AFFIRM : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (type 10-Okay)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K (“Form 10-K”). You should review the sections titled “Risk Factors” for a
discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis. For the periods
presented, references to originating bank partners are to Cross River Bank and
Celtic Bank. Unless the context otherwise requires, all references in this
report to “Affirm,” the “Company,” “we,” “our,” “us,” or similar terms refer to
Affirm Holdings, Inc. and its subsidiaries. A discussion regarding our financial
condition and results of operations for the fiscal year ended June 30, 2021
compared to the fiscal year ended June 30, 2020 is presented below. A discussion
regarding our financial condition and results of operations for the fiscal year
ended June 30, 2020 compared to the fiscal year ended June 30, 2019 can be found
in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Final Prospectus dated January 12, 2021 and filed with the
SEC pursuant to Rule 424(b)(4) on January 14, 2021.
Overview

We are building the next generation platform for digital and mobile-first
commerce. We believe that by using modern technology, the very best engineering
talent, and a mission-driven approach, we can reinvent payments and commerce.
Our solutions, which are built on trust and transparency, make it easier for
consumers to spend responsibly and with confidence, easier for merchants to
convert sales and grow, and easier for commerce to thrive.
Our point-of-sale solution allows consumers to pay for purchases in fixed
amounts without deferred interest, hidden fees, or penalties. We empower
consumers to pay over time rather than paying for a purchase entirely upfront.
This increases consumers’ purchasing power and gives them more control and
flexibility. Our platform facilitates both true 0% APR payment options and
interest-bearing loans. On the merchant side, we offer commerce enablement,
demand generation, and customer acquisition tools. Our solutions empower
merchants to more efficiently promote and sell their products, optimize their
customer acquisition strategies, and drive incremental sales. We also provide
valuable product-level data and insights – information that merchants cannot
easily get elsewhere – to better inform their strategies. Finally, our consumer
app unlocks the full suite of Affirm products for a delightful end-to-end
consumer experience. Consumers can use our app to manage payments, open a
high-yield savings account, and access a personalized marketplace.
Our company is predicated on the principles of simplicity, transparency, and
putting people first. By adhering to these principles, we have built enduring,
trust-based relationships with consumers and merchants that we believe will set
us up for long-term, sustainable success. We believe our innovative approach
uniquely positions us to define the future of commerce and payments.
Technology and data are at the core of everything we do. Our expertise in
sourcing, aggregating, and analyzing data has been what we believe to be the key
competitive advantage of our platform since our founding. We believe our
proprietary technology platform and data give us a unique advantage in pricing
risk. We use data to inform our risk scoring in order to generate value for our
consumers, merchants, and capital partners. We collect and store petabytes of
information that we carefully structure and use to regularly recalibrate and
revalidate our models, thereby getting to risk scoring and pricing faster, more
efficiently, and with a higher degree of confidence. We also prioritize building
our own technology and investing in product and engineering talent as we believe
these are enduring competitive advantages that are difficult to replicate. Our
solutions use the latest in machine learning, artificial intelligence,
cloud-based technologies, and other modern tools to create differentiated and
scalable products.
We have achieved significant growth in recent periods. Our total revenue, net
was $870.5 million, $509.5 million, and $264.4 million for the years ended
June 30, 2021, 2020, and 2019 respectively. We incurred net losses
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of $430.9 million, $112.6 million, and $120.5 million for the years ended
June 30, 2021, 2020, and 2019 respectively.
The combination of our differentiated product offering, efficient go-to-market
strategy, and strong monetization engine has resulted in rapid growth.
•Accelerating GMV growth. We grew our Gross Merchandise Volume (“GMV”) by 79%
year-over-year to $8.3 billion during the fiscal year ended June 30, 2021.
During the fiscal year ended June 30, 2020, GMV was $4.6 billion, which
represented 77% growth over the fiscal year ended June 30, 2019.
•Increased consumer engagement. The number of active consumers on our platform
grew by 3.5 million consumers from June 30, 2020 to June 30, 2021, an increase
of 97% to a total of 7.1 million.
•Expanded merchant network. We have also continued to scale the breadth and
reach of our platform. From June 30, 2020 to June 30, 2021, our merchant base
expanded by 412% to 28,995 active merchants.
•Compelling network revenue growth. Network revenue, which combines merchant
network revenue and virtual card network revenue, increased 56% year-over-year
compared to the year ended June 30, 2020. We believe that the continued growth
of network revenue demonstrates the value of our platform to our merchants.
Our business was designed to scale efficiently. Our partnerships with banks and
other funding relationships have allowed us to remain equity capital efficient.
Since July 1, 2016, we have processed approximately $17.5 billion of GMV on our
platform. As of June 30, 2021, we had over $6.5 billion in funding capacity from
a diverse set of capital partners, including through our warehouse facilities,
securitization trusts, and forward flow arrangements, an increase of $3.2
billion from $3.3 billion as of June 30, 2020.
Through the diversity of these funding relationships, the equity capital
required to build our total platform portfolio has declined from approximately
9% of the total platform portfolio as of June 30, 2020, to approximately 4% as
of June 30, 2021. We define our total platform portfolio as the unpaid principal
balance outstanding of all loans facilitated through our platform as of the
balance sheet date, including both those loans held for investment and those
loans owned by third-parties. This amount totaled $4.7 billion and $2.5 billion
as of June 30, 2021 and June 30, 2020, respectively. Additionally, we define the
equity capital required as the balance of loans held for investment, plus loans
held for sale, less funding debt and notes issued by securitization trusts, per
our consolidated balance sheet. This amount totaled $178.1 million and $220.8
million as of June 30, 2021 and June 30, 2020, respectively. Equity capital
required as a percent of the last twelve months’ GMV was 2% and 5% as of
June 30, 2021 and June 30, 2020, respectively.
We have focused on growing our platform and plan to continue making investments
to drive future growth, as evidenced by our strategic acquisitions. In January
2021, we acquired PayBright, one of Canada’s leading providers of installment
payment plans for e-commerce and in-store purchases, to expand the scale and
reach of our platform, creating a larger, more diverse merchant and consumer
network across the United States and Canada. In May 2021, we acquired Returnly,
a leader in online return experiences and post-purchase payments, to expand the
capabilities of our platform and address the full shopping journey by enabling
seamless return experiences that drive customer loyalty and satisfaction.
We believe that our continued success will depend on many factors, including our
ability to attract additional merchant partners, retain our existing merchant
partners, and grow and develop our relationships with new and existing merchant
partners (including our relationship with Amazon), help our merchants grow their
revenue on our platform, and develop new innovative solutions to establish the
ubiquity of our network and breadth of our platform. For a further discussion of
trends, uncertainties and other factors that could impact our operating results,
see the section entitled “Risk Factors” in Item 1A, which is incorporated herein
by reference.
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Our Financial Model

Our Revenue Model
From merchants, we earn a fee when we help them convert a sale and facilitate a
transaction. While merchant fees depend on the individual arrangement between us
and each merchant, and vary based on the terms of the product offering, we
generally earn larger merchant fees on 0% APR financing products and financial
products with longer term lengths. For the years ended June 30, 2021, 2020, and
2019, 0% APR financing represented 43%, 43%, and 33%, respectively, of total GMV
facilitated through our platform.
From consumers, we earn interest income on the simple interest loans that we
purchase from our originating bank partners. Interest rates charged to our
consumers vary depending on the transaction risk, creditworthiness of the
consumer, the repayment term selected by the consumer, the amount of the loan,
and the individual arrangement with a merchant. Because our consumers are never
charged deferred or compounding interest, late fees, or penalties on the loans,
we are not incentivized to profit from our consumers’ hardships.
In order to accelerate our ubiquity, we facilitate the issuance of virtual cards
directly to consumers through our app, allowing them to shop with merchants that
may not yet be fully integrated with Affirm. When these virtual cards are used
over established card networks, we earn a portion of the interchange fee from
the transaction.
Our Loan Origination and Servicing Model
When a consumer applies for a loan through our platform, the loan is
underwritten using our proprietary risk model. Once approved for the loan, the
consumer then selects his/her preferred repayment option. The substantial
majority of these loans are funded and issued by our originating bank partners.
A substantial majority of the loans facilitated through our platform are
originated through our originating bank partners: Cross River Bank, an
FDIC-insured New Jersey state-chartered bank, and Celtic Bank, an FDIC-insured
Utah state-chartered industrial bank. These partnerships allow us to benefit
from our partners’ ability to originate loans under their banking licenses while
complying with various federal, state, and other laws. Under this arrangement,
we must comply with our originating bank partners’ credit policies and
underwriting procedures, and our originating bank partners maintain ultimate
authority to decide whether to originate a loan. When an originating bank
partner originates a loan, it funds the loan out of its own funds and may
subsequently offer and sell the loan to us. Pursuant to our agreements with
these partners, we are obligated to purchase the loans facilitated through our
platform that our partner offers us and our obligation is secured by cash
deposits. To date, we have purchased all of the loans facilitated through our
platform and originated by our originating bank partners. When we purchase a
loan from an originating bank partner, the purchase price is equal to the
outstanding principal balance of the loan, plus a fee and any accrued interest.
The originating bank partner also retains an interest in the loans purchased by
us through a loan performance fee that is payable by us on the aggregate
principal amount of a loan that is paid by a consumer. See Note 13. Fair Value
of Financial Assets and Liabilities for more information on the performance fee
liability.
We are also able to originate loans directly under our lending, servicing, and
brokering licenses in Canada and across various states in the U.S. through our
consolidated subsidiaries. We started originating loans directly in Canada in
October 2019 and, through June 30, 2021, we had originated approximately $257.7
million of loans in Canada. As of June 30, 2021, we had directly originated
$336.1 million of loans in the U.S. pursuant to our state licenses.
We act as the servicer on all loans that we originate directly or purchase from
our originating bank partners and earn a servicing fee on loans we sell to our
funding sources. We do not sell the servicing rights on any of the loans,
allowing us to control the consumer experience end-to-end. To allow for flexible
staffing to support overflow and seasonal traffic, we partner with several
sub-servicers to manage customer care, first priority collections, and
third-party collections in accordance with our policies and procedures.
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Our Funding Sources
We maintain a capital-efficient model through a diverse set of funding sources.
When we originate a loan directly or purchase a loan originated by our
originating bank partners, we often utilize warehouse facilities with certain
lenders to finance our lending activities or loan purchases. We sell the loans
we originate or purchase from our originating bank partners to whole loan buyers
and securitization investors through forward flow arrangements and
securitization transactions, and earn servicing fees from continuing to act as
the servicer on the loans.
Key Operating Metrics

We collect and analyze operating and financial data of our business to assess
our performance, formulate financial projections, and make strategic decisions.
In addition to revenue, net (loss) income, and other results under accounting
principles generally accepted in the United States (“U.S. GAAP”), the following
tables set forth key operating metrics we use to evaluate our business.
Year Ended June 30,
2021 2020 2019
(in thousands)
Gross Merchandise Volume (“GMV”) $ 8,292,031 $

4,637,220 $ 2,620,059

GMV

We measure gross merchandise volume to assess the volume of transactions that
take place on our platform. We define GMV as the total dollar amount of all
transactions on the Affirm platform during the applicable period, net of
refunds. GMV does not represent revenue earned by us. However, the GMV processed
through our platform is an indicator of the success of our merchants, value
provided to our consumers, and the strength of our platform. For the year ended
June 30, 2021, GMV was $8.3 billion, which represented an increase of
approximately 79% as compared to $4.6 billion for the year ended June 30, 2020.
For the year ended June 30, 2020, GMV was $4.6 billion, which represented an
increase of approximately 77% as compared to $2.6 billion for the fiscal year
ended June 30, 2019. Our acquisitions of PayBright and Returnly contributed an
incremental $153.8 million of GMV during the year ended June 30, 2021.
June 30, 2021 June 30, 2020 June 30, 2019
(in thousands, except per consumer data)
Active Consumers 7,121 3,618 2,045
Transactions per Active Consumer (x) 2.3 2.1 2.0

Active Consumers
We assess consumer adoption and engagement by the number of active consumers
across our platform. Active consumers are the primary measure of the size of our
network. We define an active consumer as a consumer who engages in at least one
transaction on our platform during the twelve months prior to the measurement
date. As of June 30, 2021, we had 7.1 million active consumers, representing an
increase of approximately 97% compared to 3.6 million as of June 30, 2020, and
approximately 77% compared to 2.0 million at June 30, 2019. Active consumers
include an incremental 1.1 million consumers who engaged in at least one
transaction on the PayBright or Returnly platforms during the twelve months
prior to the measurement date, including prior to the acquisitions of PayBright
and Returnly by Affirm.
Transactions per Active Consumer
We believe the value of our network is amplified with greater consumer
engagement and repeat usage, highlighted by increased transactions per active
consumer. Transactions per active consumer is defined as the average number of
transactions that an active consumer has conducted on our platform during the
twelve months
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prior to the measurement date. As of June 30, 2021, we had approximately 2.3
transactions per active consumer, representing an increase of 8% as compared to
2.1 as of June 30, 2020 and an increase of 13% compared to June 30, 2019.
Transactions per active consumer includes incremental transactions completed by
active consumers on the PayBright or Returnly platforms during the twelve months
prior to the measurement date and prior to the acquisitions of PayBright and
Returnly by Affirm.
Factors Affecting Our Performance
Expanding our Network, Diversity, and Mix of Funding Relationships
Our capital efficient funding model is integral to the success of our platform.
As we scale the number of transactions on our network and grow GMV, we maintain
a variety of funding relationships in order to support our network. Our
diversified funding relationships include warehouse facilities, securitization
trusts, forward flow arrangements, and partnerships with banks. Given the short
duration and strong performance of our assets, funding can be recycled quickly,
resulting in a high-velocity, capital efficient funding model. We have continued
to reduce the percentage of our equity capital required to fund our total
platform portfolio from approximately 9% as of June 30, 2020, to approximately
4% as of June 30, 2021. The mix of on-balance sheet and off-balance sheet
funding will also impact our results in any given period.
Mix of Business on Our Platform
The mix of products that our merchants offer and our consumers purchase in any
period affects our operating results. The mix impacts GMV, revenue, and the
financial results of that period. Differences in product mix relate to different
loan durations, APR mix, and varying proportion of 0% APR versus
interest-bearing financings. For example, our low AOV products generally benefit
from shorter duration, but also have lower revenue as a percentage of GMV when
compared to high AOV products. These mix shifts are driven in part by
merchant-side activity relating to the marketing of their products, whether the
merchant is fully integrated within our network, and general economic conditions
affecting consumer demand. In addition, we expect that our commercial agreement
with Shopify to offer Shop Pay Installments powered by Affirm and our recent
Split Pay offering, a short-term payment plan for purchases under $250 with 0%
APR, will increase the mix of our shorter duration, low AOV products.
Differences in the mix of high versus low AOV will also impact our results. For
example, we expect that transactions per active consumer may increase while
revenue as a percentage of GMV may decline in the medium term to the extent that
a greater portion of our GMV comes from Split Pay and other low-AOV offerings.
Sales and Marketing Investment
We have historically relied on the strength of our merchant relationships and
positive user experience to develop our consumer brand and grow the ubiquity of
our platform. During the year ended June 30, 2021, we increased our investment
in sales and marketing channels that we believe will drive further brand
awareness and preference among both consumers and merchants. Given the nature of
our revenue, our investment in sales and marketing in a given period may not
impact results until subsequent periods. Additionally, given the increasingly
competitive nature of merchant acquisition, we expect that we may make
significant investments in retaining and acquiring new merchants. We are focused
on the effectiveness of sales and marketing spending and will continue to be
strategic in maintaining efficient consumer and merchant acquisition.
Seasonality
We experience seasonal fluctuations in our revenue as a result of consumer
spending patterns. Historically, our revenue has been the strongest during the
second quarter of our fiscal year due to increases in retail commerce during the
holiday season. Additionally, revenue associated with the purchase of home
fitness equipment historically has been strongest in the third quarter of our
fiscal year. Adverse events that occur during these months could have a
disproportionate effect on our financial results for the fiscal year.
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Timing of Merchant Transaction Recognition Change
The timing of our revenue recognition is tied to when a merchant captures
payment and confirms a transaction financed through our platform, which we refer
to as the merchant capture date. If a merchant recognizes the payment collection
and confirms the transaction later in their transaction process, we expect that
this change would delay the merchant capture date, which would delay our
recognition of GMV and revenue related to that merchant’s transactions by a
corresponding amount. Such a delay would adversely affect the GMV and revenue
that we recognize from such merchant’s transactions in the quarterly period of
such change, as the merchant capture date for a portion of such transactions
would shift to a future quarterly period. We typically experience small timing
differences between the consumer purchase date and the date when a merchant
captures payment; however, these differences have historically been immaterial.
In December 2020, the implementation of such a change began with respect to our
largest merchant, Peloton, who implemented a change in the timing of when the
transaction is considered captured. This resulted in a delay in the recognition
of GMV and revenue related to these transactions in the period ended December
31, 2020.
For the year ended June 30, 2021, we facilitated $66.3 million more transaction
volume on our platform than was captured and confirmed by our merchants, an
increase of $54.1 million from the year ended June 30, 2020, during which we
facilitated $12.2 million more transaction volume than was captured and
confirmed by our merchants. As of June 30, 2021 and over the multi-year life of
our merchant partnership with Peloton, we had facilitated approximately $73.5
million more transaction volume than had been captured and confirmed by the
merchant. This is an increase of $73.5 million from June 30, 2020 and an
increase of $7.8 million from March 31, 2021.
For more information on factors affecting our performance, see “Item 1A. Risk
Factors.”
Impact of COVID-19

The COVID-19 pandemic has had, and continues to have, a significant impact on
the U.S. economy and the markets in which we operate. Our positive performance
during this period demonstrates the value and effectiveness of our platform, the
resiliency of our business model, and the capabilities of our risk management
and underwriting approach. However, some of the COVID-19 related trends
underlying this positive performance, in particular the significant revenue
generated from certain types of merchants, may not continue at current levels.
Diversified Mix of Merchant Partners
We have a diversified set of merchant partners across industries, which allows
us to capitalize on industry tailwinds and changing consumer spending behavior,
economic conditions, and other factors that may affect a particular type of
merchant or industry. For example, following the onset of the COVID-19 pandemic,
our revenue from merchant partners in the travel, hospitality, and entertainment
industries declined significantly, but we saw a significant increase in revenue
from merchant partners offering home fitness equipment, home office products,
and home furnishings. While we have benefited as a result of such consumer
spending trends, there can be no assurance that such trends will continue or
that the levels of total revenue and merchant network revenue that we generate
from merchants in fitness equipment, home office products, and home furnishings
industries will continue; in fact, we have begun to see these trends begin to
reverse as access to COVID-19 vaccinations has increased. The decline of sales
by our merchants for any reason will generally result in lower credit sales and,
therefore, lower loan volume and associated fee income for us. However, the
beginnings of economic reopening and recovery present new opportunities for
growth in our diverse merchant base, including early indications of strong
recovery in the travel and hospitality sectors, in which we believe we are well
positioned.
Dynamic Changes to Risk Model
As part of our risk mitigation platform, we closely track data and trends to
measure risk and manage exposure, leveraging our flexibility to quickly adjust
and adapt. In response to the macroeconomic impact of the COVID-19 pandemic, we
initiated a series of refinements to our risk model based on our real-time data
observations
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and analysis. We were able to respond, implement, and test the updates to our
model quickly due to the adaptability of our infrastructure, underwriting, and
risk management models. This resulted in decreases across both charge-offs and
delinquencies. As macroeconomic conditions improved, the embedded flexibility of
the model allowed our risk tolerances to return closer to pre-pandemic levels
while still maintaining low losses. Our proprietary risk model was not designed
to take into account the longer-term impacts of social, economic, and financial
disruptions caused by the COVID-19 pandemic, and while we continue to make
refinements to our risk model as new information becomes available to us, any
changes to our risk model may be ineffective and the performance of our risk
model may decline.
Resilient Allowance Model
At the onset of the COVID-19 pandemic in March 2020, we factored in updated loss
multiples using macroeconomic data to reflect stressed expected loss scenarios
emerging from forecasted delinquencies and defaults. This stressing of the model
resulted in an increase of the allowance for credit losses as a percentage of
loans held for investment from 8.9% as of February 29, 2020 to 14.8% as of
March 31, 2020. In the months subsequent to this, we have seen stronger than
expected repayment history in the portfolio, resulting in a release of the
allowance. As of June 30, 2021 and June 30, 2020, the allowance for credit
losses as a percentage of loans held for investment was 6% and 9%, respectively.
Our allowance for credit losses has declined as a percentage of loans held for
investment as we retained a higher portion of longer-term, 0% APR loans on our
balance sheet since completing our consolidated 2020-Z1 and 2020-Z2
securitizations during the year ended June 30, 2021. These longer-term, 0% APR
loans tend to have lower expected losses than our interest bearing loans and
generally carry lower loss reserves as a percentage of initial principal
balance. Additionally, improved macroeconomic conditions have resulted in an
overall improved credit outlook and reduced expected losses. Should
macroeconomic factors or expected losses change, we may increase or decrease the
allowance for credit losses.
For more information on the risks related to the COVID-19 pandemic, see “Item
1A. Risk Factors – Risks Related to Our Business and Industry.”
Components of Results of Operations

Revenue

Merchant Network Revenue
Merchant partners are charged a fee on transactions 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. 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 when we estimate that these
losses will be recoverable over the term of our contract with the merchant. 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. During
the years ended June 30, 2021, 2020, and 2019, we generated 44%, 50% and 50% of
our revenue, respectively, from merchant network fees.
Virtual Card Network Revenue
A smaller portion of our revenue comes from our Virtual Card product. 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, which is ultimately funded and maintained by us. 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
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issuer processor for virtual debit card transactions, as with all debit card
purchases, 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. This revenue is recognized as a percentage of
both our loan volume transacted on the payment processor network and net
interchange income, and this revenue is presented net of associated processing
fees. We generated 6%, 4%, and 3% of our revenue from virtual card network fees
for the years ended June 30, 2021, 2020, and 2019, respectively.
Interest Income
We also earn revenue through interest earned on loans facilitated by our
platform. Interest income includes interest charged to consumers over the term
of the consumers’ loans based on the principal outstanding and is calculated
using the effective interest method. In addition, interest income includes the
amortization of any discounts or premiums on loan receivables created upon
either the purchase of a loan from our originating bank partners or the
origination of a loan. These discounts and premiums are accreted or amortized
over the life of the loan using the effective interest method and represented
31%, 19%, and 18% of total interest income for the years ended June 30, 2021,
2020, and 2019, respectively. During the years ended June 30, 2021, 2020, and
2019, we generated 37%, 37%, and 45% of our revenue from interest income,
respectively.
Gain on Sales of Loans
We sell a portion of the loans we originate or purchase from our originating
bank partners to third-party investors. We recognize a gain or loss on sale of
such loans as the difference between the proceeds received, adjusted for initial
recognition of servicing assets and liabilities obtained at the date of sale,
and the carrying value of the loan. During the years ended June 30, 2021, 2020,
and 2019, we generated 10%, 6% and 0% of our revenue from gain (loss) on sales
of loans, respectively.
Servicing Income
We earn a specified fee from providing professional services to manage loan
portfolios on behalf of our third-party loan owners. Under the servicing
agreements with our capital markets partners, we are entitled to collect
servicing fees on the loans that we service, which are paid monthly based upon
an annual fixed percentage of the outstanding loan portfolio balance. During the
years ended June 30, 2021, 2020, and 2019, we generated 3%, 3%, and 2% of our
revenue from servicing fees, respectively.
We expect our revenue may vary from period to period based on, among other
things, the timing and size of onboarding of new merchants, the mix of 0% APR
loans versus interest-bearing loans with simple interest, type and mix of
products that our merchants offer to their customers, the rate of repeat
transactions, transaction volume, and seasonality of or fluctuations in usage of
our platform.
Operating Expenses
Our operating expenses consist of the loss on loan purchase commitment made to
our originating bank partners, the provision for credit losses, funding costs,
processing and servicing, technology and data analytics, sales and marketing,
and general and administrative expenses. Salaries and personnel-related costs,
including benefits, bonuses, and stock-based compensation expense, comprise a
significant component of several of these expense categories. An allocation of
overhead, such as rent and other occupancy expenses, is based on employee
headcount and included in processing and servicing, technology and data
analytics, sales and marketing, and general and administrative expenses.
As of June 30, 2021, we had 1,641 employees, compared to 893 employees as of
June 30, 2020. We increased our headcount and personnel related costs across our
business in order to support our growth strategy. We expect headcount to
continue to increase during fiscal year 2022 given our focus on growth and
expansion.
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Loss on Loan Purchase Commitment
We purchase certain loans from our originating bank partners that are processed
through our platform and our originating bank partner puts back to us. Under the
terms of the agreements with our originating bank partners, we are generally
required to pay the principal amount plus accrued interest for such loans. In
certain instances, our originating bank partners may originate loans with zero
or below market interest rates that we are required to purchase. In these
instances, we may be required to purchase the loan for a price in excess of the
fair market value of such loans, which results in a loss. These losses are
recognized as loss on loan purchase commitment in our consolidated statements of
operations and comprehensive loss. These costs are incurred on a per loan basis.
Provision for Credit Losses
Provision for credit losses consists of amounts charged against income during
the period to maintain an allowance for credit losses. Our allowance for credit
losses represents our estimate of the credit losses inherent in our loans held
for investment and is based on a variety of factors, including the composition
and quality of the portfolio, loan specific information gathered through our
collection efforts, current economic conditions, and our historical net
charge-off and loss experience. These costs are incurred on a per loan basis.
Funding Costs
Funding costs consist of the interest expense we incur on our borrowings and
amortization of fees and other costs incurred in connection with funding the
purchase and origination of loans. Excluding the amortization of debt issuance
costs, which totaled $6.4 million, $2.3 million, and $1.7 million for the years
ended June 30, 2021, 2020, and 2019, respectively, we incur an expense per loan
pledged to our debt funding sources.
Processing and Servicing
Processing and servicing expense consists primarily of payment processing fees,
third-party customer support and collection expense salaries and
personnel-related costs of our customer care team, and allocated overhead.
Payment processing costs are primarily driven by the number and dollar value of
consumer repayments which grow as the number of transactions and GMV processed
on our platform increases. Customer care loan servicing costs are primarily
staffing costs related to third-party and in-house loan servicing agents, the
demand for which generally increases with the number of transactions on our
platform. Collection fees are fees paid to agencies as percentages of the
dollars of repayment they recuperate from borrowers whose loans had previously
been charged off. Processing and servicing expenses are predominantly per
transaction processing fees and third-party staffing fees that generally
increase with consumer contact.
Technology and Data Analytics
Technology and data analytics expense consists primarily of the salaries,
stock-based compensation, and personnel-related costs of our engineering and
product employees as well as our credit and analytics employees who develop our
proprietary risk model, and totaled $182.2 million, $75.8 million, and $53.2
million for the years ended June 30, 2021, 2020, and 2019, respectively.
Additionally, for the years ended June 30, 2021, 2020, and 2019, $29.0 million,
$17.1 million, and $12.6 million, respectively, of salaries and personnel costs
that relate to the development of internal-use software were capitalized into
property, equipment and software, net on the consolidated balance sheets, and
amortized into technology and data analytics expense over the useful life of the
internal-use software. This amortization expense totaled $10.3 million, $5.5
million, and $2.9 million for the years ended June 30, 2021, 2020, and 2019,
respectively. Additional technology and data analytics expenses include platform
infrastructure and hosting costs, third-party data acquisition expenses, and
expenses related to the maintenance of existing technology assets and our
technology platform as a whole.
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Sales and Marketing
Sales and marketing expense consists primarily of salaries and personnel-related
costs, as well as costs of general marketing and promotional activities,
promotional event programs, sponsorships, and allocated overhead. In July 2020,
we recognized an asset in connection with a commercial agreement with Shopify in
which we granted warrants in exchange for their promotion of the Affirm platform
with potential new merchant partners. This asset represents the probable future
economic benefit to be realized over the four-year expected benefit period and
is valued based on the fair value of the warrants at the grant date. This value
is amortized on a straight-line basis over the four-year expected benefit period
into sales and marketing expense, due to the nature of the expected benefit.
Additionally, in order to continue to expand our consumer base, we may originate
certain loans via our wholly-owned subsidiaries with zero or below market
interest rates under certain merchant arrangements that we do not expect to
achieve positive revenue. In these instances, losses measured as the difference
between the par value and fair market value of such loans are recorded as a
sales and marketing expense when the loans are originated. These losses are
recorded as sales and marketing expense. These losses totaled $1.7 million
during the year ended June 30, 2021. We expect that our sales and marketing
expense will increase as a percentage of revenue as we expand our sales and
marketing efforts to drive our growth, expansion, and diversification.
General and Administrative
General and administrative expenses consist primarily of expenses related to our
finance, legal, risk operations, human resources, and administrative personnel.
General and administrative expenses also include costs related to fees paid for
professional services, including legal, tax and accounting services, and
allocated overhead.
We expect to incur additional expenses as a result of operating as a public
company, including costs to comply with the rules and regulations applicable to
companies listed on a national securities exchange, costs related to compliance
and reporting obligations pursuant to the rules and regulations of the SEC, and
increased expenses for insurance, investor relations, and professional services.
We expect that our general and administrative expense will increase in absolute
dollars as our business grows.
Other Income and Expenses
Other Income (Expense), Net
Other income (expense), net consists of interest earned on our money market
funds included in cash and cash equivalents and restricted cash, gains and
losses incurred on both our constant maturity swaps and as related to bifurcated
derivatives associated with our convertible debt, and fair value adjustments
resulting from changes in the fair value of our contingent consideration
liability.
Income Tax (Benefit) Expense
Our income tax (benefit) expense consists of U.S. federal and state income taxes
and Canadian federal and provincial income taxes. Through June 30, 2021, we had
not been required to pay any material U.S. federal, state, or foreign income
taxes due to accumulated net operating losses.
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Results of Operations

The following tables set forth selected consolidated statements of operations
and comprehensive loss data for each of the periods presented in dollars:

Year Ended June 30,
2021 2020 2019
(in thousands)
Revenue
Merchant network revenue $ 379,551 $ 256,752 $ 132,363
Virtual card network revenue 49,851 19,340 7,911
Total network revenue 429,402 276,092 140,274
Interest income (1) 326,417 186,730 119,404
Gain on sales of loans (1) 89,926 31,907 (440)
Servicing income 24,719 14,799 5,129
Total Revenue, net $ 870,464 $ 509,528 $ 264,367
Operating Expenses (2)
Loss on loan purchase commitment $ 246,700 $ 161,452 $ 73,383
Provision for credit losses 65,878 105,067 78,025
Funding costs 52,700 32,316 25,895
Processing and servicing 73,767 49,831 32,669
Technology and data analytics 256,082 122,378 76,071
Sales and marketing 184,279 25,044 16,863
General and administrative 370,251 121,230 88,902
Total Operating Expenses 1,249,657 617,318 391,808
Operating Loss $ (379,193) $ (107,790) $ (127,441)
Other income (expense), net (54,073) (4,432) 7,022
Loss Before Income Taxes $ (433,266) $ (112,222) $ (120,419)
Income tax (benefit) expense (2,343) 376 36
Net Loss $ (430,923) $ (112,598) $ (120,455)
Excess return to preferred stockholders on repurchase – (13,205) (14,113)
Net Loss Attributable to Common Stockholders $ (430,923) $ (125,803) $ (134,568)
Other Comprehensive Income (Loss)
Foreign currency translation adjustments $ 7,042 $ (302) $ –
Unrealized gains on investments 29 – –
Net Other Comprehensive Income (Loss) 7,071 (302) –
Comprehensive Loss $

(423,852) $ (112,900) $ (120,455)

(1) Upon purchase of a loan from our originating bank partners at a price above
the fair market value of the loan or upon the origination of a loan with a par
value in excess of the fair market value of the loan, a discount is included in
the amortized cost basis of the loan. For loans held for investment, this
discount is amortized over the life of the loan into interest income. When a
loan is sold to a third-party loan buyer, the unamortized discount is released
in full at the time of sale and recognized as part of the gain or loss on sales
of loans. However, the cumulative value of the loss on loan purchase commitment
or loss on origination, the interest income recognized over time from the
amortization of discount while retained, and the release of discount into gain
(loss) on sales of
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loans, together net to zero over the life of the loan. The following table
details activity for the discount, included in loans held for investment, for
the periods indicated:
Year Ended June 30,
2021 2020 2019
(in thousands)
Balance at the beginning of the period $ 28,659 $ 13,068 $ 5,201
Additions from loans purchased, net of refunds 264,725 157,426 $ 70,700
Amortization of discount (101,078) (35,251) $ (21,833)
Unamortized discount released on loans sold (139,129) (106,584) $ (41,000)
Balance at the end of the period $ 53,177

$ 28,659 $ 13,068

(2) Amounts include stock-based compensation as follows:

Year Ended June 30,
2021 2020 2019
(in thousands)
General and administrative $ 183,055 $ 13,682 $ 22,647
Technology and data analytics 83,390 12,285 13,913
Sales and marketing 19,181 4,040 4,179
Processing and servicing 2,407 82 132
Total stock-based compensation in operating expenses 288,033 30,089 40,871

Capitalized into property, equipment and software,
net

13,999 2,921 2,882
Total stock-based compensation expense $

302,032 $ 33,010 $ 43,753

Comparison of the Years Ended June 30, 2021 and 2020

Total Revenue, net
Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
Merchant network revenue $ 379,551 $ 256,752 $ 122,799 48 %
Virtual card network revenue 49,851 19,340 30,511 158 %
Total network revenue 429,402 276,092 153,310 56 %
Interest income 326,417 186,730 139,687 75 %
Gain (loss) on sales of loans 89,926 31,907 58,019 182 %
Servicing income 24,719 14,799 9,920 67 %
Total Revenue, net $ 870,464 $ 509,528 $ 360,936 71 %

Total Revenue, net for the year ended June 30, 2021 increased by $360.9 million
or 71%, compared to the year ended June 30, 2020, primarily due to an increase
of $3,654.8 million or 79% in GMV on our platform, from $4,637.2 million for the
year ended June 30, 2020 to $8,292.0 million for the year ended June 30, 2021.
This increase in GMV was driven by the strong network effects of the expansion
of our active merchant base from 5,664 as of June 30, 2020 to 28,995 as of
June 30, 2021, growth in active consumers from 3.6 million as of June 30, 2020
to 7.1 million as of June 30, 2021, and an increase in average transactions per
consumer from 2.1 as of June 30, 2020 to 2.3 as of June 30, 2021.
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Merchant network revenue for the year ended June 30, 2021 increased by $122.8
million or 48%, compared to the year ended June 30, 2020. Merchant network
revenue as a percentage of GMV for the year ended June 30, 2021 decreased to
4.6% compared to 5.5% for the year ended June 30, 2020.
Merchant network revenue growth is generally correlated with both GMV growth and
the mix of loans on our platform as different loan characteristics are
positively or negatively correlated with merchant fee revenue as a percentage of
GMV. In particular, merchant network revenue as a percentage of GMV typically
increases with the term length and average order value of our loans (“AOV”), and
typically decreases in higher APR loans. Specifically, 0% APR loans typically
carry higher merchant fees as a percentage of GMV. The increases in merchant
network revenue during the year ended June 30, 2021 were primarily driven by
growth in GMV, partially offset by reductions in average term length and AOV.
For both the years ended June 30, 2021 and June 30, 2020, 0% APR loans accounted
for 43% of our total GMV. For the year ended June 30, 2021, loans with a term
length greater than 12 months accounted for 29% of GMV, compared with 34% for
the year ended June 30, 2020. AOV was lower at $550 for the year ended June 30,
2021, compared to $609 for the year ended June 30, 2020.
These increases were partially offset by a reduction of merchant network revenue
of $11.4 million for the year ended June 30, 2021 associated with the creation
of discounts on self-originated loans with a par value in excess of the fair
value of such loans. These discounts on certain self-originated loans are
amortized into interest income over the life of the loan and were not incurred
during the year ended June 30, 2020.
Additionally, during the third fiscal quarter of 2021, we recorded a reduction
of merchant network revenue of $3.1 million associated with estimated merchant
fees previously earned on the facilitation of transactions related to products
involved in a recall announced by our largest merchant partner, Peloton. This
estimate was derived in part based on estimates of return rates provided by
Peloton for the quarter ended March 31, 2021, in its Form 10-Q. Based on actual
return activity observed, we recorded a further reduction of merchant network
revenue of $2.3 million during the fourth fiscal quarter, bringing the total
reduction of merchant network revenue associated with the recall to $5.4 million
for the year ended June 30, 2021.
Virtual card network revenue for the year ended June 30, 2021 increased by $30.5
million or 158%, compared to the year ended June 30, 2020. This increase was
driven by an increase in GMV processed through our issuer processor of 148% for
the year ended June 30, 2021 due to increased activity on our virtual
card-enabled mobile application and growth in existing and new merchants
integrated using our virtual card platform, as well as improved economics with
our virtual card issuer processor partner.
Interest income for the year ended June 30, 2021 increased by $139.7 million or
75%, compared to the year ended June 30, 2020. Generally, interest income is
correlated with the changes in the average balance of loans held for investment,
as we recognize interest on loans held for investment using the effective
interest method over the life of the loan. The average balance of loans held for
investment increased by 87% to $1,710.9 million for the year ended June 30,
2021, compared to the same periods in the prior fiscal year.
As a percentage of average loans held for investment, total interest income
decreased slightly from approximately 20% during the year ended June 30, 2020 to
19% during the year ended June 30, 2021. This change was driven by an increase
in the average proportion of 0% APR loans being held on our consolidated balance
sheet as a percentage of the total loans held for investment, which increased
from 29% during the year ended June 30, 2020, compared to 46% during the year
ended June 30, 2021. The shift was largely due to strong volume of longer-term
0% APR loans as well as short-term Split Pay loans being held for investment and
the addition of our 0% APR 2020-Z1 and 2020-Z2 consolidated securitizations.
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While we do recognize interest income on 0% APR loans via the amortization of
the loan discount, this is generally earned at a lower rate than consumer
interest on interest-bearing loans. The total amortization of discounts on loans
held for investment increased by $65.8 million or 187%, for the year ended
June 30, 2021, compared with the year ended June 30, 2020, and represented 31%
of total interest income for the year ended June 30, 2021, compared to 19% for
the year ended June 30, 2020. This increase included the amortization of
discounts arising from self-originated loans held for investment of $18.2
million during the year ended June 30, 2021, which was nil for the year ended
June 30, 2020.
Gain (loss) on sales of loans for the year ended June 30, 2021 increased by
$58.0 million or 182%, compared to the year ended June 30, 2020. We sold loans
with an unpaid balance of $3,232.9 million for the year ended June 30, 2021 and
$2,664.4 million for the year ended June 30, 2020, for which we retained
servicing rights. This increase was primarily due to higher loan sale volume,
favorable loan sale pricing terms, and optimizing the allocation of loans to
loan buyers with higher pricing terms.
Servicing income for the year ended June 30, 2021 increased by $9.9 million or
67%, compared to the year ended June 30, 2020. This increase was primarily due
to an increase in the average unpaid principal balance of loans owned by
third-party loan owners and increases in negotiated servicing rates with new and
existing third-party loan owners. Additionally, during the year ended June 30,
2020, we recognized a reduction of servicing income of $1.0 million related to
the changes in fair value of servicing assets and liabilities compared with an
addition to servicing income of $1.5 million during the year ended June 30,
2021.
Operating Expenses
Year Ended June 30,
2021 2020
(in thousands)
Loss on loan purchase commitment $ 246,700 $ 161,452
Provision for credit losses 65,878 105,067
Funding costs 52,700 32,316
Processing and servicing 73,767 49,831
Total transaction costs 439,045 348,666
Technology and data analytics 256,082 122,378
Sales and marketing 184,279 25,044
General and administrative 370,251 121,230
Total Operating Expenses $ 1,249,657 $ 617,318

Loss on Loan Purchase Commitment

Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
Loss on loan purchase commitment $ 246,700 $ 161,452 $ 85,248 53 %
Percentage of total revenue, net 28 % 32 %

Loss on loan purchase commitment for the year ended June 30, 2021 increased by
$85.2 million or 53%, compared to the year ended June 30, 2020. This increase
was due to a significant increase in the volume of loans purchased above fair
market value, primarily as a result of an increase in purchases of 0% APR loans
from our originating bank partners during the period. During the year
ended June 30, 2021, we purchased $7.9 billion of loan receivables from our
originating bank partners, representing an increase of $3.2 billion or 68%,
compared to the year ended June 30, 2020.
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Provision for Credit Losses
Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
Provision for credit losses $ 65,878 $ 105,067 $ (39,189) (37) %
Percentage of total revenue, net 8 % 21 %

Provision for credit losses generally represents the amount of expense required
to maintain the allowance for credit losses on our consolidated balance sheet,
which represents management’s estimate of future losses. In the event that our
loans outperform expectation and/or we reduce our expectation of credit losses
in future periods, we may release reserves and thereby reduce the allowance for
credit losses, yielding income in the provision for credit losses. The provision
is determined by the change in estimates for future losses and the net
charge-offs incurred in the period. We record provision expense for each loan we
retain as loans held for investment, whether we originate the loan or purchase
it from one of our originating bank partners.
At the onset of the COVID-19 pandemic in March 2020, we factored in updated loss
multiples using macroeconomic data to reflect stressed expected loss scenarios
emerging from forecasted delinquencies and defaults. This stressing of the model
resulted in an increase of the allowance for credit losses up to 14.6% at its
peak as of March 31, 2020. In the months subsequent to this, we have seen
stronger than expected repayment history in the portfolio, resulting in a
release of the allowance over time. While the allowance for credit losses
increased by 24% compared to June 30, 2020, the balance of loans held for
investment increased 96% compared to the prior period. As of June 30, 2021, the
allowance for credit losses as a percentage of loans held for investment
decreased to 5.8%, compared to 9.2% as of June 30, 2020.
This decrease in the allowance for credit losses as a percentage of loans held
for investment over time was due to a combination of factors. Firstly, continued
stronger than expected repayment performance of the portfolio accounted for a
decrease of 62% in our net charge-offs as a percentage of our average loans held
for investment to 3.0%, compared with 7.9% for the year ended June 30, 2020.
Secondly, we began transitioning to a new underlying data model which
incorporates internal improvements to our underwriting and collections processes
while allowing for a more granular segmentation of the loan portfolio. This
change in model resulted in a decrease in the allowance of approximately $48.2
million. These decreases were offset by allowances recognized on new purchases
and originations of loans held for investment in the period, though with
generally higher credit quality and pledged to securitization trusts. This
combination of factors, coupled with the in-period charge-offs and recoveries,
resulted in a decrease in the provision for credit losses of $39.2 million
compared to the year ended June 30, 2020.
Funding Costs
Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
Funding costs $ 52,700 $ 32,316 $ 20,384 63 %
Percentage of total revenue, net 6 % 6 %

Funding costs for the year ended June 30, 2021 increased by $20.4 million or
63%, compared to the year ended June 30, 2020. Funding costs for a given period
are correlated with the sum of the average balance of funding debt and the
average balance of notes issued by securitization trusts. This increase was
primarily due to the introduction of notes issued by securitization trusts
during the current fiscal year, which bear interest at fixed rates. The average
balance of notes issued by securitization trusts during the year ended June 30,
2021 was $747.0 million, which did not exist during the prior year period. The
average balance of funding debt for the year ended June 30, 2021 increased by
$38.0 million or 5%, compared to the year ended June 30, 2020, while the average
reference interest rate decreased by 91% during the period.
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Processing and Servicing
Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
Processing and servicing $ 73,767 $ 49,831 $ 23,936 48 %
Percentage of total revenue, net 8 % 10 %

Processing and servicing expense for the year ended June 30, 2021 increased by
$23.9 million or 48%, compared to the year ended June 30, 2020. This increase
was primarily due to a $12.5 million or 57% increased in payment processing fees
due to increased servicing activity and payments volume for the year ended
June 30, 2021. Additionally, processing fees paid to our customer referral
partners increased by $3.4 million or 189% for the year ended June 30, 2021.
Personnel costs increased by $6.4 million or 119% for the year ended June 30,
2021 driven by growth in headcount, while third-party loan servicing and
collections spend remained flat, increasing only 4% due to vendor cost
improvements.
Technology and Data Analytics
Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
Technology and data analytics $ 256,082 $ 122,378 $ 133,704 109 %
Percentage of total revenue, net 29 % 24 %

Technology and data analytics expense for the year ended June 30, 2021 increased
by $133.7 million or 109%, compared to the year ended June 30, 2020. This
increase was primarily due to a $106.4 million or 140%, increase in engineering,
product, and data science personnel costs for the year ended June 30, 2021,
compared to the year ended June 30, 2020, net of capitalized costs for
internal-use software, to continue to support our growth and technology platform
as a whole. The largest component of these personnel costs was stock-based
compensation, which accounted for $71.1 million of the increase compared to the
year ended June 30, 2020, largely due to the vesting of RSUs for which the
service-based condition had been met prior to the IPO and the performance-based
condition was met on the IPO date.
Additionally, there was a $15.1 million or 63%, increase in data infrastructure
and hosting costs for the year ended June 30, 2021, compared to the year ended
June 30, 2020, as well as a $0.9 million or 6%, increase in underwriting data
provider costs for the year ended June 30, 2021 compared to the year
ended June 30, 2020. Our data infrastructure and hosting and underwriting and
data provider costs all benefited from unit level cost improvements achieved as
a result of vendor contract renegotiations.
Sales and Marketing
Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
Sales and marketing $ 184,279 $ 25,044 $ 159,235 636 %
Percentage of total revenue, net 21 % 5 %

Sales and marketing expense for the year ended June 30, 2021 increased by
$159.2 million or 636%, compared to the year ended June 30, 2020. This increase
was primarily due to $64.8 million of expense incurred during the year
ended June 30, 2021 associated with the amortization of our commercial agreement
asset with Shopify, which was recognized in July 2020. This asset represents the
probable future economic benefit to be realized over the four-year expected
benefit period and is valued based on the fair value of the warrants granted to
Shopify under such commercial agreement at the grant date. This value is
amortized on a straight-line basis over the four-year expected benefit period.
Additionally, stock-based compensation related to employees in the sales and
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marketing functions increased $15.1 million or 375%, compared to the year
ended June 30, 2020, largely due to the vesting of RSUs for which the
service-based condition had been met prior to the IPO and the performance-based
condition was met on the IPO date.
Furthermore, there was a $32.3 million or 1,154% increase in brand and consumer
marketing spend during the year ended June 30, 2021 compared to the year
ended June 30, 2020, associated with our expanded brand-activation, holiday
shopping, lifestyle, and travel marketing campaigns, as well as a $12.4 million
or 2,480% increase in business-to-business marketing spend compared to the year
ended June 30, 2020. Prior to this fiscal year, we had only engaged in very
limited marketing efforts, primarily in the form of co-marketing with merchants.
General and Administrative
Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
General and administrative $ 370,251 $ 121,230 $ 249,021 205 %
Percentage of total revenue, net 43 % 24 %

General and administrative expense for the year ended June 30, 2021 increased by
$249.0 million or 205%, compared to the year ended June 30, 2020. This increase
was primarily due to an increase of $198.9 million or 263% in personnel costs
during the year ended June 30, 2021, compared to the year ended June 30, 2020,
as a result of increased headcount as we continue to grow our finance, legal,
operations, and administrative organizations. The largest component of these
personnel costs was stock-based compensation, which increased by $169.4 million
compared to the year ended June 30, 2020. This was primarily due to $83.9
million of expense recognized during the year ended June 30, 2021 based on a
long-term, multi-year performance-based stock option award granted to our Chief
Executive Officer prior to our IPO, as well as the vesting of RSUs for which the
service-based condition had been met prior to the IPO and the performance-based
condition was met on the IPO date.
Additionally, professional fees increased by $16.3 million or 133% during the
year ended June 30, 2021, compared to the year ended June 30, 2020, to support
our initial public offering, acquisitions, international expansion, and
regulatory compliance programs.
Other Income, net
Year Ended June 30, Change
2021 2020 $ %
(in thousands, except percentage)
Other income, net $ (54,073) $ (4,432) $ (49,641) 1,120 %
Percentage of total revenue, net (6) % (1) %

For the year ended June 30, 2021, other income (expense), net, was primarily
comprised of a loss of $87.2 million recognized based on the change in fair
value of the contingent consideration liability associated with our acquisition
of PayBright driven by changes in the value of our common stock, and a gain of
$30.1 million recognized upon the conversion of convertible notes into shares of
Series G-1 preferred stock. The conversion of convertible notes was accounted
for as a debt extinguishment since the number of shares of Series G-1 preferred
stock issued upon conversion was variable and this gain represented the
difference between the carrying value of the debt at the time of extinguishment
and the allocated proceeds. Additionally, we recognized a loss of $(1.6) million
related to increases in the fair value of investments.
For the year ended June 30, 2020, other income (expense), net was primarily
comprised of interest earned on money market funds of $3.9 million, offset by
losses on our constant maturity swaps of $4.0 million and a loss of $3.8 million
on the extinguishment of our convertible debt derivative liability.
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Quarterly Results of Operations and Other Data

The following tables set forth our selected unaudited quarterly consolidated
statements of operations data for each of the quarters indicated, as well as
the percentage that each line item represents of our total revenue for each
quarter presented. The information for each quarter has been prepared on a basis
consistent with our audited consolidated financial statements and reflect, in
the opinion of management, all adjustments which consist only of a normal,
recurring nature that are necessary for a fair statement of the financial
information contained in those financial statements. Our historical results are
not necessarily indicative of the results that may be expected in the future.
The following quarterly financial data should be read in conjunction with our
consolidated financial statements included elsewhere in this Form 10-K. Totals
may not foot due to rounding.
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Three Months Ended
December 31, September 30, December 31, September 30,
June 30, 2021 March 31, 20211 2020 2020 June 30, 2020 March 31, 2020 2019 2019
(in thousands) (unaudited)

Revenue

Merchant network revenue $ 88,657 $ 97,999

$ 99,630 $ 93,265 $ 85,249 $ 67,350 $ 67,764 $ 36,389
Virtual card network revenue 19,264

13,809 10,820 5,958 2,699 5,930 7,110 3,601

Total network revenue $ 107,921 $ 111,808

$ 110,450 $ 99,223 $ 87,948 $ 73,280 $ 74,874 $ 39,990
Interest income 103,793 94,530 73,857 54,237 49,117 52,372 45,073 40,168
Gain (loss) on sales of
loans 42,582 16,350 14,560 16,434 11,578 9,866 4,738 5,725
Servicing income 7,484 7,977 5,174 4,084 4,689 2,755 5,291 2,064
Total Revenue, net $ 261,780 $ 230,665 $ 204,041 $ 173,978 $ 153,332 $ 138,273 $ 129,976 $ 87,947
Operating Expenses
Loss on loan purchase
commitment $ 51,010 $ 62,054

$ 67,768 $ 65,868 $ 55,311 $ 43,519 $ 42,661 $ 19,961
Provision for credit losses 25,489

(1,063) 12,521 28,931 (32,171) 82,216 30,178 24,844
Funding costs 15,623 14,665 12,060 10,352 7,817 8,204 8,167 8,128
Processing and servicing 21,924 21,543 16,802 13,498 14,806 13,678 11,652 9,695
Technology and data
analytics 71,233 109,447 41,634 33,768 31,744 33,654 31,612 25,368
Sales and marketing 63,544 59,041 39,112 22,582 5,066 7,108 7,651 5,219
General and administrative 137,647 159,415 40,916 32,273 31,439 31,399 30,688 27,704

Total Operating Expenses $ 386,470 $ 425,102

$ 230,813 $ 207,272 $ 114,012 $ 219,778 $ 162,609 $ 120,919
Operating (Loss) Income $ (124,690) $ (194,437)

$ (26,772) $ (33,294) $ 39,320 $ (81,505) $ (32,633) $ (32,972)
Other income (expense), net (5,985)

(77,773) 240 29,445 (4,413) (4,022) 1,730 2,273
(Loss) Income Before Income
Taxes $ (130,675) $ (272,210)

$ (26,532) $ (3,849) $ 34,907 $ (85,527) $ (30,903) $ (30,699)
Income tax (benefit) expense (2,448)

(70) 78 97 94 93 93 96
Net (Loss) Income $ (128,227) $ (272,140) $ (26,610) $ (3,946) $ 34,813 $ (85,620) $ (30,996) $ (30,795)

1 We determined that stock based compensation recorded during the three months
ended March 31, 2021 was understated, as the estimated fair value of RSUs
granted during the three months ended December 31, 2020 did not reflect an
increase in share value due to the anticipated IPO. As a result, the
accompanying unaudited interim financial information for the three months ended
March 31, 2021 has been adjusted to reflect additional stock based compensation
expense of $25.0 million from amounts previously reported.

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Operating expenses include stock-based compensation as follows:
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30,
June 30, 2021 March 31, 2021 2020 2020 2020 2020 2019 2019
(in thousands) (unaudited)

Processing and servicing $ 473 $ 1,621 $

287 $ 26 $ 28 $ 27 $ 32 $ (5)
Technology and data
analytics 21,922 56,699 2,556 2,213 1,988 3,360 3,610 3,327
Sales and marketing 6,415 11,425 581 760 868 918 963 1,291
General and
administrative 81,771 94,983 3,097 3,204 2,496 3,665 3,689 3,812
Total stock-based
compensation expense $ 110,581 $ 164,728 $ 6,521 $ 6,203 $ 5,380 $ 7,970 $ 8,294 $ 8,425

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The following table presents each line item as a percentage of our total revenue
for each quarter presented:
Three Months Ended
June 30, March 31, December 31, September 30, June 30, March 31, December 31, September 30,
2021 2021 2020 2020 2020 2020 2019 2019
Revenue
Merchant network revenue 34 % 42 % 49 % 54 % 56 % 49 % 52 % 41 %
Virtual card network revenue 7 % 6 % 5 % 3 % 2 % 4 % 5 % 4 %
Total network revenue 41 % 48 % 54 % 57 % 57 % 53 % 58 % 45 %
Interest income 40 % 41 % 36 % 31 % 32 % 38 % 35 % 46 %
Gain (loss) on sales of
loans 16 % 7 % 7 % 9 % 8 % 7 % 4 % 7 %
Servicing income 3 % 3 % 3 % 2 % 3 % 2 % 4 % 2 %
Total Revenue, net 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Operating Expenses
Loss on loan purchase
commitment 19 % 27 % 33 % 38 % 36 % 31 % 33 % 23 %
Provision for credit losses 10 % – % 6 % 17 % (21) % 59 % 23 % 28 %
Funding costs 6 % 6 % 6 % 6 % 5 % 6 % 6 % 9 %
Processing and servicing 8 % 9 % 8 % 8 % 10 % 10 % 9 % 11 %
Technology and data
analytics 27 % 47 % 20 % 19 % 21 % 24 % 24 % 29 %
Sales and marketing 24 % 26 % 19 % 13 % 3 % 5 % 6 % 6 %
General and administrative 53 % 69 % 20 % 19 % 21 % 23 % 24 % 32 %
Total Operating Expenses 148 % 184 % 113 % 119 % 74 % 159 % 125 % 137 %
Operating (Loss) Income (48) % (84) % (13) % (19) % 26 % (59) % (25) % (37) %
Other income (expense), net (2) % (34) % – % 17 % (3) % (3) % 1 % 3 %
(Loss) Income Before Income
Taxes (50) % (118) % (13) % (2) % 23 % (62) % (24) % (35) %
Income tax (benefit) expense (1) % – % – % – % – % – % – % – %
Net (Loss) Income (49) % (118) % (13) % (2) % 23 % (62) % (24) % (35) %

The following table sets forth some of the key operating metrics we use to
evaluate our business for each of the periods indicated:

Three Months Ended
December 31, September 30, December 31, September 30,
June 30, 2021 March 31, 2021 2020 2020 June 30, 2020 March 31, 2020 2019 2019
(in thousands) (unaudited)
Gross Merchandise
Volume (GMV) $ 2,483,616 $ 2,257,374 $ 2,075,112 $ 1,475,929 $ 1,202,846 $ 1,231,484 $ 1,341,584 $ 861,306

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Quarterly Revenue Trends
Total Revenue, net has generally increased sequentially in each of the periods
presented due to the continued growth in GMV, increase in active consumers, and
expansion of our merchant network. We generally experience seasonality in our
business in terms of changes in GMV in accordance with retail and e-commerce
trends. We typically see increased revenue in the second fiscal quarter of each
year as a result of the increased GMV occurring as a part of the holiday
shopping season, which is most evident in merchant network revenue as this
revenue is recognized when the terms of the executed merchant agreement have
been fulfilled and the merchant successfully confirms the transaction. We
believe that this seasonality has affected and will continue to affect our
quarterly results; however, to date its effect may have been masked by our rapid
growth.
Since we recognize interest income on loans held for investment over the term of
the loan, a substantial portion of the revenue we report in each period is
attributable to loans created via transactions occurring in prior periods.
Consequently, increases or decreases in GMV in one period may not be immediately
reflected in our revenue for that period and may positively or negatively affect
our revenue in future periods. This effect is lessened by the relatively short
duration of loans held for investment but may be increased by shifts in the
relative proportion of loans held for investment compared to loans sold to
third-party loan buyers.
Quarterly Operating Expense Trends
Operating expenses generally have increased sequentially in each of the periods
presented, other than the fourth fiscal quarter of 2020 and fourth fiscal
quarter of 2021. Quarterly increases in operating expenses are primarily due to
increased costs of operations as our GMV and total platform portfolio have grown
and due to increased investments in headcount and other related expenses to
support our growth. We expect headcount to continue to increase given our focus
on growth and expansion.
The provision for credit losses represents the amount of expense required to
maintain the allowance of credit losses on our balance sheet which represents
management’s estimate of future losses. The provision is determined by the
change in estimates for future losses and the net charge offs incurred in the
period. Our provision for losses has generally grown in line with the increase
in loans held for investment, with the exception of the third and fourth fiscal
quarters of 2020 as well as the second and third fiscal quarters of 2021.
In March 2020, at the onset of the COVID-19 pandemic, we increased our allowance
for loan losses significantly after factoring in updated loss multiples using
macroeconomic data to reflect stressed expected loss scenarios emerging from
forecasted delinquencies and defaults. This resulted in a significant increase
in provision for credit losses during the period. However, during the following
quarter ended June 30, 2020, we saw stronger than expected repayment history in
the portfolio, resulting in a decrease in these stressed loss multiples and
release of the allowance and therefore, a significant decrease in operating
expenses.
During the second and third fiscal quarters of 2021, we saw similarly stronger
than expected repayment history as well as improving macroeconomic factors
resulting in reduced provision expense. Additionally, we began transitioning to
a new underlying data model which incorporates internal improvements to our
underwriting and collections processes while allowing for a more granular
segmentation of the loan portfolio. This change in model resulted in a decrease
to the allowance. These decreases were largely offset by allowances recognized
on new purchases and originations of loans held for investment in the period
with generally higher credit quality and pledged to securitization trusts,
however, this combination of factors, coupled with the in-period charge-offs and
repayments, resulted in income recognized from the provision for credit losses
of during the three months ended March 31, 2021. Should similar macroeconomic or
other factors arise that change our loss expectations, we may increase or
decrease the allowance.
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Liquidity and Capital Resources

Sources and Uses of Funds
We have incurred losses since our inception, accumulating a deficit of
$888.4 million and $447.2 million as of June 30, 2021 and June 30, 2020,
respectively. We have historically financed the majority of our operating and
capital needs through the private sales of equity securities, borrowings from
debt facilities and convertible debt, third-party loan sale arrangements, and
cash flows from operations. In September and October 2020, we issued an
aggregate of 21,836,687 shares of Series G preferred stock for aggregate cash
proceeds of $435.1 million. On January 15, 2021, we closed an initial public
offering of our Class A common stock with cash proceeds, before expenses, of
$1.3 billion.
As of June 30, 2021, our principal sources of liquidity were cash and cash
equivalents, available capacity from revolving debt facilities, revolving
securitizations, forward flow loan sale arrangements, and certain cash flows
from our operations. We believe that our existing cash balances, available
capacity under our revolving debt facilities, revolving securitizations and
off-balance sheet loan sale arrangements, and cash from operations, are
sufficient to meet both our existing operating, working capital, and capital
expenditure requirements and our currently planned growth for at least the next
12 months. We cannot provide assurance, however, that our business will generate
sufficient cash flows from operations or that future borrowings will be
available to us in an amount sufficient to enable us to fund our liquidity
needs. Our ability to do so depends on prevailing economic conditions and other
factors, many of which are beyond our control. Our on- and off-balance sheet
facilities provide funding subject to various constraining limits on the
financed portfolios. These limits are generally tied to loan-level attributes
such as loan term, credit quality, and interest rate, as well as borrower- and
merchant-level attributes.
Cash and Cash Equivalents
As of June 30, 2021, we had approximately $1.5 billion of cash to fund our
future operations compared to approximately $267.1 million as of June 30, 2020.
Our cash and cash equivalents were held primarily for continued investment in
our business, for working capital purposes, and to facilitate a portion of our
lending activities. Our policy is to invest cash in excess of our immediate
working capital requirements in short-term investments and deposit accounts to
preserve the principal balance and maintain adequate liquidity.
Restricted Cash
Restricted cash consists primarily of: (i) deposits restricted by standby
letters of credit for office leases; (ii) funds held in accounts as collateral
for our originating bank partners; and (iii) servicing funds held in accounts
contractually restricted by agreements with warehouse credit facilities and
third-party loan owners. We have no ability to draw on such funds as long as
they remain restricted under the applicable arrangements. Our policy is to
invest restricted cash held in debt facility related accounts and cash deposited
as collateral for leases in investments designed to preserve the principal
balance and provide liquidity. Accordingly, such cash is invested primarily in
money market instruments that offer daily purchase and redemption and provide
competitive returns consistent with our policies and market conditions.
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Funding Debt
The following table summarizes our funding debt facilities as of June 30, 2021:
Maturity Fiscal Year Borrowing Capacity Principal Outstanding
(in thousands)

2022 $ 177,298 $ 104,159
2023 1,325,000 460,289
2024 250,000 22,705
2025 – –
2026 250,000 102,203
Total $ 2,002,298 $ 689,356

Warehouse Credit Facilities
Through trusts, we entered into warehouse credit facilities with certain lenders
to finance the purchase and origination of our loans. These trusts are
consolidated variable interest entities (“VIE”), and each trust entered into a
credit agreement and security agreement with a commercial bank as administrative
agent and a national banking association as collateral trustee and paying agent.
Borrowings under these agreements are referred to as funding debt. These credit
agreements contain operating covenants, including limitations on the incurrence
of certain indebtedness and liens, restrictions on certain intercompany
transactions, and limitations on the amount of dividends and stock repurchases.
Our funding debt facilities include concentration limits for various loan
characteristics including credit quality, product mix, geography, and merchant
concentration. As of June 30, 2021, we were in compliance with all applicable
covenants in the agreements. Refer to Note 11. Debt of the accompanying notes to
the consolidated financial statements included elsewhere in this Form 10-K for
additional information.
These revolving facilities mature between 2022 and 2026, and subject to covenant
compliance generally permit borrowings up to 12 months prior to the final
maturity date. Borrowings under these facilities generally occur multiple times
per week, and generally coincide with the purchase of loans from our originating
bank partners. We manage liquidity by accessing diversified pools of capital and
avoid concentration with any single counterparty; we are diversified across
different types of investors including investment banks, asset managers, and
insurance companies.
Borrowings under these facilities bear interest at an annual benchmark rate of
LIBOR or at an alternative commercial paper rate (which is either (i) the per
annum rate equivalent to the weighted-average of the per annum rates at which
all commercial paper notes were issued by certain lenders to fund advances or
maintain loans, or (ii) the daily weighted-average of LIBOR, as set forth in the
applicable credit agreement), plus a spread ranging from 1.70% to 4.00%.
Interest is payable monthly. In addition, these agreements require payment of a
monthly unused commitment fee ranging from 0.20% to 0.75% per annum on the
undrawn portion available.
Other Funding Facilities
Prior to our acquisition of PayBright on January 1, 2021, PayBright entered into
various credit facilities utilized to finance the origination of loans in
Canada. Similar to our warehouse credit facilities, borrowings under these
agreements are referred to as funding debt, and proceeds from the borrowings may
only be used for the purposes of facilitating loan funding and origination.
These facilities are secured by PayBright loan receivables pledged to the
respective facility as collateral, mature in 2022, and bear interest based on a
commercial paper rate plus a spread ranging from 1.25% to 4.25%.
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Convertible Debt
On April 29, 2020, we entered into a note purchase agreement with various
investors and issued convertible notes in an aggregate amount of $75.0 million
with a maturity date of April 29, 2021 and bearing interest at a rate of 1.00%
per annum.
On September 11, 2020, as part of our Series G equity financing round, the
convertible notes issued in April 2020 were fully converted into 4,444,321
shares of Series G-1 preferred stock.
Revolving Credit Facility
On January 19, 2021, we entered into a revolving credit agreement with a
syndicate of commercial banks for a $185.0 million unsecured revolving credit
facility. This facility bears interest at a rate equal to, at our option, either
(a) a Eurodollar rate determined by reference to adjusted LIBOR for the interest
period, plus an applicable margin of 2.50% per annum or (b) a base rate
determined by reference to the highest of (i) the federal funds rate plus 0.50%
per annum, (ii) the rate last quoted by The Wall Street Journal as the U.S.
prime rate, and (iii) the one-month adjusted LIBOR plus 1.00% per annum, in each
case, plus an applicable margin of 1.50% per annum. The revolving credit
agreement has a final maturity date of January 19, 2024. The facility contains
certain covenants and restrictions, including certain financial maintenance
covenants, and requires payment of a monthly unused commitment fee of 0.35% per
annum on the undrawn balance available. There are no borrowings outstanding
under the facility at June 30, 2021. Refer to Note 11. Debt.
Securitizations
In connection with asset-backed securitizations, we sponsor and establish trusts
to ultimately purchase loans facilitated by our platform. Securities issued from
our asset-backed securitizations are senior or subordinated, based on the
waterfall criteria of loan payments to each security class. The subordinated
residual interests issued from these transactions are first to absorb credit
losses in accordance with the waterfall criteria. The assets are transferred
into a trust such that the assets are legally isolated from the creditors of
Affirm and are not available to satisfy our obligations. These assets can only
be used to settle obligations of the underlying trusts. Each securitization
trust issued senior notes and residual certificates to finance the purchase of
the loans facilitated by our platform. At the closing of each securitization, we
contributed loans, facilitated through our technology platform, with an
aggregate outstanding principal balance of $1,856.8 million. The 2020-Z1,
2020-Z2, and 2021-Z1 securitizations are secured by static pools of loans
contributed at closing, whereas the 2020-A and 2021-A securitizations are
revolving and we may contribute additional loans from time to time until the end
of the revolving period. Refer to Note 12. Securitizations and Variable
Interest Entities.
Cash Flows

The following table summarizes our cash flows for the periods presented:

Year Ended
June 30,
2021 2020
(in thousands)
Net Cash Used in Operating Activities $ (193,130) $

(71,302)

Net Cash Used in Investing Activities (1,022,033)

(253,073)

Net Cash Provided by Financing Activities(1) 2,577,830 294,732

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(1) Amounts include net cash provided by the issuance of redeemable convertible
preferred stock and convertible debt as follows:
Year Ended
June 30,
2021 2020
(in thousands)
Proceeds from initial public offering, net $

1,305,176 $ –
Proceeds from issuance of redeemable convertible preferred
stock, net of repurchases and issuance costs

434,529 (7,110)
Proceeds from issuance of common stock, net of repurchases 46,242 (16,121)
Proceeds from issuance of convertible debt – 75,000

Net cash (used in) provided by equity-related financing
activities

$ 1,785,947 $ 51,769
Net cash provided by debt-related financing activities 950,163 242,963
Payments of tax withholding for stock-based compensation (158,280) –
Net cash provided by financing activities $

2,577,830 $ 294,732

Operating Activities
Our largest sources of operating cash flows are fees charged to merchant
partners on transactions processed through our platform and interest income from
consumers’ loans. Our primary uses of cash from operating activities are for
general and administrative, technology and data analytics, funding costs,
processing and servicing, and sales and marketing expenses.
Cash used in operating activities for the year ended June 30, 2021 was
$193.1 million, an increase of $121.8 million from $71.3 million for the year
ended June 30, 2020. This reflects our net loss of $430.9 million, adjusted for
non-cash charges of $332.3 million, net cash outflows of $45.9 million from the
purchase and sale of loans held for sale, and net cash inflows of $53.7 million
provided by changes in our operating assets and liabilities.
Non-cash charges primarily consisted of: provision for credit losses, which
decreased by $39.2 million or 37% due to lower than expected credit losses and
improved credit quality of the portfolio; gain (loss) on sales of loans, which
increased by $58.0 million from $31.9 million for the year ended June 30, 2020
due to improved loan sale economics and increased loan sales since the fourth
quarter of the prior year; and amortization of premiums and discounts, which
increased by $62.8 million or 227% due to increased amortization of discounts
related to loans purchased from our originating bank partners at a price above
fair market value. Additionally, during the year ended June 30, 2021, we
recognized a gain of $30.1 million resulting from the conversion of the
convertible notes into shares of Series G-1 redeemable convertible preferred
stock in September 2020. This gain represented the difference between the
carrying value of the debt at the time of extinguishment and the allocated
proceeds. We also incurred $69.1 million of amortization expense associated with
our commercial agreement assets. None of these non-cash charges were earned or
incurred during the year ended June 30, 2020. Furthermore, we incurred
$288.0 million of stock-based compensation, up from $29.6 million during the
year ended June 30, 2020 due to accelerated vesting of RSUs for which the
service-based condition had been met prior to the IPO and the performance-based
condition was met on the IPO date, and losses of $87.2 million due to the
increase in the fair value of our contingent consideration liability, driven by
changes in the value of our common stock.
Our net cash outflows resulting from changes in operating assets and liabilities
increased to $53.7 million for the year ended June 30, 2021, compared to cash
inflows of $31.0 million for the year ended June 30, 2020. This shift was
primarily due to increases to other assets as a result of the recognition of our
Shopify commercial agreement asset, which had a balance of $205.8 million at
June 30, 2021, partially offset by increases to accrued expenses and other
liabilities associated with our contingent consideration liability, which had a
balance of $147.8 million at June 30, 2021.

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Investing Activities

Cash used in investing activities for the year ended June 30, 2021 was
$1,022.0 million, an increase of $769.0 million from $253.1 million for the year
ended June 30, 2020. The main driver of this was $5.9 billion of purchases and
origination of loans, representing an increase of $3.1 billion or 108% compared
to the prior year, due partly to continued growth in GMV but also due to the
establishment of five new securitization trusts during the period in which we
purchased loans and contributed approximately $1,856.8 million of loan
receivables to the trusts, rather than selling to third-party loan buyers and
classifying this activity as an operating activity on the statement of cash
flows. Additionally, we recorded cash outflows of approximately $222.4 million
related to cash consideration for acquisitions, net of cash and restricted cash
acquired. These cash outflows were partially offset by $4,324.6 million of
repayments of loans and other servicing activity, representing an increase of
$2,029.8 million, or 88%, compared to the prior year, due to a higher average
balance of loans held for investment and generally increasing credit quality of
the portfolio.

Financing Activities
Cash provided by financing activities for the year ended June 30, 2021 was
$2,577.8 million, an increase of $2,283.1 million from $294.7 million during the
year ended June 30, 2020. A main driver of this was the issuance of common stock
upon our initial public offering in January 2021 for $1,305.2 million, net of
issuance costs, and issuances of Series G redeemable convertible preferred stock
in September 2020 and October 2020 for $434.5 million, net of issuance costs.
Additionally, the issuance of notes by our newly formed securitization trusts
during the year ended June 30, 2021 resulted in net cash inflows of $1,185.5
million, net of in-period principal repayments. Each of these cash inflows
represented new financing activities compared to the year ended June 30, 2020
but were partially offset by $222.8 million of net cash outflows from funding
debt as principal repayments on debt exceeded proceeds from draws on these
revolving credit facilities. The net cash outflows from funding debt are in
contrast to net cash inflows from funding debt of $250.7 million during the year
ended June 30, 2020. The shift between periods is largely due to the
availability of new funding sources in our securitization trusts. Additionally,
we recorded payments of approximately $158.3 million for tax withholding
associated with stock-based compensation during the year ended June 30, 2021
which did not occur in prior periods, as the vesting of RSUs was triggered by
the initial public offering in January 2021.
Liquidity and Capital Risks and Requirements

There are numerous risks to our financial results, liquidity, capital raising,
and debt refinancing plans, some of which may not be quantified in our current
liquidity forecasts. The principal factors that could impact our liquidity and
capital needs are customer delinquencies and defaults, a prolonged inability to
adequately access capital market funding, declines in loan purchases and
therefore revenue, fluctuations in our financial performance, the timing and
extent of spending to support development efforts, the expansion of sales and
marketing activities, the introduction of new and enhanced products, and the
continuing market adoption of our platform. We intend to support our liquidity
and capital position by pursuing diversified debt financings (including new
securitizations and revolving debt facilities) and extending existing secured
revolving facilities to provide committed liquidity in case of prolonged market
fluctuations.
We may, in the future, enter into arrangements to acquire or invest in
complementary businesses, products, and technologies. We may be required to seek
additional equity or debt financing in connection with those efforts. In the
event that we require additional financing, we may not be able to raise such
financing on terms acceptable to us or at all. Additionally, as a result of any
of these actions, we may be subject to restrictions and covenants in the
agreements governing these transactions that may place limitations on us, and we
may be required to pledge additional collateral as security. If we are unable to
raise additional capital or generate cash flows necessary to expand our
operations and invest in continued innovation, we may not be able to compete
successfully, which would harm our business, operations, and financial
condition. It is also possible that the actual outcome of one or more of our
plans could be materially different than expected or that one or more of our
significant judgments or estimates could prove to be materially incorrect.
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Concentrations of Revenue
For the years ended June 30, 2021, 2020, and 2019 approximately 20%, 28%, and
20% of total revenue, respectively, was driven by one merchant partner, Peloton.
We believe we have a strong relationship with Peloton and, in September 2020, we
entered into a renewed merchant agreement with Peloton with an initial
three-year term ending in September 2023, which automatically renews for
additional and successive one-year terms until terminated. While we believe our
growth will facilitate both revenue growth and merchant diversification as we
continue to integrate with a wide range of merchants, our revenue concentration
may cause our financial performance to fluctuate significantly from period to
period based on the revenue from such merchant partner.
Contractual Obligations

The following table summarizes our contractual obligations as of June 30, 2021:
Payments Due By Period
Less than More than
Total 1 Year 1 – 3 Years 3 – 5 Years 5 Years
(in thousands)
Funding debt $ 689,356 $ 104,159 $

482,994 $ 102,203 $ –
Notes issued by securitization
trusts

1,184,415 – – 1,184,415 –
Operating lease commitments(1) 88,535 15,303 31,438 31,374 10,420
Purchase commitments(2) 81,369 39,702 41,667 – –
Contingent consideration
liability(3) 147,820 – 147,820 – –
Commercial agreement liability(3) 25,357 – 25,357 – –
Total $ 2,216,852 $ 159,164 $ 729,276 $ 1,317,992 $ 10,420

(1)Consists of payment obligations under our office leases.
(2)In May 2020, we entered into an addendum to our agreement with our cloud
computing web services provider which included annual spending commitments, as
further described below.
(3)Refer to Note 6. Balance Sheet Components for a description of the contingent
consideration liability and commercial agreement liability, each recorded as a
component of accrued expenses and other liabilities on the consolidated balance
sheets.
The commitment amounts in the table above are associated with contracts that are
enforceable and legally binding and that specify all significant terms,
including fixed or minimum services to be used, fixed, minimum or variable price
provisions, and the approximate timing of the actions under the contracts.
In February 2012, we entered into an agreement with a third-party cloud
computing web services provider for our cloud computing and hosting services. In
May 2020, we entered into an addendum to our agreement with our cloud computing
web services provider which included annual spending commitments for the period
between May 2020 and April 2023 with an aggregate committed spend of $120.0
million during such period. Our agreement with our cloud computing web services
provider will continue indefinitely until terminated by either party. Our
cloud-computing web services provider may terminate the customer agreement for
convenience with 30 days prior written notice and may, in some cases, terminate
the agreement immediately for cause upon notice. If we fail to meet the minimum
purchase commitment during any year, we may be required to pay the difference.
We pay our cloud-computing web services provider monthly, and we may pay more
than the minimum purchase commitment to our cloud-computing web services
provider based on usage.
Off-Balance Sheet Arrangements

Off-balance sheet loans relate to unconsolidated securitization transactions and
loans sold to third-party investors for which we have some form of continuing
involvement, including as servicer. For an off-balance sheet
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loan where servicing is the only form of continuing involvement, we would only
experience a loss if we were required to repurchase such a loan due to a breach
in representations and warranties associated with our loan sale or servicing
contracts. As of June 30, 2021, the aggregate outstanding balance of loans held
by third-party investors or off-balance sheet VIEs was $2.5 billion. As of
June 30, 2021, we had one off-balance sheet VIE, the 2021-Z1 securitization. In
the unlikely event principal payments on the loans backing any off-balance sheet
securitization are insufficient to pay senior note holders, including any
retained interest, then any amounts the Company contributed to the
securitization reserve accounts may be depleted. See Note 12. Securitizations
and Variable Interest Entities of the accompanying notes to our consolidated
financial statements for more information.
Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with U.S. GAAP. U.S. GAAP requires us to make certain estimates
and judgments that affect the amounts reported in consolidated financial
statements. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Because
certain of these accounting policies require significant judgment, our actual
results may differ materially from our estimates. To the extent that there are
differences between our estimates and actual results, our future consolidated
financial statement presentation, financial condition, results of operations,
and cash flows will be affected.
We evaluate our significant estimates on an ongoing basis, including, but not
limited to, estimates related to merchant network revenue, loss on loan purchase
commitment, allowance for credit losses, stock-based compensation, and income
taxes. We believe these estimates have the greatest potential effect on our
consolidated financial statements. Therefore, we consider these to be our
critical accounting policies and estimates. For further information, all of our
significant accounting policies, including recent accounting pronouncements, are
described in Note 2. Summary of Significant Accounting Policies of the
accompanying notes to our consolidated financial statements included in this
Form 10-K.
Merchant Network Revenue
Merchant network revenue consists primarily of merchant fees. Merchants are
charged a fee on each transaction processed through the Affirm platform. The
fees range depending on the individual arrangement between us and each merchant
and vary based on the terms of the product offering. The fee is recognized as
earned when the terms of the executed merchant agreement have been fulfilled and
the merchant successfully confirms the transaction. We present our transaction
with the merchant separate from our transactions with our originating bank
partners. Except where we originate certain loans via our wholly-owned
subsidiaries, our bank partners are the originator of the loan extended to the
merchant’s customer, and accordingly we account for the loan separate from the
fee received from the merchant.

When we originate loans via our wholly-owned subsidiaries, certain loans may
have 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
when we estimate that these losses will be recoverable over the term of our
contract with the merchant. 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.

Loss on Loan Purchase Commitment

We purchase loans from our originating bank partners that are facilitated
through our platform. Under the terms of the agreement, we are generally
required to pay the principal amount plus accrued interest for such loans. In
certain instances, our originating bank partner may originate loans with zero or
below market interest rates that we are required to purchase. In these
instances, we may be required to purchase the loan for a price in excess of the
fair market value of such loans, which results in a loss on loan purchase and is
recognized as loss on loan purchase commitment in our consolidated statements of
operations. The fair value is determined by taking the difference
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between the estimated fair value of the loan and the anticipated purchase price.
When the loan is purchased, the liability is included in the amortized cost
basis of the purchased loan as a discount, which is then amortized into interest
income over the life of the loan.

Allowance for Credit Losses

The allowance for credit losses on loans held for investment is determined based
on management’s current estimate of expected credit losses over the remaining
contractual term, historical credit losses, consumer payment trends, estimates
of recoveries, and future expectations on individual loans as of each balance
sheet date. We immediately recognize an allowance for expected credit losses
upon origination of a loan. 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 consolidated statements
of operations and comprehensive loss. We have made an accounting policy election
to not measure an allowance for credit losses for accrued interest receivables.
Previously recognized interest receivable from charged-off loans that is accrued
but not collected from the consumer is reversed.

In estimating the allowance for credit losses, management utilizes a migration
analysis of delinquent and current loan receivables. Migration analysis is a
technique used to estimate the likelihood that a loan receivable will progress
through various stages of delinquency and to charge-off. The analysis focuses on
the pertinent factors underlying the quality of the loan portfolio. These
factors include historical performance, the age of the receivable balance,
seasonality, customer credit-worthiness, changes in the size and composition of
the loan portfolio, delinquency levels, bankruptcy filings, actual credit loss
experience, and current economic conditions. We also take into consideration
certain qualitative factors where we adjust our quantitative baseline using our
best judgement to consider the inherent uncertainty regarding future economic
conditions and consumer loan performance. For example, the Company considers the
impact of current economic and environmental factors at the reporting date that
did not exist over the period from which historical experience was used. As of
June 30, 2021, we have considered the impact of government intervention and
legislation in the form of stimulus checks, extended unemployment benefits, and
small business relief on loan repayment and consumer behavior patterns.

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 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 underlying assumptions, estimates, and assessments we use to provide for
losses are updated periodically to reflect our view of current conditions, which
can result in changes to our assumptions. Changes in such estimates can
significantly affect the allowance and provision for credit losses. It is
possible that we will experience loan losses that are different from our current
estimates.

Stock-Based Compensation Expense

Compensation expense related to stock-based transactions, including employee,
consultant, and non-employee director stock option awards and restricted stock
units (“RSUs”), is measured and recognized in the consolidated financial
statements based on fair value. The fair value of each equity-classified option
award is estimated on the grant date using the Black Scholes option-pricing
model. Expense is recognized on a straight-line basis over the vesting period of
the award based on the estimated portion of the award that is expected to vest.

Our option-pricing model requires the input of highly subjective assumptions,
including the fair value of the underlying common stock, the expected term of
the option, the expected volatility of the price of our common stock, risk-free
interest rates, and the expected dividend yield of our common stock. The
assumptions used in our option-pricing model represent management’s best
estimates. These estimates involve inherent uncertainties and the application of
management’s judgment. If factors change and different assumptions are used, our
stock-based compensation expense could be materially different in the future.
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Additionally, we have granted stock option awards with service-based and
performance-based vesting conditions, with market-based conditions that are
incorporated into the grant date fair value. We determined the grant date fair
value of these awards by utilizing a Monte Carlo simulation model that
incorporates the possibility that the market-based conditions may not be
satisfied. The Monte Carlo simulation also incorporates assumptions including
expected stock price volatility, expected term, and risk-free interest rates. We
estimate the volatility of common stock on the date of grant based on the
weighted-average historical stock price volatility of comparable publicly-traded
companies in our industry group. We estimate the expected term of the award
based on various exercise scenarios. The risk-free interest rate is determined
using a U.S. Treasury rate for the period that coincides with the expected term
set forth.

We will continue to use judgment in evaluating the assumptions related to our
stock-based compensation on a prospective basis. As we continue to accumulate
additional data related to our common stock, we may have refinements to our
estimates, which could materially impact our future stock-based compensation
expense.

Income Taxes

We report income taxes in accordance with Financial Accounting Standards Board
Accounting Standards Codification (“FASB ASC”) 740, Income Taxes (“ASC 740”),
which requires an asset and liability approach in accounting for income taxes.
Under this method, the deferred tax assets and liabilities are determined based
on the differences between the financial reporting and the tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. A valuation allowance
reduces the deferred tax assets to the amount that is more likely than not to be
realized.

The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex federal and state tax laws and regulations. ASC 740
states that a tax benefit from an uncertain tax position may be recognized when
it is more likely than not that the position will be sustained upon examination,
including resolutions of any related appeals or litigation processes, on the
basis of the technical merits.

We record unrecognized tax benefits as liabilities in accordance with ASC 740
and adjust these liabilities when our judgment changes as a result of the
evaluation of new information not previously available. Due to the complexity of
some of these uncertainties, the ultimate resolution may result in a payment
that is materially different from our current estimate of the unrecognized tax
benefit liabilities. These differences will be reflected as increases or
decreases to income tax expense in the period in which new information is
available.

We assess the available positive and negative evidence to estimate whether
sufficient future taxable income will be generated to permit the use of existing
deferred tax assets. A significant piece of objective negative evidence
evaluated was the cumulative loss incurred for the years ended June 30, 2021,
2020, and 2019. Such objective evidence limits the ability to consider other
subjective evidence, such as our projections for future growth. On the basis of
this evaluation, as of June 30, 2021, 2020, and 2019, a full valuation allowance
has been recorded against our gross deferred tax asset, net of future reversing
deferred tax liabilities. The amount of the deferred tax assets considered
realizable, however, could be adjusted if estimates of the future taxable income
during the carryforward period are reduced or increased or if objective negative
evidence in the form of cumulative losses is no longer present and additional
weight is given to subjective evidence such as our projections for growth.
Recent Accounting Pronouncements

Refer to Note 2. Summary of Significant Accounting Policies of the accompanying
notes to our consolidated financial statements.

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