value on the consolidated balance sheets. Changes in the fair value, other than declines in fair value due to credit recognized as an allowance, are reflected in other comprehensive income (loss) on the consolidated statements of operations and comprehensive loss. Declines in fair value due to credit are reflected in other (expense) income, net on the consolidated statements of operations and comprehensive loss.

The following table summarizes the activity related to the fair value of the notes receivable and residual trust certificates during the years ended June 30, 2022 and June 30, 2021 (in thousands):


	Year ended June 30,
	2022		2021
Fair value at beginning of period	$	16,170	$	—
Additions	54,998		16,144
Cash received (due to payments or sales)	(19,559)		—
Change in unrealized gain (loss)	(509)		29
Accrued interest	595		—
Reversal of (impairment on) securities available for sale	(17)		(3)
Fair value at end of period	$	51,678	$	16,170

Significant unobservable inputs used for our Level 3 fair value measurement of the notes and residual trust certificates are the discount rate, loss rate, and prepayment rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates as of June 30, 2022:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	3.68%	22.50%	5.37%
Loss rate	0.61%	10.95%	2.65%
Prepayment rate	5.25%	35.00%	18.48%

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates as of June 30, 2021:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	11.46%	11.46%	11.46%
Loss rate	0.61%	0.61%	0.61%
Prepayment rate	10.50%	10.50%	10.50%

The following table summarizes the effect that adverse changes in estimates would have on the fair value of the securitization residual trust certificates given hypothetical changes in significant unobservable inputs (in thousands):


	Year ended June 30,
	2022		2021
Discount rate assumption:
Discount rate increase of 25%	$	(1,410)	$	(22)
Discount rate increase of 50%	$	(2,295)	$	(44)
Loss rate assumption:
Loss rate increase of 25%	$	(729)	$	(24)
Loss rate increase of 50%	$	(964)	$	(48)
Prepayment rate assumption:
Prepayment rate decrease of 25%	$	(545)	$	(13)
Prepayment rate decrease of 50%	$	(519)	$	(27)

Contingent Consideration

Our acquisition of PayBright included consideration transferred and shares held in escrow, contingent upon the achievement of future milestones. We classified the contingent consideration as a liability. The acquisition date fair value of the contingent consideration liability was estimated using a Monte Carlo simulation in which the fair value is equal to the estimated number of shares to be released from escrow, which are determined based on simulated revenue, multiplied by the simulated share price, discounted at the risk-free rate. The liability is remeasured to its fair value at each reporting date, utilizing a Monte Carlo simulation for periods in which actual revenues are unknown, until the contingency is resolved. During the year ended June 30, 2022 one of these milestones was achieved and a portion of the shares were released from escrow, resulting in a reduction to the contingent liability. The change in fair value of the contingent consideration at each reporting date is recognized as a component of other (expense) income, net in the consolidated statements of operations and comprehensive loss for the respective period.

The following table summarizes the activity related to the fair value of the PayBright contingent consideration during the years ended June 30, 2022 and June 30, 2021 (in thousands):


	Year ended June 30,
	2022		2021
Fair value at beginning of period	$	153,447	$	—
Subsequent changes in fair value	(89,313)		150,135
Fair value of shares released from escrow	(32,110)		—
Effect of foreign currency translation	(8,676)		3,312
Fair value at end of period	$	23,348	$	153,447

Significant unobservable inputs used for our Level 3 fair value measurement of the PayBright contingent consideration are the discount rate, equity volatility, and revenue volatility. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the contingent consideration as of June 30, 2022:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	15.00%	15.00%	15.00%
Equity volatility	36.00%	139.00%	116.00%
Revenue volatility	11.00%	144.00%	34.00%

Level 3 fair value measurement of the contingent consideration as of June 30, 2021:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	12.00%	12.00%	12.00%
Equity volatility	37.00%	97.00%	62.00%
Revenue volatility	8.00%	98.00%	37.00%

The Kite acquisition included $9.0 million of cash held in escrow, the release of which is determined based on employee retention. The acquisition date fair value of the contingent consideration of $1.2 million was estimated using a probability-weighted approach in which the likelihoods of potential employee retention outcomes were applied to the respective payout amounts and discounted to present value. The contingent consideration asset is remeasured to fair value at each reporting date based on the remaining amount held in escrow, passage of time, and

any changes in expectations regarding employee retention outcomes until the contingency is resolved. The change in fair value of the contingent consideration asset at each reporting date is recognized as a component of other (expense) income, net in the consolidated statements of operations and comprehensive loss for the respective period. During the year ended June 30, 2022, the contingency was resolved and the fair value of the contingent consideration asset was reduced to zero. For the years ended June 30, 2022 and 2021, respectively, the change in fair value of the contingent consideration asset was not material.

Profit Share Liability

During the fiscal year ended June 30, 2021, we entered into a commercial agreement with an enterprise partner, in which we are obligated to share in the profitability of transactions facilitated by our platform. Upon capture of a loan under this program, we record a liability associated with the estimated future profit to be shared over the life of the loan based on estimated program profitability levels. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the consolidated balance sheets.

The following table summarizes the activity related to the fair value of the profit share liability during the years ended June 30, 2022 and June 30, 2021 (in thousands):


	Year ended June 30,
	2022		2021
Fair value at beginning of period	$	2,464	$	—
Facilitation of loans	5,955		4,206
Actual performance	(7,642)		(1,661)
Subsequent changes in fair value	1,210		(81)
Fair value at end of period	$	1,987	$	2,464

Significant unobservable inputs used for our Level 3 fair value measurement of the profit share liability are the discount rate and estimated program profitability. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the profit sharing liability as of June 30, 2022:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	30.00%	30.00%	30.00%
Program profitability	1.25%	3.54%	1.28%

The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the profit sharing liability as of June 30, 2021:


Unobservable Input	Minimum	Maximum	Weighted Average
Discount rate	30.00%	30.00%	30.00%
Program profitability	1.79%	3.75%	3.75%

Financial Assets and Liabilities Not Recorded at Fair Value

The following table presents the fair value hierarchy for financial assets and liabilities not recorded at fair value as of June 30, 2022 (in thousands):


	Carrying Amount		Level 1		Level 2		Level 3		Balance at Fair Value
Assets:
Loans held for sale	$	2,670	$	—	$	2,670	$	—	$	2,670
Loans held for investment, net	2,348,169		—		—		2,412,871		2,412,871
Other assets	12,661		—		12,661		—		12,661
Total assets	$	2,363,500	$	—	$	15,331	$	2,412,871	$	2,428,202
Liabilities:
Convertible senior notes, net (1)	$	1,706,668	$	—	$	984,285	$	—	$	984,285
Notes issued by securitization trusts	1,627,580		—		—		1,529,401		1,529,401
Funding debt(2)	683,395		—		—		683,388		683,388
Total liabilities	$	4,017,643	$	—	$	984,285	$	2,212,789	$	3,197,074

(1)The estimated fair value of the convertible senior notes is determined based on a market approach, using the estimated or actual bids and offers of the notes in an over-the-counter market on the last business day of the period.

(2)As of June 30, 2022, debt issuance costs in the amount of $10.8 million, was included within funding debt.

The following table presents the fair value hierarchy for financial assets and liabilities not recorded at fair value as of June 30, 2021 (in thousands):


	Carrying Amount		Level 1		Level 2		Level 3		Balance at Fair Value
Assets:
Loans held for sale	$	13,030	$	—	$	13,030	$	—	$	13,030
Loans held for investment, net	1,904,560		—		—		1,883,364		1,883,364
Accounts receivable, net	91,575		—		91,575		—		91,575
Other assets	171,250		—		171,250		—		171,250
Total assets	$	2,180,415	$	—	$	275,855	$	1,883,364	$	2,159,219
Liabilities:
Accounts payable	$	57,758	$	—	$	57,758	$	—	$	57,758
Payable to third-party loan owners	50,079		—		50,079		—		50,079
Accrued interest payable	2,751		—		2,751		—		2,751
Accrued expenses and other liabilities	161,502		—		159,387		2,115		161,502
Notes issued by securitization trusts	1,176,673		—		—		1,184,663		1,184,663
Funding debt	689,356		—		—		689,356		689,356
Total liabilities	$	2,138,119	$	—	$	269,975	$	1,876,134	$	2,146,109

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details