SEC Filing | Affirm Holdings, Inc.

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afrm-20220930

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 September 30, 2022


☐			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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.


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 November 3, 2022, the number of shares of the registrant’s Class A common stock outstanding was 230,046,307 and the number of shares of the registrant's Class B common stock outstanding was 60,103,756.

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TABLE OF CONTENTS


						Page
Cover						1
Table of Contents						2
Part I - Financial Information						5
Item 1. Unaudited Financial Statements						5
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)						5
CONDENSED CONSOLIDATED BALANCE SHEETS, CONT. (Unaudited)						6
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)						7
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)						8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)						9
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT. (Unaudited)						10
1. Business Description						11
2. Summary of Significant Accounting Policies						11
3. Interest Income						13
4. Loans Held for Investment and Allowance for Credit Losses						15
5. Business Combinations						17
6. Balance Sheet Components						18
7. Leases						22
8. Commitments and Contingencies						23
9. Transactions with Related Parties						24
10. Debt						24
11. Securitization and Variable Interest Entities						27
12. Investments						29
13. Fair Value of Financial Assets and Liabilities						33
14. Redeemable Convertible Preferred Stock and Stockholders' Equity						43
15. Equity Incentive Plans						44
16. Income Taxes						47
17. Net Loss per Share Attributable to Common Stockholders						48
18. Segments and Geographical Information						49
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations						50
Item 3. Quantitative and Qualitative Disclosures About Market Risk						64
Item 4. Controls and Procedures						66
Part II - Other Information						67
Item 1. Legal Proceedings						68
Item 1A. Risk Factors						69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						69
Item 3. Defaults Upon Senior Securities						69
Item 4. Mine Safety Disclosures						69
Item 5. Other Information						69
Item 6. Exhibits						70
Signatures						71

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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, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 new merchants and commerce partners and retain and grow our relationships with existing merchants and commerce partners;

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

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

•our expectations regarding the development, innovation, introduction of, and demand for, our products;

•our ability to successfully engage new originating bank partners;

•the availability of funding sources to support our business model;

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

•the performance of loans facilitated and originated through our platform;

•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 impacts of inflation and a rising interest rate environment; 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 and our most recently filed Annual Report on Form 10-K for the year ended June 30, 2022 (the "Annual Report"). 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, heavily regulated 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 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.

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You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, events, or circumstances. 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 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 such as “we believe” and similar statements reflect our current 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 (“SEC”), webcasts, press releases, conference calls, and social media. 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. The contents of our website are not incorporated into this filing. We have included our investor relations website address as an inactive textual reference and do not intend it to be an active link to 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)


	September 30, 2022		June 30, 2022
Assets
Cash and cash equivalents	$	1,530,132	$	1,255,171
Restricted cash	383,406		295,636
Securities available for sale at fair value	1,237,291		1,595,373
Loans held for sale	7,112		2,670
Loans held for investment	2,681,637		2,503,561
Allowance for credit losses	(153,025)		(155,392)
Loans held for investment, net	2,528,612		2,348,169
Accounts receivable, net	147,757		142,052
Property, equipment and software, net	208,460		171,482
Goodwill	525,000		539,534
Intangible assets	71,037		78,942
Commercial agreement assets	241,639		263,196
Other assets	284,614		281,567
Total Assets	$	7,165,060	$	6,973,792
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable	$	34,534	$	33,072
Payable to third-party loan owners	90,811		71,383
Accrued interest payable	5,292		6,659
Accrued expenses and other liabilities	249,812		237,598
Convertible senior notes, net	1,707,724		1,706,668
Notes issued by securitization trusts	1,720,812		1,627,580
Funding debt	792,637		672,577
Total liabilities	4,601,622		4,355,537
Commitments and contingencies (Note 8)
Stockholders’ equity:
Class A common stock, par value $0.00001 per share: 3,030,000,000 shares authorized, 229,388,460 shares issued and outstanding as of September 30, 2022; 3,030,000,000 shares authorized, 227,255,529 shares issued and outstanding as of June 30, 2022	2		2
Class B common stock, par value $0.00001 per share: 140,000,000 shares authorized, 60,103,756 shares issued and outstanding as of September 30, 2022; 140,000,000 authorized, 60,109,844 shares issued and outstanding as of June 30, 2022	1		1
Additional paid in capital	4,454,829		4,231,303
Accumulated deficit	(1,857,171)		(1,605,902)
Accumulated other comprehensive loss	(34,223)		(7,149)
Total stockholders’ equity	2,563,438		2,618,255
Total Liabilities and Stockholders’ Equity	$	7,165,060	$	6,973,792

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)

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.


	September 30, 2022		June 30, 2022
Assets of consolidated VIEs, included in total assets above
Restricted cash	$	231,353	$	164,530
Loans held for investment	2,309,638		2,179,026
Allowance for credit losses	(124,000)		(124,052)
Loans held for investment, net	2,185,638		2,054,974
Accounts receivable, net	8,195		8,195
Other assets	17,639		14,570
Total assets of consolidated VIEs	$	2,442,825	$	2,242,269
Liabilities of consolidated VIEs, included in total liabilities above
Accounts payable	$	2,752	$	2,897
Accrued interest payable	5,249		6,525
Accrued expenses and other liabilities	14,335		15,494
Notes issued by securitization trusts	1,720,812		1,627,580
Funding debt	621,660		514,033
Total liabilities of consolidated VIEs	2,364,808		2,166,529
Total net assets	$	78,017	$	75,740

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 September 30,
	2022		2021
Revenue
Merchant network revenue	$	113,149	$	92,244
Virtual card network revenue	26,708		19,395
Total network revenue	139,857		111,639
Interest income	136,802		117,302
Gain on sales of loans	63,595		30,979
Servicing income	21,370		9,465
Total Revenue, net	$	361,624	$	269,385
Operating Expenses
Loss on loan purchase commitment	$	35,610	$	51,678
Provision for credit losses	64,250		63,647
Funding costs	25,066		16,753
Processing and servicing	54,359		25,201
Technology and data analytics	144,961		78,013
Sales and marketing	163,873		63,960
General and administrative	160,972		136,204
Total Operating Expenses	649,091		435,456
Operating Loss	$	(287,467)	$	(166,071)
Other (expense) income, net	36,018		(140,373)
Loss Before Income Taxes	$	(251,449)	$	(306,444)
Income tax expense (benefit)	(180)		171
Net Loss	$	(251,269)	$	(306,615)
Other Comprehensive Loss
Foreign currency translation adjustments	$	(21,546)	$	(3,802)
Unrealized loss on securities available for sale, net	(5,528)		(279)
Net Other Comprehensive Loss	(27,074)		(4,081)
Comprehensive Loss	$	(278,343)	$	(310,696)
Per share data:
Net loss per share attributable to common stockholders for Class A and Class B
Basic	$	(0.86)	$	(1.13)
Diluted	$	(0.86)	$	(1.13)
Weighted average common shares outstanding
Basic	290,929,270		271,677,516
Diluted	290,929,270		271,677,516

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 STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share amounts)


	Common Stock		Additional Paid-In Capital			Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
		Shares			Amount
Balance as of June 30, 2022		287,365,373	$	3		$	4,231,303	$	(1,605,902)	$	(7,149)	$	2,618,255
Issuance of common stock upon exercise of stock options		215,949	—			1,192		—		—		1,192
Forfeiture of common stock related to acquisitions		(243,384)	—			—		—		—		—
Repurchases of Common Stock		(12,437)	—			(109)		—		—		(109)
Vesting of restricted stock units		2,166,715	—			—		—		—		—
Vesting of warrants for common stock		—	—			108,742		—		—		108,742
Stock-based compensation		—	—			141,012		—		—		141,012
Tax withholding on stock-based compensation		—	—			(27,311)		—		—		(27,311)
Foreign currency translation adjustments		—	—			—		—		(21,546)		(21,546)
Unrealized loss on securities available for sale		—	—			—		—		(5,528)		(5,528)
Net Loss		—	—			—		(251,269)		—		(251,269)
Balance as of September 30, 2022		289,492,216	$	3		$	4,454,829	$	(1,857,171)	$	(34,223)	$	2,563,438


	Common Stock		Additional Paid-In Capital			Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
		Shares			Amount
Balance as of June 30, 2021		269,358,104	$	3		$	3,467,236	$	(898,485)	$	6,773	$	2,575,527
Issuance of common stock upon exercise of stock options		7,403,503	—			37,470		—		—		37,470

Issuance of common stock in acquisition		183,733	—			10,000		—		—		10,000
Vesting of restricted stock units		772,653	—			—		—		—		—
Repurchases of common stock		(821)	—			(5)		—		—		(5)
Stock-based compensation		—	—			104,879		—		—		104,879
Tax withholding on stock-based compensation		—	—			(39,817)		—		—		(39,817)
Foreign currency translation adjustments		—	—			—		—		(3,802)		(3,802)
Unrealized loss on securities available for sale		—	—			—		—		(279)		(279)
Net Loss		—	—			—		(306,615)		—		(306,615)
Balance as of September 30, 2021		277,717,172	$	3		$	3,579,763	$	(1,205,100)	$	2,692	$	2,377,358

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)


	Three Months Ended September 30,
	2022		2021
Cash Flows from Operating Activities
Net Loss	$	(251,269)	$	(306,615)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for credit losses	64,250		63,647
Amortization of premiums and discounts on loans, net	(34,595)		(35,708)
Gain on sales of loans	(63,595)		(30,979)
Changes in fair value of assets and liabilities	3,906		139,884
Amortization of commercial agreement assets	21,557		18,971
Amortization of debt issuance costs	1,076		5,231
Amortization of discount on securities available for sale	(7,620)		—
Commercial agreement warrant expense	108,743		—
Stock-based compensation	119,808		93,189
Depreciation and amortization	20,882		10,541
Other	2,053		4,002
Change in operating assets and liabilities:
Purchases of loans held for sale	(1,655,213)		(896,786)
Proceeds from the sale of loans held for sale	1,707,838		888,580
Accounts receivable, net	(6,649)		(12,076)
Other assets	(3,000)		78,086
Accounts payable	1,462		368,096
Payable to third-party loan owners	19,428		(11,618)
Accrued interest payable	(1,078)		553
Accrued expenses and other liabilities	3,231		(11,848)
Net Cash Provided by (Used in) Operating Activities	51,215		365,150
Cash Flows from Investing Activities
Purchases and origination of loans held for investment	(2,744,825)		(1,847,458)
Proceeds from the sale of loans held for investment	326,713		195,039
Principal repayments and other loan servicing activity	2,206,725		1,486,099
Acquisition, net of cash and restricted cash acquired	—		(5,999)

Additions to property, equipment and software	(31,151)		(16,347)
Purchases of securities available for sale	(104,629)		(443,560)
Proceeds from maturities and repayments of securities available for sale	464,492		889
Other investing cash inflows (outflows)	(52)		1,827

Net Cash Provided by (Used in) Investing Activities	117,273		(629,510)
Cash Flows from Financing Activities

Proceeds from funding debt	1,193,761		682,106
Payment of debt issuance costs	(7,423)		(6,609)
Principal repayments of funding debt	(1,059,607)		(873,778)
Proceeds from issuance of notes and residual trust certificates by securitization trusts	249,931		499,789
Principal repayments of notes issued by securitization trusts	(150,713)		(55,204)



Proceeds from exercise of common stock options and warrants and contributions to ESPP	1,013		37,470
Repurchases of common stock	(109)		(4)
Payments of tax withholding for stock-based compensation	(27,311)		(39,817)
Net Cash Provided by Financing Activities	199,542		243,953
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(5,299)		3,588
Net Increase in Cash, Cash Equivalents and Restricted Cash	362,731		(16,819)
Cash, Cash equivalents and Restricted cash, Beginning of period	1,550,807		1,692,632
Cash, Cash Equivalents and Restricted Cash, End of Period	$	1,913,538	$	1,675,813

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, CONT.

(Unaudited)

(in thousands)


	Three Months Ended September 30,
	2022		2021
Reconciliation to amounts on consolidated balance sheets (as of period end)
Cash and cash equivalents	1,530,132		1,439,531
Restricted cash	383,406		236,282
Total Cash, Cash Equivalents and Restricted Cash	$	1,913,538	$	1,675,813


	Three Months Ended September 30,
	2022		2021
Supplemental Disclosures of Cash Flow Information
Cash payments for interest expense	$	22,819	$	10,195
Cash paid for operating leases	4,167		4,475
Cash paid for income taxes	138		72
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Stock-based compensation included in capitalized internal-use software	21,204		11,690
Issuance of common stock in connection with acquisition	—		10,000
Additions to property and equipment included in accrued expenses	—		56

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 next-generation commerce platform, agreements with originating banks, and capital markets partners, we enable consumers to confidently pay for a purchase over time, with terms ranging from one to sixty 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. Loans are directly originated or 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 solutions. Consumers get the flexibility to buy now and make simple regular payments for their purchases and merchants see increased average order value, repeat purchase rates, 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 deferred interest, 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 fiscal year ended June 30, 2022. The balance sheet as of June 30, 2022 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 business trust entities and limited partnerships established to enter into warehouse credit agreements with certain lenders for funding debt facilities and certain asset-backed securitization transactions. All intercompany accounts and transactions have been eliminated in consolidation.

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 variable consideration for revenue, the allowance for credit losses, capitalized internal-use software development costs, valuation allowance for deferred tax assets, loss on loan

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purchase commitment, the fair value of servicing assets and liabilities, discount on directly originated loans, the fair value of assets acquired and any contingent consideration transferred in business combinations, the evaluation for impairment of intangible assets and goodwill, the fair value of available for sale debt securities including retained interests in our securitization trusts, the fair value of residual certificates issued by our securitization trusts held by third parties, and stock-based compensation, including the fair value of warrants issued to nonemployees. We base our estimates on market-based inputs, historical experience, current events, and other factors we believe to be reasonable under the circumstances. These estimates are subjective in nature and to the extent that there are differences between these estimates and actual results, our financial condition or operating results in future periods may be affected.

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.

Significant Accounting Policies

There were no material changes to our significant accounting policies as disclosed in Note 2. Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, which was filed with the SEC on August 29, 2022.

Recently Adopted Accounting Standards

Financial Instruments - Credit Losses

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments— Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosure” which addresses areas identified by the FASB as part of its post-implementation review of the current expected credit losses model or “CECL” previously issued in ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326)”. The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings by creditors while enhancing the disclosure requirements for loan refinancing and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases in the vintage disclosures. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted if an entity has adopted ASU 2016-13. Amendments in this ASU should be applied prospectively except for the transition method related to the accounting for troubled debt restructurings in which an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. We early adopted the new standard effective July 1, 2022 on a prospective basis. The adoption of the guidance did not have a material impact on our interim condensed financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Business Combinations

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which requires contract assets and contract liabilities, such as deferred revenue, acquired in a business combination to be recognized and measured in accordance with Topic 606 (Revenue from Contracts with Customers). ASU 2021-08 is expected to reduce diversity in practice and increase comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The ASU is effective for fiscal years beginning after December 15, 2022 and should be applied prospectively to acquisitions occurring on or after the effective date. Early adoption is permitted, including for interim periods, and is applicable to all business combinations for which the acquisition date occurs within the beginning of the fiscal year of adoption. We are in the process of evaluating the impact of adopting this accounting standard update on our consolidated financial statements and disclosures.

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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”). This ASU is effective for all entities upon issuance as of March 12, 2020 through December 31, 2022. In January 2021, the FASB also issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which provides additional optional expedients and exceptions applicable to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This ASU is effective for all entities upon issuance as of January 7, 2021 through December 31, 2022 and can be applied prospectively. We have reviewed all our financial agreements that utilize LIBOR as the reference rate and determined there is no impact to our interim condensed consolidated financial statements as of September 30, 2022. Throughout the remaining effective period for ASU 2020-04 and ASU 2021-01, we will continue to evaluate the available relief measures within each of these amendments and will determine any impact on our consolidated financial statements and disclosures, as applicable.

3. Revenue

The following table presents the company’s revenue disaggregated by revenue source (in thousands):


	Three Months Ended September 30,
	2022		2021

Merchant network revenue	$	113,149	$	92,244
Virtual card network revenue	26,708		19,395

Interest income	136,802		117,302
Gain on sales of loans	63,595		30,979
Servicing income	21,370		9,465
Total Revenue, net	$	361,624	$	269,385

Merchant Network Revenue

Merchant partners (or integrated merchants) are generally charged a fee based on gross merchandise volume (GMV) 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 merchant successfully confirms the transaction, which is when the terms of the executed merchant agreement are fulfilled. 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 certain cases, the losses incurred on loans originated for a merchant may exceed the total network revenue earned on those loans. To the extent we do not expect to recover the losses in future periods, we record the excess loss amounts as a sales and marketing expense.

A portion of merchant network revenue relates to affiliate network revenue, which is generated when a user makes a purchase on a merchant’s website after being directed from an advertisement on Affirm’s website or mobile application. We earn a fixed placement fee and/or commission as a percentage of the associated sale. Revenue is recognized at the point in time when the performance obligation has been fulfilled, which is when the sale occurs.

For both the three months ended September 30, 2022 and 2021, there were no merchants that exceeded 10% of total revenue.

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Virtual Card Network Revenue

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 for a virtual debit card 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 virtual debit card is funded at the time a transaction is authorized using cash held by the issuer processor in a reserve fund. Our originating bank partner then originates a loan to the consumer once the transaction is confirmed by the merchant. The non-integrated merchants are charged interchange fees by the issuer processor for virtual debit card transactions, and the issuer processor shares a portion of this revenue with us. We also leverage this issuer processor as a means of integrating certain merchants. Similarly, for these arrangements with integrated merchants, the merchant is charged interchange fees by the issuer processor and the issuer processor shares a portion of this revenue with us.

Interest Income

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


	Three Months Ended September 30,
	2022		2021
Interest income on unpaid principal balance	$	106,138	$	82,941
Amortization of discount on loans	38,969		38,445
Amortization of premiums on loans	(4,374)		(2,737)
Interest receivable charged-off, net of recoveries	(3,931)		(1,347)
Total interest income	$	136,802	$	117,302

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 consumer 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 September 30, 2022 and June 30, 2022, the balance of loans held for investment on non-accrual status was $2.4 million and $1.7 million, respectively.

Gain on Sales of Loans

We sell certain loans we originate or purchase from our originating bank partners directly to third-party investors or to securitizations. We recognize a gain or loss on sale of loans sold to third parties or to unconsolidated securitizations as the difference between the proceeds received and the carrying value of the loan, adjusted for the initial recognition of any assets or liabilities incurred upon sale, which generally include a net servicing asset or liability in connection with our ongoing obligation to continue to service the loans and a recourse liability based on our estimate of future losses in connection with our obligation to repurchase loans that do not meet certain contractual requirements and such information about the loan was unknown at the time of sale.

Servicing Income

Servicing income includes contractual fees specified in our servicing agreements with third-party loan owners and unconsolidated securitizations that are earned from providing professional services to manage loan portfolios on their behalf.

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4. Loans Held for Investment and Allowance for Credit Losses

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


	September 30, 2022		June 30, 2022
Unpaid principal balance	$	2,706,883	$	2,516,733
Accrued interest receivable	23,365		20,697
Premiums on loans held for investment	8,866		8,911
Less: Discount due to loss on loan purchase commitment	(26,682)		(20,692)
Less: Discount due to loss on directly originated loans	(29,641)		(20,443)
Less: Fair value adjustment on loans acquired through business combination	(1,154)		(1,645)
Total loans held for investment	$	2,681,637	$	2,503,561

Loans held for investment includes loans originated through our originating bank partners and directly originated loans. 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 $3,491.9 million and $2,244.2 million during the three months ended September 30, 2022 and 2021, respectively.

These loans have a variety of lending terms as well as maturities ranging from one to sixty months. Given that our loan portfolio focuses on one product segment, point-of-sale unsecured installment loans, we generally evaluate the entire portfolio as a single homogeneous loan portfolio and make merchant or program specific adjustments as necessary.

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 for our directly originated loans and originating bank partner loans, 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 and therefore the lowest likelihood of loss. 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 team closely tracks the distribution of ITACs at the portfolio level, as well as ITACs at the individual loan level to monitor for signs of a changing credit profile within the portfolio. Repayment performance within each ITACs band is also monitored to support 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 amortized cost basis excluding accrued interest receivable, by fiscal year of origination on loans held for investment and loans held for sale (in thousands) as of September 30, 2022:


	Amortized Costs Basis by Fiscal Year of Origination
	2023		2022		2021		2020		2019		Prior		Total
96+	$	900,877	$	531,930	$	81,877	$	24,676	$	12	$	2	$	1,539,374
94-96	357,155		301,358		4,854		548		6		2		663,923
90-94	59,343		100,989		1,545		2		4		—		161,883
<90	21,476		13,270		47		2		—		—		34,795
No score(1)	80,491		147,410		31,816		5,273		372		47		265,409
Total amortized cost basis	$	1,419,342	$	1,094,957	$	120,139	$	30,501	$	394	$	51	$	2,665,384

(1)This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology including loan receivables originated in Canada and Australia.


	Net Charge-offs by Fiscal Year of Origination
	2023		2022		2021		2020		2019		Prior		Total
Current period charge-offs	(251)		(66,889)		(3,709)		(162)		(16)		(9)		(71,036)
Current period recoveries	4		3,590		1,858		650		419		279		6,800
Current period net charge-offs	$	(247)	$	(63,299)	$	(1,851)	$	488	$	403	$	270	$	(64,236)

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 amortized cost basis excluding accrued interest receivable of loans held for investment and loans held for sale by delinquency status (in thousands):


	September 30, 2022		June 30, 2022
Non-delinquent loans	$	2,473,859	$	2,322,919
4 – 29 calendar days past due	89,460		77,963
30 – 59 calendar days past due	42,128		34,669
60 – 89 calendar days past due	31,736		26,919
90 – 119 calendar days past due (1)	28,201		23,064
Total amortized cost basis	$	2,665,384	$	2,485,534

(1)Includes $29.0 million and $22.7 million of loan receivables as of September 30, 2022 and June 30, 2022, respectively, that are 90 days or more past due, but are not on nonaccrual status.

We maintain an allowance for credit losses at a level sufficient to absorb expected credit losses based on evaluating known and inherent risks in our loan portfolio. The allowance for credit losses is determined based on our current estimate of expected credit losses over the remaining contractual term, historical credit losses, consumer payment trends, estimates of recoveries, and future expectations as of each balance sheet date. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses are recognized in earnings through the provision for credit losses presented on our interim condensed consolidated statements of operations and comprehensive loss. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. Loans are charged-off in accordance with our

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charge-off policy, as the contractual principal becomes 120 days past due. Subsequent recoveries of the unpaid principal balance, if any, are credited to the allowance for credit losses.

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


	Three Months Ended September 30,
	2022		2021
Balance at beginning of period	$	155,392	$	117,760
Provision for credit losses	61,869		61,004
Charge-offs	(71,036)		(30,454)
Recoveries of charged-off receivables	6,800		3,711
Balance at end of period	$	153,025	$	152,021

5. Acquisitions

There were no acquisitions accounted for as business combinations completed in the three months ended September 30, 2022. During the three months ended September 30, 2021, we completed one acquisition accounted for as business combinations, discussed further below.

Acquisitions completed during the three months ended September 30, 2021

ShopBrain

On July 1, 2021, Affirm completed the acquisition of technology and intellectual property from Yroo, Inc. and entered into employment arrangements with certain of its employees (“the ShopBrain acquisition”). Yroo, Inc. is a data aggregation and cataloging technology company based in Canada (“ShopBrain”). The purchase price was comprised of (i) $30.0 million in cash and (ii) 151,745 shares of our Class A common stock issued to the shareholders of ShopBrain at closing.

The acquisition date fair value of the consideration transferred was approximately $40.0 million, which consisted of the following (in thousands):


Cash	$	30,000
Fair value of Class A common stock transferred	10,000
Total acquisition date fair value of the consideration transferred	$	40,000

The acquisition was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”). The acquired identifiable intangible assets have been recorded at their estimated fair values with the excess purchase price assigned to goodwill. The goodwill was primarily attributed to future synergies from integration and the value of the assembled workforce. The goodwill is expected to be deductible for income tax purposes.

The following table summarizes the allocation of the consideration paid of approximately $40.0 million to the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):


Intangible assets	$	9,488
Total net assets acquired	9,488
Goodwill	30,512
Total purchase price	$	40,000

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The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):


	Fair Value		Useful Life (in years)
Developed technology	$	9,488	3.0

The fair values of the intangible assets were determined by applying the replacement cost method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represents Level 3 measurements.

The transaction costs associated with the acquisition were approximately $0.1 million for the three months ended September 30, 2021, which are included in general and administrative expense within the interim condensed consolidated statements of operations and compre