SEC Filing | Affirm Holdings, Inc.

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afrm-20201231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 001-39888

Affirm Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware									84-2224323
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

650 California Street
San Francisco, California									94108
(Address of Principal Executive Offices)									(Zip Code)

(415) 984-0490

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, par value $0.00001 per share	AFRM	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically and every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding

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12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of February 10, 2021, the number of shares of the registrants Class A common stock outstanding was 129,792,757 and the number of shares of the registrant's Class B common stock outstanding was 127,614,694.

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						Page
Cover						1
Table of Contents						3
Part I - Financial Information						6
Item 1. Unaudited Financial Statements						6
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)						6
CONDENSED CONSOLIDATED BALANCE SHEETS, CONT. (Unaudited)						7
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)						8
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Unaudited)						9
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)						11
1. Business Description						12
2. Summary of Significant Accounting Policies						12
3. Interest Income						17
4. Loans Held for Investment and Allowance for Credit Losses						18
5. Other Assets						20
6. Commitments and Contingencies						20
7. Transactions with Related Parties						21
8. Funding Debt						22
9. Notes Issued by Securitization Trusts						22
10. Convertible Debt						24
11. Variable Interest Entities						25
12. Fair Value of Financial Assets and Liabilities						25
13. Redeemable Convertible Preferred Stock and Stockholders’ Deficit						33
14. Stock Based Compensation						38
15. Income Taxes						39
16. Net Loss per Share Attributable to Common Stockholders						40

1 7 . Segments and Geographical Information						41
1 8 . Subsequent Events						41
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations						43
Item 3. Quantitative and Qualitative Disclosures About Market Risk						67
Item 4. Controls and Procedures						68
Part II - Other Information						70
Item 1. Legal Proceedings						71
Item 1A. Risk Factors						72
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						117
Item 3. Defaults Upon Senior Securities						117
Item 4. Mine Safety Disclosures						118
Item 5. Other Information						119
Item 6. Exhibits						120
Signatures						121

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q ("Form 10-Q"), as well as information included in oral statements or other written statements made or to be made by us, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this report, including statements regarding our future results of operations and financial condition, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as "anticipate," "believe," "continue," "could," "design," "estimate," "expect," "intend," "may," "plan," "potentially," "predict," "project," "should," "will," “would,” or the negative of these terms or other similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

•our expectations regarding our future revenue, expenses, and other operating results and key operating metrics;

•our ability to attract additional merchants and retain and grow our relationships with our existing merchant partners;

•our ability to attract new consumers and retain and grow our relationships with our existing consumers;

•our ability to compete successfully in a highly competitive industry;

•our ability to successfully engage new originating bank partners;

•the availability of funding sources to support our network;

•our ability to effectively price and score credit risk using our proprietary risk model;

•the performance of loans facilitated through our platform;

•our expectations regarding product launches;

•the future growth rate of our revenue and related key operating metrics;

•our ability to achieve or sustain profitability in the future;

•our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business;

•our ability to protect our confidential, proprietary, or sensitive information;

•past and future acquisitions, investments, and other strategic investments;

•our ability to maintain, protect, and enhance our brand and intellectual property;

•litigation, investigations, regulatory inquiries, and proceedings;

•the impact of macroeconomic conditions on our business, including the impact of the COVID-19 pandemic;

•our expectations relating to our status as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012; and

•the size and growth rates of the markets in which we compete.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled "Risk Factors" and elsewhere in this Form 10-Q. Other sections of this Form 10-Q may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we

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assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations. You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this report with the understanding that our actual future results, levels of activity, performance, and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (investors.affirm.com), our filings with the Securities and Exchange Commission, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with investors and the general public about our company, our products, and other issues. It is possible that the information that we make available on our website may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

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Part I - Financial Information

Item 1. Unaudited Financial Statements

AFFIRM HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except shares and per share amounts)


	June 30, 2020		December 31, 2020
Assets
Cash and cash equivalents	$	267,059	$	520,741
Restricted cash	61,069		116,049
Loans held for sale	4,459		12,302
Loans held for investment	1,034,312		1,888,432
Allowance for credit losses	(95,137)		(131,165)
Loans held for investment, net	939,175		1,757,267
Accounts receivable, net	59,001		67,046
Property, equipment and software, net	48,140		49,358
Other assets	23,348		185,359
Total Assets	$	1,402,251	$	2,708,122
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit
Liabilities:
Accounts payable	$	18,361	$	26,224
Payable to third-party loan owners	24,998		33,043
Accrued interest payable	1,860		3,133
Accrued expenses and other liabilities	27,810		44,629
Convertible debt	74,222		—
Notes issued by securitization trusts	—		818,446
Funding debt	817,926		804,960
Total liabilities	965,177		1,730,435
Commitments and contingencies (Note 6)
Redeemable convertible preferred stock, $0.00001 par value, 124,453,009 and 149,860,292 shares authorized as of June 30, 2020 and December 31, 2020, respectively; 122,115,971 and 148,396,979 shares issued and outstanding as of June 30, 2020 and December 31, 2020, respectively; liquidation preference of $809,032 and $1,305,240 as of June 30, 2020 and December 31, 2020, respectively	804,170		1,327,271
Stockholders’ deficit:
Common stock, $0.00001 par value, 232,000,000 and 304,000,000 shares authorized as of June 30, 2020 and December 31, 2020, respectively; 47,684,427 and 59,239,370 shares issued and outstanding as of June 30, 2020 and December 31, 2020, respectively	—		—


Additional paid in capital	80,373		142,477
Accumulated deficit	(447,167)		(493,999)
Accumulated other comprehensive gain (loss)	(302)		1,938
Total stockholders’ deficit	(367,096)		(349,584)
Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit	$	1,402,251	$	2,708,122

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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AFFIRM HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS, CONT.

(Unaudited)

(in thousands, except shares and per share amounts)

The following table presents the assets and liabilities of consolidated variable interest entities (“VIEs”), which are included in the interim condensed consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. The liabilities in the table below include liabilities for which creditors do not have recourse to the general credit of the Company. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate upon consolidation.


	June 30, 2020		December 31, 2020
Assets of consolidated VIEs, included in total assets above
Restricted cash	$	28,788	$	87,000
Loans held for investment	935,085		1,772,970
Allowance for credit losses	(87,467)		(120,086)
Loans held for investment, net	847,618		1,652,884
Accounts receivable, net	8,146		8,209
Other assets	3,345		886
Total assets of consolidated VIEs	$	887,897	$	1,748,979
Liabilities of consolidated VIEs, included in total liabilities above
Accounts payable	$	492	$	65
Accrued interest payable	1,732		3,133
Accrued expenses and other liabilities	565		1,479
Notes issued by securitization trusts	—		818,446
Funding debt	817,926		804,960
Total liabilities of consolidated VIEs	820,715		1,628,083
Total net assets	$	67,182	$	120,896

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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AFFIRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended December 31,				Six Months Ended December 31,
	2019		2020		2019		2020
Revenue
Merchant network revenue	$	67,764	$	99,630	$	104,153	$	192,895
Virtual card network revenue	7,110		10,820		10,711		16,778
Interest income	45,073		73,857		85,241		128,094
Gain on sales of loans	4,738		14,560		10,463		30,994
Servicing income	5,291		5,174		7,355		9,258
Total Revenue, net	$	129,976	$	204,041	$	217,923	$	378,019
Operating Expenses
Loss on loan purchase commitment	$	42,661	$	67,768	$	62,622	$	133,636
Provision for credit losses	30,178		17,468		55,022		57,735
Funding costs	8,167		12,060		16,295		22,412
Processing and servicing	11,652		16,802		21,347		30,300
Technology and data analytics	31,612		41,634		56,980		75,402
Sales and marketing	7,651		39,112		12,870		61,694
General and administrative	30,688		40,916		58,392		73,182
Total Operating Expenses	162,609		235,760		283,528		454,361
Operating Loss	$	(32,633)	$	(31,719)	$	(65,605)	$	(76,342)
Other income, net	1,730		240		4,003		29,685
Loss Before Income Taxes	$	(30,903)	$	(31,479)	$	(61,602)	$	(46,657)
Income tax expense	93		78		189		175
Net Loss	$	(30,996)	$	(31,557)	$	(61,791)	$	(46,832)
Excess return to preferred stockholders on repurchase	(13,205)		—		(13,205)		—
Net Loss Attributable to Common Stockholders	$	(44,201)	$	(31,557)	$	(74,996)	$	(46,832)
Other Comprehensive Income (Loss)
Foreign currency translation adjustments	$	(15)	$	1,834	$	10	$	2,240
Net Other Comprehensive Income (Loss)	(15)		1,834		10		2,240
Comprehensive Loss	$	(31,011)	$	(29,723)	$	(61,781)	$	(44,592)
Per share data:
Net loss per share attributable to common stockholders:
Basic	$	(0.92)	$	(0.45)	$	(1.55)	$	(0.69)
Diluted	$	(0.92)	$	(0.45)	$	(1.55)	$	(1.07)
Weighted average common shares outstanding:
Basic	48,079,867		70,801,521		48,241,444		67,795,598
Diluted	48,079,867		70,801,521		48,241,444		69,534,680

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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AFFIRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ DEFICIT

(Unaudited)

(in thousands, except share amounts)


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Deficit
	Shares	Amount		Shares	Amount
Balance as of June 30, 2019	122,653,704	$	798,074	47,078,208	$	—	$	54,824	$	(318,238)	$	—	$	(263,414)
Issuance of common stock	—	—		213,770	—		743		—		—		743
Repurchases of common stock	—	—		(63,719)	—		—		(865)		—		(865)
Issuance of redeemable convertible preferred stock, net of issuance costs of $20	1,175,872	15,481		—	—		—		—		—		—
Stock-based compensation	—	—		—	—		9,323		—		—		9,323
Foreign currency translation adjustments	—	—		—	—		—		—		25		25
Net Loss	—	—		—	—		—		(30,795)		—		(30,795)
Balance as of September 30, 2019	123,829,576	$	813,555	47,228,259	$	—	$	64,890	$	(349,898)	$	25	$	(284,983)
Issuance of common stock	—	$	—	1,485,298	—		478		—		—		478
Repurchases of common stock	—	—		(1,385,879)	—		(2,123)		(15,467)		—		(17,590)
Repurchases of redeemable convertible preferred stock	(1,713,605)	(9,385)		—	—		(13,205)		—		—		(13,205)

Stock-based compensation	—	—		—	—		9,155		—		—		9,155
Foreign currency translation adjustments	—	—		—	—		—		—		(15)		(15)
Net Loss	—	—		—	—		—		(30,996)		—		(30,996)
Balance as of December 31, 2019	122,115,971	$	804,170	47,327,678	$	—	$	59,195	$	(396,361)	$	10	$	(337,156)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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AFFIRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ DEFICIT, CONT.

(Unaudited)

(in thousands, except share amounts)


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Deficit
	Shares	Amount		Shares	Amount
Balance as of June 30, 2020	122,115,971	$	804,170	47,684,427	$	—	$	80,373	$	(447,167)	$	(302)	$	(367,096)
Issuance of common stock	—	—		388,246	—		1,741		—		—		1,741
Repurchases of common stock	—	—		(115,625)	—		(584)		—		—		(584)
Issuance of redeemable convertible preferred stock, net of issuance costs of $440	21,824,141	434,434		—	—		—		—		—		—
Vesting and exercise of warrants for common stock	—	—		5,074,398	—		67,645		—		—		67,645
Stock-based compensation	—	—		—	—		7,175		—		—		7,175
Conversion of convertible debt	4,444,321	88,559		—	—		(42,124)		—		—		(42,124)
Foreign currency translation adjustments	—	—		—	—		—		—		406		406
Net Loss	—	—		—	—		—		(15,275)		—		(15,275)
Balance as of September 30, 2020	148,384,433	$	1,327,163	53,031,446	$	—	$	114,226	$	(462,442)	$	104	$	(348,112)
Issuance of common stock	—	—		6,220,024	—		21,676		—		—		21,676
Repurchases of common stock	—	—		(12,100)	—		(199)		—		—		(199)
Issuance of redeemable convertible preferred stock, net of issuance costs of $143	12,546	108		—	—		—		—		—		—

Stock-based compensation	—	—		—	—		6,774		—		—		6,774

Foreign currency translation adjustments	—	—		—	—		—		—		1,834		1,834
Net loss	—	—		—	—		—		(31,557)		—		(31,557)
Balance as of December 31, 2020	148,396,979	$	1,327,271	59,239,370	$	—	$	142,477	$	(493,999)	$	1,938	$	(349,584)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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AFFIRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Six Months Ended December 31,
	2019		2020
Cash Flows from Operating Activities
Net Loss	$	(61,791)	$	(46,832)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for credit losses	55,022		57,735
Amortization of premiums and discounts on loans, net	(13,194)		(31,453)
Gain on sales of loans	(10,463)		(30,994)
Changes in fair value of servicing assets and liabilities	902		(188)
Changes in fair value and extinguishment of convertible debt derivative	—		(30,106)
Change in fair value of residual trust certificates	—		(274)
Amortization of commercial agreement asset	—		31,300
Amortization of debt issuance costs	1,142		2,361
Stock-based compensation	16,794		12,724
Depreciation and amortization	4,544		7,071
Income tax expense	189		175
Other	12		2,241
Purchases of loans held for sale	(1,084,810)		(1,033,915)
Proceeds from the sale of loans held for sale	1,052,121		1,001,673
Change in operating assets and liabilities:
Accounts receivable, net	(3,058)		(9,080)
Other assets	(7,252)		(16,906)
Accrued interest payable	1,256		1,799
Accounts payable	1,991		7,862
Accrued expenses and other liabilities	5,081		16,802
Payable to third-party loan owners	6,869		8,046
Net Cash Used in Operating Activities	(34,645)		(49,959)
Cash Flows from Investing Activities
Purchases of loans held for investment	(1,339,851)		(2,582,741)
Origination of loans	—		(109,047)
Proceeds from the sale of loans	137,057		204,960
Principal repayments of loans	943,486		1,700,809
Acquisition funds in transit	—		(113,628)
Additions to property, equipment and software	(13,502)		(7,063)
Net Cash Used in Investing Activities	(272,810)		(906,710)
Cash Flows from Financing Activities
Proceeds from funding debt	969,782		1,533,379
Payment of debt issuance costs	(1,371)		(6,787)
Principal repayments of funding debt	(739,608)		(1,544,502)
Proceeds from issuance of notes and residual trust certificates by securitization trusts	—		896,455
Principal repayments of notes issued by securitization trusts	—		(70,390)

Proceeds from issuance of redeemable convertible preferred stock, net	15,481		434,542
Repurchases of redeemable convertible preferred stock	(22,591)		—
Proceeds from issuance of common stock	1,221		23,417
Repurchases of common stock	(18,454)		(783)
Net Cash Provided by Financing Activities	204,460		1,265,331
Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash	(102,995)		308,662
Cash and cash equivalents and restricted cash, beginning of period	357,771		328,128
Cash and Cash Equivalents and Restricted Cash, end of period	$	254,776	$	636,790
Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	13,924	$	16,716
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Stock-based compensation included in capitalized internal-use software	$	1,683	$	1,225
Additions to property and equipment included in accrued expenses	1,559		24
Issuance of warrants in exchange for commercial agreement	—		67,645
Conversion of convertible debt	—		88,559

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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1. Business Description

Affirm Holdings, Inc. (“Affirm”, the “Company”, “we”, “us”, or “our”), headquartered in San Francisco, California, provides consumers with a simpler, more transparent, and flexible alternative to traditional payment options. Our mission is to deliver honest financial products that improve lives. Through our technology-driven payments network and partnerships with originating banks, Affirm enables consumers to confidently pay for a purchase over time, with terms ranging from one to forty-eight months. When a consumer applies for a loan through our platform, the loan is underwritten using our proprietary risk model, and once approved, the consumer selects their preferred repayment option. The majority of loans are funded and issued by our originating bank partners.

Merchants partner with us to transform the consumer shopping experience and to acquire and convert customers more effectively through our frictionless point-of-sale payment solution. Consumers get the flexibility to buy now and make simple monthly payments for their purchases and merchants see increased average order value, repeat purchase rate, and an overall more satisfied customer base. Unlike legacy payment options and our competitors’ product offerings, which charge deferred or compounding interest and unexpected costs, we disclose up-front to consumers exactly what they will owe — no hidden fees, no penalties.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), disclosure requirements for interim financial information, and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended June 30, 2020. The balance sheet as of June 30, 2020 has been derived from the audited financial statements at that date. Management believes these interim condensed consolidated financial statements reflect all adjustments, including those of a normal and recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

Our interim condensed financial statements have been prepared on a consolidated basis. Under this basis of presentation, our financial statements consolidate all wholly owned subsidiaries and variable interest entities (“VIEs”), in which we have a controlling financial interest. These include various Delaware business trust entities established to enter into warehouse credit agreements with certain lenders for funding debt facilities and asset-backed securitization transactions.

Our variable interest arises from contractual, ownership, or other monetary interests in the entity, which changes with fluctuations in the fair value of the entity’s net assets. We consolidate a VIE when we are deemed to be the primary beneficiary. We assess whether or not we are the primary beneficiary of a VIE on an ongoing basis.

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts in the interim condensed consolidated financial statements and the accompanying notes. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for credit losses, capitalized software development costs, valuation allowance for deferred tax assets, convertible debt derivatives, loss on loan purchase commitment, and discount on self-originated loans. We base our estimates on historical experience, current events and other factors we believe to be reasonable under the circumstances. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results will be materially affected.

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These estimates are based on information available as of the date of the interim condensed consolidated financial statements; therefore, actual results could differ materially from those estimates.

Revenue Recognition

Merchant Network Revenue — Revenue from Contracts with Customers

Merchant network revenue consists of merchant fees. Merchant partners (or merchants) are charged a fee on each transaction processed through the Affirm platform. The fees vary depending on the individual arrangement between us and each merchant and on the terms of the product offering. The fee is recognized at the point in time the terms of the executed merchant agreement have been fulfilled and the merchant successfully confirms the transaction.

Our contracts with merchants are defined at the transaction level and do not extend beyond the service already provided (i.e., each transaction represents a separate contract). The fees collected from merchants for each transaction are determined as a percentage of the value of the goods purchased by the consumer from merchants and consider a number of factors including the end consumer’s credit risk and financing term . We do not have any capitalized contract costs, and do not carry any material contract balances.

Our service comprises a single performance obligation to merchants to facilitate transactions with consumers. From time to time, we offer merchants promotional incentives to offer our products to their customers, such as fee reductions or rebates. These amounts, as well as refunds, are recorded as a reduction of revenue and netted against merchant network revenue.

We may originate certain loans via our wholly-owned subsidiaries, with zero or below market interest rates. In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting in a loss, which we record as a reduction to merchant network revenue. In order to continue to expand our consumer base, we may originate loans under certain merchant arrangements that we do not expect to achieve positive revenue. In these instances, the loss is recorded as sales and marketing expense.

Virtual Card Network Revenue — Revenue from Contracts with Customers

We have agreements with issuer processors to facilitate transactions through the issuance of virtual debit cards to be used by consumers at checkout. Consumers can apply through the Affirm app and, upon approval, receive a single-use virtual debit card to be used for their purchase online or offline at a non-integrated merchant. The non-integrated merchants are charged interchange fees for virtual debit card transactions by the issuer processors, as with all debit card purchases, and the issuer processor shares a portion of this revenue with us.

Our contracts with issuer processors are defined at the transaction level and do not extend beyond the service already provided. The fees collected from issuer processors for each transaction are determined as a percentage of the interchange fees charged on transactions facilitated on the payment processor network, and revenue is recognized at the point in time the transaction is completed successfully. The fees collected are presented in revenue, net of associated processing fees. As the issuer processors do not provide distinct services to us, any fees paid to the issuer processors are offset against collected fees. We have concluded that these fees do not give rise to a future material right because the pricing of each transaction does not depend on the volume of prior successful transactions. We do not have any capitalized contract costs, and do not carry any material contract balances.

Our service comprises a single performance obligation to the issuer processors to facilitate transactions with consumers.

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Interest Income

We accrue interest income using the effective interest method. Interest income on a loan is accrued daily, based on the finance charge disclosed to the consumer, over the term of the loan based upon the principal outstanding. The accrual of interest on a loan is suspended if a formal dispute with the borrower involving either Affirm or the merchant of record is opened, or a loan is 120 days past due. Upon the resolution of a dispute with the consumer, the accrual of interest is resumed and any interest that would have been earned during the disputed period is retroactively accrued. As of June 30, 2020 and December 31, 2020, the balance of Loans held for investment on non-accrual status was $0.3 million and $0.5 million, respectively.

The account is charged-off in the period the account becomes 120 days past due or meets other charge-off policy requirements. Past due status is based on the contractual terms of the loans. Previously recognized interest receivable from charged-off loans that is accrued but not collected from the consumer is reversed.

Any discounts or premiums on loan receivables created upon purchase of the loan from our originating bank partners are amortized over the life of the loan using the effective interest method. The amortization is presented together as interest income in the interim condensed consolidated statements of operations and comprehensive loss.

Servicing Income

Servicing fees are contractual fees specified in our servicing agreements with third-party loan owners that are earned from providing professional services to manage loan portfolios on their behalf. The servicing fee is calculated on a daily basis by multiplying a set fee percentage (as outlined in the executed agreements with third-party loan owners) by the outstanding loan principal balance. We recognize this revenue on a monthly basis.

Customer Referral Partners

From time to time, we make payments to customer referral partners providing lead generation services for each transaction processed through our technology platform. We first evaluate whether the customer referral partner is a customer or a vendor. We consider customer referral partners as customers if we determine they are the principal to eligible merchants in providing the facilitation of credit service. We consider customer referral partners as vendors if we determine that we are the principal to eligible merchants in providing the facilitation of credit service. Payments made to customer referral partners that are not considered to be our customers are expensed as incurred and recorded in Sales and marketing within our interim condensed consolidated statements of operations and comprehensive loss.

Stock-Based Compensation

In accordance with ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), equity-classified stock-based compensation provided to employees is measured based on the grant date fair value of stock-based awards and recognized as compensation expense on a straight-line basis over the period during which the award holder is required to perform services in exchange for the award (the requisite service period). In addition, we made an accounting policy election to estimate the expected forfeiture rate for service-based awards and only recognize expense for those stock-based awards expected to vest. We estimate the forfeiture rate based on our historical experience with stock-based awards that are granted and forfeited prior to vesting.

We account for stock-based awards to non-employees, including consultants, in accordance with ASC 718, in which equity-classified awards are measured at the grant date fair value and recognized as expense in the period and manner as though we had paid cash in exchange for goods or services instead of granting a stock-based award.

We have granted restricted stock units (“RSUs”) which are subject to two vesting conditions: a service-based vesting condition that is typically four years from the date of grant, and a performance-based vesting condition (i.e., a liquidity event in the form of either a change of control or an initial public offering). Stock-based

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compensation is recognized only when it is determined that it is probable that a liquidity event will occur. As of June 30, 2020 and December 31, 2020, it was not probable that a liquidity event would occur and, accordingly, no stock-based compensation expense has been recognized in any period presented.

Upon exercise or vesting of a stock-based award, if the tax deduction exceeds the compensation cost that was previously recorded for financial statement purposes, this will result in an excess tax benefit.

Recently Adopted Accounting Standards

We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, we are provided the option to adopt new or revised accounting guidance either (i) within the same periods as those applicable to public business entities or (ii) within the same time periods as non-public business entities, for as long as we qualify as an emerging growth company. We have elected to adopt new or revised accounting guidance within the same time period as non-public business entities, unless, as indicated below, management determines it is preferable to take advantage of early adoption provisions provided for within the applicable guidance.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("ASC 606"). ASC 606 requires revenue to be recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services and also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts. Subsequent to the issuance of ASU 2014-09, the FASB issued several amendments to ASC 606 to clarify or improve the revenue recognition standard such as principal versus agent considerations in ASU 2016-08, technical corrections and improvements to ASC 606 in ASU 2016-20, and clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial asset in ASU 2017-05.

In June 2020, the FASB issued ASU 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities” ("ASC 842"), which amends the effective dates of ASC 606 and ASC 842 to give immediate relief to certain entities as a result of the widespread adverse economic effects and business disruptions caused by the COVID-19 pandemic. ASU 2020-05 permits certain entities that have not yet made statements available for issuance to adopt ASC 606 for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020. Under ASU 2020-05, we adopted ASC 606 on July 1, 2020 using the modified retrospective transition method. Under this method, we evaluated contracts that were not complete as of the date of adoption as if those contracts had been accounted for under ASC 606. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with revenue accounting literature in effect during those periods. The adoption of ASC 606 did not have a material impact on our revenue arrangements.

ASC 606 explicitly excludes revenue generated in accordance with ASC 310, "Receivables" and ASC 860, "Transfers and Servicing." Accordingly, we have concluded that interest income, gains on loan sales and servicing income are not affected by the adoption of ASC 606 and its related amendments. Merchant network revenue and virtual card network revenue are within the scope of ASC 606.

Stock Based Compensation

In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” that expands on the scope of ASC 718 to include stock-based payment transactions for acquiring goods and services from non-employees. For non-public business entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption of ASC 606. We have adopted ASC 606 effective July 1, 2020 and have correspondingly adopted ASU 2018-07 as of that date. There was no material impact to existing stock-based awards to non-employees.

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Income Taxes

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which removes certain exceptions related to the approach for intraperiod tax allocation, recognizing deferred tax liabilities for outside basis differences and calculating income taxes in interim periods. The guidance also reduces complexity in certain areas, including franchise taxes that are partially based on income and accounting for tax law changes in interim periods. We early adopted the new standard effective July 1, 2020 on a prospective basis. The adoption of the new standard did not have a material impact on our interim condensed consolidated financial statements.

We have adopted all new accounting pronouncements that are in effect and applicable to us for the period ended December 31, 2020.

Recent Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” that substantially modifies lessee accounting for leases, and requires most leases to be recognized on the balance sheet with enhanced disclosures. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Subsequent to the issuance of ASU 2016-02, the FASB issued several amendments to ASC 842 to clarify or improve the new leases standard such as codification and targeted improvements in ASUs 2018-10, 2018-11 and 2019-01, narrow-scope improvements for lessors

in ASU 2018-20, etc. For private companies, the amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The effective dates in ASU 2016-02 for private companies were deferred by one year pursuant to the FASB’s issuance of ASU 2019-10, “Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates” in November 2019.

As noted above, in June 2020, the FASB issued ASU 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities,” which amends the effective dates of ASC 606 and ASC 842 to give immediate relief to certain entities as a result of the widespread adverse economic effects and business disruptions caused by the COVID-19 pandemic. ASU 2020-05 permits certain private entities that have not yet issued their financial statements or made financial statements available for issuance, to adopt ASC 842 for fiscal years beginning after December 15, 2021, and interim reporting periods within fiscal years beginning after December 15, 2022. We have elected to adopt the effective date deferral standard and will adopt ASU 2016-02 and its related amendments for our annual reporting period beginning July 1, 2022. We are currently evaluating the impact of adopting ASU 2016-02 and its amendments on our consolidated financial statements.

Financial Instruments — Credit Losses

In June 2016, the FASB issued amendments on ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326).” The amendments will replace the incurred loss impairment methodology in U.S. GAAP with a methodology that measures expected credit losses based on historical experience, current conditions and a reasonable and supportable forecast. This amendment is generally referred to as the current expected credit loss (CECL) standard. The amendments in this standard will be recognized through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Subsequent to the issuance of ASU 2016-13, the FASB issued several amendments to ASC 326 to clarify or improve the financial instruments credit losses standard such as codification and targeted improvements in ASUs 2018-19, 2019-04, 2019-05, 2019-11 and 2020-03. For private companies, the amendments in ASU 2016-13 were initially effective for fiscal years beginning after December 15, 2021, and interim periods therein. The effective dates in ASU 2016-13 for private companies were deferred by one year (fiscal years beginning after December 15, 2022) pursuant to the FASB’s issuance of ASU 2019-10, “Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates” in November 2019.”

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The standard dictates that institutions estimate the cash flows that are not expected to be collected over the contractual life of the loan, adjusted for prepayments. Our current methodology also estimates the total expected cash flow not expected to be collected on our consolidated balance sheets. Based on preliminary analysis, we do not expect that the consideration of forward-looking information, i.e. the reasonable and supportable forecast, will result in a material impact to our consolidated financial statements. However, we are still in the process of evaluating the impact.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Interbank Offered Rate (“LIBOR”) by the end of 2021. This ASU is effective for all entities upon issuance as of March 12, 2020 through December 31, 2022. We are in the process of reviewing our revolving credit agreements and loan sale agreements that utilize LIBOR as the reference rate and introducing new fallback language to these agreements. We expect this change to have an immaterial impact on our consolidated financial statements.

Convertible Debt Instruments

In August 2020, the FASB issued ASU 2020-06, "Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40),” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. We are in the process of evaluating the impact of this amendment on our consolidated financial statements.

3. Interest Income

Interest income consisted of the following components (in thousands):


	Three Months Ended December 31,				Six Months Ended December 31,
	2019		2020		2019		2020
Interest income on unpaid principal balance	$	39,747	$	54,243	$	74,735	$	96,745
Amortization of discount on loans held for investment	8,323		22,448		15,729		37,218
Amortization of premiums on loans held for investment	(1,432)		(2,118)		(2,535)		(4,076)
Interest receivable charged-off, net of recoveries	(1,565)		(716)		(2,688)		(1,793)
Total interest income	$	45,073	$	73,857	$	85,241	$	128,094

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4. Loans Held for Investment and Allowance for Credit Losses

Loans held for investment consisted of the following (in thousands):


	June 30, 2020		December 31, 2020
Unpaid principal balance	$	1,054,077	$	1,953,610
Accrued interest receivable	8,707		12,577
Premiums on loans held for investment	4,646		6,118
Less: Discount due to loan commitment liability	(28,659)		(71,571)
Less: Loans held for sale	(4,459)		(12,302)
Total loans held for investment	$	1,034,312	$	1,888,432

The majority of the loans that are underwritten using our technology platform and originated by our originating bank partners are later purchased by us. We purchased loans from our originating bank partners in the amount of $1,323.1 million and $2,223.6 million for the three and six months ended December 31, 2019, respectively, and $2,065.4 million and $3,589.6 million for the three and six months ended December 31, 2020, respectively.

These loans have a variety of lending terms as well as maturities ranging from one to forty-eight months. Given that our loan portfolio focuses on one product segment, point-of-sale unsecured installment loans, we evaluate the entire portfolio as a single homogeneous loan portfolio.

We closely monitor credit quality for our loan receivables to manage and evaluate our related exposure to credit risk. Credit risk management begins with initial underwriting, where loan applications are assessed against the credit underwriting policy and procedures of our originating bank partners, and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal historical experience, including the consumer’s prior repayment history on our platform as well as other measures. We combine these factors to establish a proprietary score as a credit quality indicator.

Our proprietary score (“ITACs”) is assigned to most loans facilitated through our technology platform, ranging from zero to 100, with 100 representing the highest credit quality. The ITACs model analyzes the characteristics of a consumer's attributes that are shown to be predictive of both willingness and ability to repay including, but not limited to: basic features of a consumer's credit profile, a consumer's prior repayment performance with other creditors, current credit utilization, and legal and policy changes. When a consumer passes both fraud and credit policy checks, the application is assigned an ITACs score. ITACs is also used for portfolio performance monitoring. Our credit risk organization closely tracks the distribution of a consumer ITACs as well as the ITACs of loans to monitor for signs of a changing credit profile within the portfolio. Repayment performance within each ITACs band is also monitored to ensure both the integrity of the risk scoring models and to measure possible changes in consumer behavior amongst various credit tiers.

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The following table presents an analysis of the credit quality, by ITACs score, of the unpaid principal balance of loans held for investment and loans held for sale (in thousands):


	June 30, 2020		December 31, 2020
96+	$	746,758	$	1,459,271
94 – 96	196,083		357,629
90 – 94	82,368		74,199
<90	8,004		25,517
No score(1)	20,864		36,994
Total unpaid principal balance	$	1,054,077	$	1,953,610

(1)This balance represents loan receivables in new markets without sufficient data currently available for use of the Affirm scoring methodology.

Loan receivables are defined as past due if either the principal or interest have not been received within four calendars days of when they are due in accordance with the agreed upon contractual terms. The following table presents an aging analysis of the unpaid principal balance related to loans held for investment and loans held for sale by delinquency status (in thousands):


	June 30, 2020		December 31, 2020
Non-delinquent loans	$	1,019,492	$	1,906,552
4 – 29 calendar days past due	16,765		27,481
30 – 59 calendar days past due	5,393		8,522
60 – 89 calendar days past due	6,268		5,827
90 – 119 calendar days past due	6,159		5,228
Total unpaid principal balance	$	1,054,077	$	1,953,610

We maintain an allowance for credit losses at a level that is appropriate to absorb probable losses inherent in our loans. The allowance for credit losses covers estimated losses. When loans are charged off, we may continue to attempt to recover amounts from the respective consumers.

The following table details activity in the allowance for credit losses (in thousands):


	Three Months Ended December 31,				Six Months Ended December 31,
	2019		2020		2019		2020
Balance at beginning of period	$	76,060	$	124,273	$	66,260	$	95,137
Provision for credit losses(1)	29,948		16,008		54,838		56,464
Charge-offs	(21,560)		(11,791)		(37,793)		(25,865)
Recoveries of charged-off receivables	1,407		2,675		2,550		5,429
Balance at end of period	$