AFFIRM HOLDINGS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the interim condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q ("Form 10-Q") and our audited consolidated financial
statements and the related notes and the discussion under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the fiscal year ended June 30, 2021 included in our Annual
Report on Form 10-K (our "Annual Report"). Some of the information contained in
this discussion and analysis, including information with respect to our planned
investments to drive future growth, includes forward-looking statements that
involve risks and uncertainties. You should review the sections titled
"Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" of
this Form 10-Q and our most recently filed Annual Report on Form 10-K for a
discussion of forward-looking statements and 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.
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 approximately $269.4 million and $174.0 million for the three months ended
September 30, 2021 and 2020, respectively. We
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incurred net losses of $306.6 million and $3.9 million for the three months
ended September 30, 2021 and 2020, respectively.
The combination of our differentiated product offering, efficient go-to-market
strategy, and strong monetization engine has resulted in fast growth.
•Rapid GMV growth. We grew our Gross Merchandise Volume ("GMV") by approximately
84% period-over-period to $2.7 billion during the three months ended
September 30, 2021 from $1.5 billion during the three months ended September 30,
2020.
•Increased consumer engagement. The number of active consumers on our platform
grew by 1.6 million consumers from June 30, 2021 to September 30, 2021, an
increase of 22%, to a total of 8.7 million.
•Expanded merchant network. We have also continued to scale the breadth and
reach of our platform. From June 30, 2021 to September 30, 2021, our merchant
base expanded by 253% to 102,217 active 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 $20.2 billion of GMV on our
platform. As of September 30, 2021, we had over $7.3 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
$0.8 billion from $6.5 billion as of June 30, 2021.
Through the diversity of these funding relationships, the equity capital
required to build our total platform portfolio has declined from approximately
4% of the total platform portfolio as of June 30, 2021, to approximately 3% as
of September 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 $5.0 billion and $4.7
billion as of September 30, 2021 and June 30, 2021, 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 interim condensed consolidated balance sheet.
This amount totaled $140.2 million and $178.1 million as of September 30, 2021
and June 30, 2021, respectively. Equity capital required as a percent of the
last twelve months' GMV was 1% and 2% as of September 30, 2021 and June 30,
2021, respectively.
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.
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. For the three
months ended September 30, 2021 and 2020, 0% APR financing represented 43% and
46%, 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
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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 or not. 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. As of September 30, 2021, we had originated
approximately $394.0 million of loans in Canada. As of September 30, 2021, we
had directly originated $722.4 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.
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.
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                                          Three Months Ended
                                            September 30,
                                        2021             2020
                                            (in thousands)

Gross Merchandise Volume (GMV) $ 2,712,939$ 1,475,929

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 and the
strength of our platform. For the three months ended September 30, 2021, GMV was
$2.7 billion, which represented an increase of approximately 84% as compared to
$1.5 billion for the three months ended September 30, 2020.

                                                       September 30, 2021              June 30, 2021               September 30, 2020
                                                                          (in thousands, except per consumer data)
Active Consumers                                               8,692                         7,121                         3,882
Transactions per Active Consumer (x)                             2.3                                  2.3                            2.2


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 12 months prior to the measurement date.
As of September 30, 2021, we had 8.7 million active consumers, representing an
increase of approximately 22% compared to 7.1 million at June 30, 2021, and
approximately 124% compared to $3.9 million at September 30, 2020.
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
12 months prior to the measurement date. As of September 30, 2021, we had
approximately 2.3 transactions per active consumer, an increase of 3% compared
to June 30, 2021, and approximately 8% compared to September 30, 2020.
Transactions per active consumer includes incremental transactions completed by
active consumers on the PayBright and 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 4% as of June 30, 2021 to approximately 3%
as of September 30, 2021. The mix of on-balance sheet and off-balance sheet
funding will also impact our results in any given period.
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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 average order value ("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 three months ended September 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 occurring
through 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.
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.
In the three months ended September 30, 2021, we facilitated $29.6 million more
transaction volume on our platform than was captured and confirmed by our
merchants, an increase of $16.1 million from the three months ended September
30, 2020, in which we facilitated $13.5 million more transaction volume than was
captured and
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confirmed by our merchants. As of September 30, 2021 and over the multi-year
life of our merchant partnership with Peloton, we had facilitated approximately
$18.1 million more transaction volume than had been captured and confirmed by
the merchant. As of September 30, 2020, we had not yet implemented the change in
timing of when the transactions is considered captured.
For more information on factors affecting our performance, see the section
titled "Risk Factors" in Item 1A.
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 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 loans
held for investment reaching a high of 14.8% as of March 31, 2020. In the months
subsequent to this and during fiscal year 2021, we saw stronger than expected
repayment history in the portfolio and increased credit quality of loans held on
our balance sheet from credit tightening, resulting in a release of the
allowance over time. As the economic
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reopening and recovery continues, we believe our allowance model is well
equipped to forecast expected loss scenarios resulting from both the shifting
product mix of loans on our balance sheet as well as a return to pre-pandemic
credit levels over time. As of September 30, 2021 and June 30, 2021, the
allowance for credit losses as a percentage of loans held for investment was
6.8% and 5.8%, respectively. Should macroeconomic factors or expected losses
change, we may increase or decrease the allowance for credit losses.
Components of Results of Operations

Revenue

Merchant Network Revenue
Merchant partners are charged a fee on each transaction processed through the
Affirm platform. The fees vary depending on the individual arrangement between
us and each merchant and on the terms of the product offering. The fee is
recognized at the point in time the terms of the executed merchant agreement
have been fulfilled and the merchant successfully confirms the transaction. We
may originate certain loans via our wholly-owned subsidiaries, with zero or
below market interest rates. In these instances, the par value of the loans
originated is in excess of the fair market value of such loans, resulting in a
loss, which we record as a reduction to merchant network revenue. In order to
continue to expand our consumer base, we may originate loans under certain
merchant arrangements that we do not expect to achieve positive revenue. In
these instances, the loss is recorded as sales and marketing expense. During the
three months ended September 30, 2021 and 2020, we generated 34% and 54% of our
revenue from merchant network fees, respectively.
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 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 7% and 3% of our revenue from virtual
card network fees for the three months ended September 30, 2021 and 2020,
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
33% and 27% of total interest income for the three months ended September 30,
2021 and 2020, respectively. During the three months ended September 30, 2021
and 2020, we generated 44% and 31% of our revenue from interest income,
respectively.
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Gain on Sales of Loans
We sell a portion of the loans we 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 three months ended September 30, 2021 and 2020, we
generated 11% and 9% of our revenue from gain 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 third party loan owners, 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
three months ended September 30, 2021 and 2020, we generated 4% 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, stock-based compensation expense and occupancy,
comprise a significant component of several of these expense categories. An
allocation of overhead, such as rent and other overhead, 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 September 30, 2021, we had 1,876 employees, compared to 1,641 employees as
of June 30, 2021. We increased our headcount and personnel related costs across
our business in order to support our growth expansion strategy. We expect
headcount to continue to increase during fiscal year 2022 given our focus on
growth and expansion.
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 interim condensed
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.
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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
purchases and origination of loans. Excluding the amortization of debt issuance
costs, which totaled $5.2 million and $1.1 million for the three months ended
September 30, 2021 and 2020, 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, which totaled $50.5 million and $21.1 million for the
three months ended September 30, 2021 and 2020, respectively.
Additionally, for the three months ended September 30, 2021and 2020, $26.8
million and $5.1 million, respectively, of salaries and personnel costs that
relate to the creation of internally-developed software were capitalized into
property, equipment and software, net on the interim condensed consolidated
balance sheets, and amortized into technology and data analytics expense over
the useful life of the developed software. This amortization expense totaled
$3.6 million and $2.6 million for the three months ended September 30, 2021 and
2020, 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.
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, the par value of the loans
originated is in excess of the fair market value of such loans, which results in
a loss. These losses are recorded as sales and marketing expense. These losses
totaled $5.1 million during the three months ended September 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.
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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, Net
Other (expense) income, net consists of interest earned on our money market
funds included in cash and cash equivalents and restricted cash, interest earned
on securities available for sale, gains and losses incurred on both our interest
rate caps, and fair value adjustments resulting from changes in the fair value
of our contingent consideration liability.
Income Tax Expense
Our income tax expense consists of U.S. federal and state income taxes, Canadian
federal and provincial income taxes, and income taxes attributable to other
foreign jurisdictions.
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Results of Operations

The following tables set forth selected interim condensed consolidated
statements of operations and comprehensive loss data for each of the periods
presented in dollars:
                                                                   Three Months Ended September 30,
                                                                      2021                     2020
                                                                            (in thousands)
Revenue
Merchant network revenue                                      $           92,244          $     93,265
Virtual card network revenue                                              19,395                 5,958
Total network revenue                                                    111,639                99,223
Interest income (1)                                                      117,302                54,237
Gain on sales of loans (1)                                                30,979                16,434
Servicing income                                                           9,465                 4,084
Total Revenue, net                                            $          269,385          $    173,978
Operating Expenses (2)
Loss on loan purchase commitment                              $           51,678          $     65,868
Provision for credit losses                                               63,647                28,931
Funding costs                                                             16,753                10,352
Processing and servicing                                                  25,201                13,498
Technology and data analytics                                             78,013                33,768
Sales and marketing                                                       63,960                22,582
General and administrative                                               136,204                32,273
Total Operating Expenses                                                 435,456               207,272
Operating Loss                                                $         (166,071)         $    (33,294)
Other (expense) income, net                                             (140,373)               29,445
Loss Before Income Taxes                                      $         (306,444)         $     (3,849)
Income Tax Expense                                                           171                    97
Net Loss                                                      $         (306,615)         $     (3,946)

Other Comprehensive Income (Loss)
Foreign currency translation adjustments                      $           (3,802)         $        405
Unrealized gain (loss) on securities available for sale, net                (279)                    -
Net Other Comprehensive Income (Loss)                                     (4,081)                  405
Comprehensive Loss                                            $         (310,696)         $     (3,541)




(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
on sales of 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:
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                                                                 Three Months Ended September 30,
                                                                    2021                    2020
                                                                          (in thousands)
Balance at the beginning of the period                       $         53,177          $     28,659
Additions from loans purchased, net of refunds                         77,270                58,143
Amortization of discount                                              (38,445)              (14,770)
Unamortized discount released on loans sold                           (38,345)              (15,997)
Balance at the end of the period                             $         53,657          $     56,035

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

                                                                    Three Months Ended September 30,
                                                                       2021                     2020
                                                                             (in thousands)
General and administrative                                     $           67,742          $      3,204
Technology and data analytics                                              20,067                 2,213
Sales and marketing                                                         5,024                   760
Processing and servicing                                                      356                    26
Total stock-based compensation in operating expenses                       93,189                 6,203
Capitalized into property, equipment and software, net                     11,690                   972
Total stock-based compensation expense                         $          

104,879 $ 7,175

Comparison of the Three Months Ended September 30, 2020 and 2021

Total Revenue, net
                                                  Three Months Ended September 30,                      Change
                                                      2021                   2020                 $                 %
                                                                    (in thousands, except percentage)
Merchant network revenue                       $         92,244          $   93,265$ (1,021)               (1) %
Virtual card network revenue                             19,395               5,958            13,437               226  %
Total network revenue                                   111,639              99,223            12,416                13  %
Interest income                                         117,302              54,237            63,065               116  %
Gain on sales of loans                                   30,979              16,434            14,545                89  %
Servicing income                                          9,465               4,084             5,381               132  %
Total Revenue, net                                      269,385             173,978            95,407                55  %


Total Revenue, net for the three months ended September 30, 2021 increased by
$95.4 million or 55%, primarily due to an increase of $1,237.0 million or 84% in
GMV on our platform, from $1,475.9 million for the three months ended
September 30, 2020 to $2,712.9 million for the three months ended September 30,
2021. This increase in GMV was driven by the strong network effects of the
expansion of our active merchant base to 102,217 as of September 30, 2021
compared with 6,519 as of September 30, 2020 and an increase in average
transactions per consumer to 2.3 as of September 30, 2021 from 2.2 as of
September 30, 2020.
Merchant network revenue for the three months ended September 30, 2021 decreased
by $1.0 million or 1%, compared to the three months ended September 30, 2020.
Merchant network revenue as a percentage of GMV
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for the three months ended September 30, 2021 decreased to 3% compared to 6% for
the three months ended September 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 AOV of our loans, and typically decreases
with shorter duration and higher APR loans. Specifically, long-term 0% APR loans
typically carry higher merchant fees as a percentage of GMV and have a higher
AOV.
The decrease in merchant network revenue during the three month period was
primarily driven by reductions in the concentration of long-term 0% APR loans,
our highest merchant fee category, and a corresponding decrease in AOV driven by
the rapid adoption of our Split Pay product. For the three months ended
September 30, 2021, approximately 10% of total revenue was driven by our largest
merchant partner, for which we facilitate long-term 0% APR loans with a higher
merchant fee, compared with 30% of total revenue in the comparative period. More
broadly, for the three months ended September 30, 2021 and 2020, loans with a
term length greater than 12 months accounted for 20% and 39%, respectively. AOV
was lower at $402 and $661 for the three months ended September 30, 2021 and
2020, respectively.
Additionally, we recorded a reduction of merchant network revenue of $11.9
million for the three months ended September 30, 2021, associated with the
creation of discounts upon origination of loans with a par value in excess of
the fair value of such loans, which was not material during the three months
ended September 30, 2020.
Virtual card network revenue for the three months ended September 30, 2021
increased by $13.4 million or 226% compared to the three months ended
September 30, 2020. This increase was driven by an increase in GMV processed
through our issuer processor of 210% for the three months September 30, 2021,
due to increased activity on our virtual card-enabled mobile application as well
as growth in existing and new merchants integrated using our virtual card
platform.
Interest income for the three months ended September 30, 2021 increased by
$63.1 million or 116%, compared to the three months ended September 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 74% to $2,133.6
million for the three months ended September 30, 2021, compared to the same
period in the prior fiscal year.
As an annualized percentage of average loans held for investment, total interest
income increased from approximately 18% during the three months ended
September 30, 2020 to 22% during the three months ended September 30, 2021. This
change was driven by an increase in the average proportion of 0% APR loans being
held on our interim condensed consolidated balance sheet as a percentage of the
total loans held for investment, which increased from 25% during the three
months ended September 30, 2020 to 41% during the three months ended
September 30, 2021. The shift was largely due to continued volume of longer-term
0% APR loans, including those being held on our balance sheet through our
consolidated 2020-Z1 and 2020-Z2 securitizations, as well as growth in
short-term Split Pay loans being held for investment.
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 $23.7 million or 160% for the three months
ended September 30, 2021, compared with the three months ended September 30,
2020, and represented 33% of total interest income for the three months ended
September 30, 2021, compared to 27% for the three months ended September 30,
2020. This increase included the amortization of discounts arising from
self-originated loans held for investment of $16.4 million during the three
months ended September 30, 2021, which was nil for the three months ended
September 30, 2020.
Gain on sales of loans for the three months ended September 30, 2021 increased
by $14.5 million or 89%, compared to the three months ended September 30, 2020.
We sold loans with an unpaid balance of $1,093.1 million
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for the three months ended September 30, 2021 and $421.6 million for the three
months ended and September 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 three months ended September 30, 2021 increased by
$5.4 million or 132% compared to the three months ended September 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.
Operating Expenses
                                            Three Months Ended September 30,
                                                  2021                      2020
                                                     (in thousands)
Loss on loan purchase commitment    $          51,678                    $  65,868
Provision for credit losses                    63,647                       28,931
Funding costs                                  16,753                       10,352
Processing and servicing                       25,201                       13,498
Total transaction costs                       157,279                      118,649
Technology and data analytics                  78,013                       33,768
Sales and marketing                            63,960                       22,582
General and administrative                    136,204                       32,273
Total operating expenses            $         435,456                    $ 207,272

Loss on Loan Purchase Commitment

                                            Three Months Ended
                                               September 30,                       Change
                                         2021                  2020             $            %
                                                  (in thousands, except percentage)
Loss on loan purchase commitment    $    51,678$ 65,868$ (14,190)      (22) %
Percentage of total revenue, net             19   %               38  %


Loss on loan purchase commitment for the three months ended September 30, 2021
decreased by $14.2 million or 22% compared to the three months ended
September 30, 2020. This decrease was due to a decrease in the volume and
concentration of long-term 0% APR loans purchased from our originating bank
partners compared to the prior period, which are purchased above fair market
value. During the three months ended September 30, 2021, we purchased $724.4
million of 0% APR loan receivables from our originating bank partners,
representing a decrease of $13.2 million or 2%, compared to the three months
ended September 30, 2020.
Provision for Credit Losses
                                             Three Months Ended
                                               September 30,                       Change
                                          2021                  2020            $            %
                                                  (in thousands, except percentage)

Provision for credit losses $ 63,647 $ 28,931$ 34,716 120 %
Percentage of total revenue, net

              24   %               17  %


Provision for credit losses generally represents the amount of expense required
to maintain the allowance for credit losses on our interim condensed
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
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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 as a percentage of
loans held for investment up to 14.6% at its peak as of March 31, 2020. In the
months subsequent to this, we saw stronger than expected repayment history and
increased credit quality in the portfolio, and during the three months ended
September 30, 2020, this percentage decreased from 9.2% as of June 30, 2020 to
8.7%, resulting in a release of the allowance and in turn, a relatively reduced
provision for credit losses for the period.
Additionally, during the prior fiscal year, following the loss of our emerging
growth company status, we adopted ASU 2016-13, "Financial Instruments - Credit
Losses (Topic 326)" using the modified retrospective approach. The amendments
replaced the incurred loss impairment methodology for computing our allowance
for credit losses with the current expected credit loss model ("CECL"),
effective July 1, 2020. As part of this modified retrospective approach to
adoption, we recorded an adjustment further reducing the provision for credit
losses by $11.3 million for the three months ended September 30, 2020.
During the three months ended September 30, 2021, the allowance for credit
losses as a percentage of loans held for investment increased from 5.8% as of
June 30, 2021 to 6.8%. This increase was driven by in part by a deconcentration
of long-term, high-credit-quality 0% APR loans, rapid growth of new product
lines with higher expected losses, and normalization of credit closer to
pre-pandemic levels. The combination of reduced provision for credit losses due
to release of stressed expected loss scenarios and the adoption of CECL in the
prior year and normalization of credit levels in the current period resulted in
an increase in provision for credit losses of $34.7 million or 120% compared to
the three months ended September 30, 2020.
Funding Costs
                                             Three Months Ended
                                                September 30,                       Change
                                         2021                    2020            $           %
                                                  (in thousands, except percentage)
Funding costs                       $    16,753$ 10,352$ 6,401        62  %
Percentage of total revenue, net              6   %                  6  %


Funding costs for the three months ended September 30, 2021 increased by
$6.4 million or 62%, compared to the three months ended September 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 three months ended September 30, 2021 was $1,399.2 million,
compared with $249.5 million during the three months ended September 30, 2020.
The average balance of funding debt for the three months ended September 30,
2021 decreased by $175.7 million or 23%, compared to the three months ended
September 30, 2020 while the average reference interest rate decreased by 47%
during each periods.

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Processing and Servicing
                                             Three Months Ended
                                               September 30,                       Change
                                         2021                   2020            $            %
                                                  (in thousands, except percentage)
Processing and servicing            $    25,201$ 13,498$ 11,703        87  %
Percentage of total revenue, net              9   %                 8  %


Processing and servicing expense for the three months ended September 30, 2021
increased by $11.7 million or 87% compared to the three months ended
September 30, 2020. This increase was primarily due to an $8.4 million or 140%
increase in payment processing fees due to increased servicing activity and
payments volume for the three months ended September 30, 2021. Additionally,
processing fees paid to our customer referral partners decreased by $1.4 million
or 233%, for the three months ended September 30, 2021. Personnel costs
increased by $6.4 million or 119% for the three months ended September 30, 2021
driven by growth in headcount, while third-party loan servicing and collections
spend remained relatively flat, increasing only 4% due to vendor cost
improvements.
Technology and Data Analytics
                                            Three Months Ended
                                              September 30,                       Change
                                        2021                   2020            $            %
                                                 (in thousands, except percentage)
Technology and data analytics      $    78,013$ 33,768$ 44,245       131  %
Percentage of total revenue, net            29   %                19  %


Technology and data analytics expense for the three months ended September 30,
2021 increased by $44.2 million or 131% compared to the three months ended
September 30, 2020. This increase was primarily due to a $29.4 million or 139%
increase in engineering, product, and data science personnel costs for the three
months ended September 30, 2021, compared to the three months ended
September 30, 2020, net of capitalized costs for internally developed 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 $17.9 million of the increase compared to the three months ended
September 30, 2020, largely due to vesting of RSUs.
Additionally, there was an $8.1 million or 119% increase in data infrastructure
and hosting costs for the three months ended September 30, 2021, compared to the
three months ended September 30, 2020, due to increased capacity requirements of
our technology platform, as well as a $2.1 million or 68% increase in
underwriting data provider costs for the three months ended September 30, 2021,
compared to the three months ended September 30, 2020, due to cost improvements
achieved as a result of contract renegotiations.
Sales and Marketing
                                             Three Months Ended
                                               September 30,                       Change
                                         2021                   2020            $            %
                                                  (in thousands, except percentage)
Sales and marketing                 $    63,960$ 22,582$ 41,378       183  %
Percentage of total revenue, net             24   %                13  %


Sales and marketing expense for the three months ended September 30, 2021
increased by $41.4 million or 183% compared to the three months ended
September 30, 2020. This increase was primarily due to $2.8 million of expense
incurred during the three months ended September 30, 2021 associated with the
amortization of an asset associated with our commercial agreement 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
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amortized on a straight-line basis over the four-year expected benefit period.
Additionally, stock-based compensation related to employees in the sales and
marketing functions increased $4.3 million or 561% compared to three months
ended September 30, 2020, largely due to the vesting of RSUs.
Furthermore, there was a $10.9 million or 1,211% increase in brand and consumer
marketing spend during the three months ended September 30, 2021 compared to the
three months ended September 30, 2020, associated with our expanded
brand-activation, holiday shopping, lifestyle, and travel marketing campaigns,
as well as a $5.7 million or 1,425% increase in business-to-business marketing
spend compared to the three months ended September 30, 2020.
General and Administrative
                                          Three Months Ended
                                             September 30,                     Change
                                          2021             2020             $            %
                                                (in thousands, except percentage)

General and administrative $ 136,204$ 32,273$ 103,931 322 %
Percentage of total revenue, net

              51   %          19  %


General and administrative expense for the three months ended September 30, 2021
increased by $103.9 million or 322% compared to the three months ended
September 30, 2020. This increase was primarily due to an increase of $81.8
million or 403% in personnel costs during the three months ended September 30,
2021 compared to the three months ended September 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 $64.5 million compared to the
three months ended September 30, 2020. This was primarily due to $42.3 million
of expense recognized during the three months ended September 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 that was met on the IPO date.
Additionally, professional fees increased by $3.4 million or 74% during the
three months ended September 30, 2021 compared to the three months ended
September 30, 2020, to support our acquisitions, international expansion, and
regulatory compliance programs.
Other (Expense) Income, net
                                          Three Months Ended
                                            September 30,                      Change
                                         2021             2020             $              %
                                                 (in thousands, except percentage)

Other (expense) income, net $ (140,373)$ 29,445$ (169,818) (577) %
Percentage of total revenue, net

             (52) %          17  %


For the three months ended September 30, 2021, other (expense) income, net, was
largely comprised of a loss of $141.6 million recognized based on the change in
fair value of the contingent consideration liability associated with our
acquisition of PayBright, driven by increases in the value of our common stock.
For the three months ended September 30, 2020, other (expense) income, net was
primarily comprised of 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.
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Liquidity and Capital Resources

Sources and Uses of Funds
We have incurred losses since our inception, accumulating a deficit of
$1.2 billion and $0.9 billion as of September 30, 2021 and June 30, 2021,
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 September 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
in the long-term. 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 September 30, 2021, we had approximately $1.4 billion of cash to fund our
future operations compared to approximately $1.5 billion as of June 30, 2021.
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 September 30,
2021:
Maturity Fiscal Year        Borrowing Capacity       Principal Outstanding
                                            (in thousands)
2022                       $           267,240      $              137,153
2023                                         -                           -
2024                                 1,325,000                     246,647
2025                                         -                           -
2026                                         -                           -
Thereafter                             650,000                     111,266
Total                      $         2,242,240      $              495,066


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 ("VIEs"), 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 September 30, 2021, we were in compliance with all
applicable covenants in the agreements. Refer to Note 10. Debt in the notes to
the interim consolidated financial statements included elsewhere in this Form
10-Q for additional information.
These revolving facilities mature between 2022 and 2027, 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 1.65% to 4.00%.
Interest is payable monthly. In addition, these agreements require payment of a
monthly unused commitment fee ranging from 0.10% 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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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 0.25% 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 September 30, 2021. Refer to Note 10. 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. The 2020-Z1, 2020-Z2, and 2021-Z1
securitizations are secured by static pools of loans contributed at closing,
whereas the 2020-A, 2021-A and 2021-B securitizations are revolving and we may
contribute additional loans from time to time until the end of the revolving
period. Refer to Note 11. Securitization and Variable Interest Entities.
Cash Flows

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

                                                                 Three Months Ended
                                                                    September 30,
                                                                 2021               2020
                                                                   (in thousands)

Net Cash Provided by (Used in) Operating Activities $ 365,150

(2,304)

Net Cash Used in Investing Activities                              (629,510)      (357,761)
Net Cash Provided by Financing Activities(1)                        243,953        817,811




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(1)Amounts include net cash provided by the issuance of redeemable convertible
preferred stock and convertible debt as follows:
                                                                          Three Months Ended
                                                                             September 30,
                                                                       2021                 2020
                                                                            (in thousands)

Proceeds from issuance of redeemable convertible preferred
stock, net of repurchases and issuance costs

                      $         -          $   434,434
Proceeds from issuance of common stock, net of repurchases             37,466                1,157

Net cash provided by equity-related financing activities $ 37,466$ 435,591
Net cash provided by debt-related financing activities

                246,304              382,220
Payments of tax withholding for stock-based compensation              (39,817)                   -
Net cash provided by financing activities                         $   

243,953 $ 817,811


Operating Activities
Our largest sources of operating cash 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 provided in operating activities for the three months ended September 30,
2021 was $365.2 million, an increase of $367.5 million from cash used in
operating activities of $2.3 million for the three months ended September 30,
2020. This reflects our net loss of $306.6 million, adjusted for non-cash
charges of $268.8 million, net cash outflows of $8.2 million from the purchase
and sale of loans held for sale, and net cash inflows of $411.2 million provided
by changes in our operating assets and liabilities.
Non-cash charges primarily consisted of: provision for credit losses, which
increased by $34.7 million or 120% due to an increase on loans held for
investment, partially offset by lower than expected credit losses and improved
credit quality of the portfolio; gain on sales of loans, which increased by
$14.5 million from $16.4 million for the three months ended September 30, 2020
due to improved loan sale economics and increased loan sales since the first
quarter of the prior fiscal year; and amortization of premiums and discounts,
which increased by $24.6 million or 221% due to increased amortization of
discounts related to loans purchased from our originating bank partners at a
price above fair market value. Furthermore, we incurred $93.2 million of
stock-based compensation, up from $6.2 million 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 $141.6
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 inflows resulting from changes in operating assets and liabilities
increased to $411.2 million for the three months ended September 30, 2021
compared to net cash inflows of $12.5 million for the three months ended
September 30, 2020. This shift was primarily due to increases to accounts
payable driven by $395.2 million of employee option exercise taxes payable,
associated with the timing of significant employee stock option exercises during
the period.
Investing Activities
Cash used in investing activities for the three months ended September 30, 2021
was $629.5 million, an increase of $271.7 million from $357.8 million for the
three months ended September 30, 2020. The main driver of this was $1,847.5
million of purchases of loans, representing an increase of $669.7 million or 57%
compared to the first quarter of the prior year, due partly to continued growth
in GMV. Additionally, we recorded cash outflows of approximately $443.6 million
related to purchases of available for sale securities in the current period.
These cash outflows were partially offset by $1,486 million of repayments of
loans, representing an increase of $737.0 million,
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or 98%, compared to the first quarter of 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 three months ended September 30,
2021 was $244.0 million, a decrease of $573.9 million from $817.8 million during
the three months ended September 30, 2020. A main driver of this was the
issuance of notes by our newly formed securitization trust during the three
months ended September 30, 2021 resulted in net cash inflows of $444.6 million,
net of in-period principal repayments. This cash inflow represented new
financing activities compared to the three months ended September 30, 2020 but
was partially offset by $191.7 million of net cash outflows from funding debt as
principal repayments on debt exceeded proceeds from draws on these revolving
credit facilities. This net cash outflow from funding debt was in contrast to a
net cash inflow from the conversion of convertible notes of $434.4 million
during the three months ended September 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 $39.8 million for
tax withholding associated with stock-based compensation during the three months
ended September 30, 2021 which did not occur in the 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.
Concentrations of Revenue
For the three months ended September 30, 2021 and 2020 approximately 10% and 30%
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.
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Contractual Obligations

There were no material changes outside of the ordinary course of business in our
commitments and contractual obligations for the three months ended September 30,
2021 from the commitments and contractual obligations disclosed in the section
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations," set forth in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2021, which was filed with the SEC on September 17, 2021.
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 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 September 30, 2021, the aggregate outstanding balance of loans
held by third-party investors or off-balance sheet VIEs was $2.6 billion. As of
September 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
11. Securitization and Variable Interest Entities of the accompanying notes to
our interim condensed 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, our significant accounting policies are described in
Note 2. Summary of Significant Accounting Policies within the notes to the
interim condensed consolidated financial statements.
Recent Accounting Pronouncements

Refer to Note 2. Summary of Significant Accounting Policies within the notes to
the interim condensed consolidated financial statements.

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