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Affirm Holdings, Inc. - Quarter Report: 2022 December (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 ☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2022

OR

 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  __________ to __________

Commission File Number 001-39888

Affirm Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
84-2224323
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
650 California Street
San Francisco, California
94108
(Address of principal executive offices)
(Zip Code)
(415) 984-0490
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, par value $0.00001 per shareAFRMThe Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
  ☐
Non-accelerated filer  
☐
Smaller reporting company
  ☐
Emerging growth company
  ☐
                
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of February 3, 2023, the number of shares of the registrant’s Class A common stock outstanding was 233,906,114 and the number of shares of the registrant’s Class B common stock outstanding was 60,088,662.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•our expectations regarding our future revenue, expenses, and other operating results and key operating metrics;
•our ability to attract new merchants and commerce partners and retain and grow our relationships with existing merchants and commerce partners;
•our ability to compete successfully in a highly competitive and evolving industry;
•our ability to attract new consumers and retain and grow our relationships with our existing consumers;
•our expectations regarding the development, innovation, introduction of, and demand for, our products;
•our ability to successfully engage new and existing originating bank partners;
•the availability of funding sources to support our business model;
•our ability to effectively price and score credit risk using our proprietary risk model;
•the performance of loans facilitated and originated through our platform;
•the future growth rate of our revenue and related key operating metrics;
•our ability to achieve or sustain profitability in the future;
•the impact of any reduction in our workforce, including our ability to realize certain cost savings anticipated as a result of the reduction and our ability to continue to attract and retain highly skilled employees;
•our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business;
•our ability to protect our confidential, proprietary, or sensitive information;
•past and future acquisitions, investments, and other strategic investments;
•our ability to maintain, protect, and enhance our brand and intellectual property;
•litigation, investigations, regulatory inquiries, and proceedings;
•the impact of macroeconomic conditions on our business, including the impacts of inflation, a rising interest rate environment and increasing recessionary concerns; and
•the size and growth rates of the markets in which we compete.
Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this Form 10-Q and our most recently filed Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the “Annual Report”). Other sections of this Form 10-Q may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive, heavily regulated and rapidly changing
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environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

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

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

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (investors.affirm.com), our filings with the Securities and Exchange Commission (“SEC”), webcasts, press releases, conference calls, and social media. We use these mediums, including our website, to communicate with investors and the general public about our company, our products, and other issues. It is possible that the information that we make available on our website may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website. The contents of our website are not incorporated into this filing. We have included our investor relations website address as an inactive textual reference and do not intend it to be an active link to our website.

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Part I - Financial Information

Item 1. Unaudited Financial Statements

AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except shares and per share amounts)
December 31, 2022June 30, 2022
Assets
Cash and cash equivalents$1,440,333 $1,255,171 
Restricted cash424,460 295,636 
Securities available for sale at fair value914,923 1,595,373 
Loans held for sale344 2,670 
Loans held for investment3,655,504 2,503,561 
Allowance for credit losses(182,100)(155,392)
Loans held for investment, net3,473,404 2,348,169 
Accounts receivable, net201,622 142,052 
Property, equipment and software, net248,939 171,482 
Goodwill527,630 539,534 
Intangible assets63,755 78,942 
Commercial agreement assets220,082 263,196 
Other assets289,259 281,567 
Total Assets$7,804,751 $6,973,792 
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable$28,974 $33,072 
Payable to third-party loan owners127,378 71,383 
Accrued interest payable11,971 6,659 
Accrued expenses and other liabilities220,619 237,598 
Convertible senior notes, net1,708,779 1,706,668 
Notes issued by securitization trusts1,314,212 1,627,580 
Funding debt1,882,670 672,577 
Total liabilities5,294,603 4,355,537 
Commitments and contingencies (Note 8)
Stockholders’ equity:
    Class A common stock, par value $0.00001 per share: 3,030,000,000 shares authorized, 232,003,118 shares issued and outstanding as of December 31, 2022; 3,030,000,000 shares authorized, 227,255,529 shares issued and outstanding as of June 30, 2022
2 2 
    Class B common stock, par value $0.00001 per share: 140,000,000 shares authorized, 60,088,662 shares issued and outstanding as of December 31, 2022; 140,000,000 authorized, 60,109,844 shares issued and outstanding as of June 30, 2022
1 1 
Additional paid in capital4,716,385 4,231,303 
Accumulated deficit(2,179,608)(1,605,902)
Accumulated other comprehensive loss(26,632)(7,149)
Total stockholders’ equity2,510,148 2,618,255 
Total Liabilities and Stockholders’ Equity $7,804,751 $6,973,792 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONT.
(Unaudited)
(in thousands)

    The following table presents the assets and liabilities of consolidated variable interest entities (“VIEs”), which are included in the interim condensed consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. The liabilities in the table below include liabilities for which creditors do not have recourse to the general credit of the Company. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate upon consolidation.
December 31, 2022June 30, 2022
Assets of consolidated VIEs, included in total assets above
Restricted cash$248,612 $164,530 
Loans held for investment3,153,253 2,179,026 
Allowance for credit losses(148,125)(124,052)
Loans held for investment, net3,005,128 2,054,974 
Accounts receivable, net8,196 8,195 
Other assets17,554 14,570 
Total assets of consolidated VIEs$3,279,490 $2,242,269 
Liabilities of consolidated VIEs, included in total liabilities above
Accounts payable$2,801 $2,897 
Accrued interest payable11,937 6,525 
Accrued expenses and other liabilities17,045 15,494 
Notes issued by securitization trusts1,314,212 1,627,580 
Funding debt1,704,812 514,033 
Total liabilities of consolidated VIEs3,050,807 2,166,529 
Total net assets$228,683 $75,740 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Revenue
Merchant network revenue$134,019 $127,087 $247,168 $219,331 
Virtual card network revenue29,117 26,558 55,825 45,953 
Total network revenue163,136 153,645 302,993 265,284 
Interest income155,321 138,355 292,123 255,657 
Gain on sales of loans59,607 57,690 123,202 88,669 
Servicing income21,494 11,321 42,864 20,786 
Total Revenue, net$399,558 $361,011 $761,182 $630,396 
Operating Expenses
Loss on loan purchase commitment$38,422 $65,265 $74,032 $116,943 
Provision for credit losses106,689 52,640 170,939 116,287 
Funding costs43,751 17,700 68,817 34,453 
Processing and servicing66,508 41,849 120,867 67,050 
Technology and data analytics156,747 94,989 301,708 173,002 
Sales and marketing188,334 143,476 352,207 207,436 
General and administrative158,639 141,292 319,611 277,496 
Total Operating Expenses759,090 557,211 1,408,181 992,667 
Operating Loss$(359,532)$(196,200)$(646,999)$(362,271)
Other income (expense), net35,527 36,741 71,545 (103,632)
Loss Before Income Taxes$(324,005)$(159,459)$(575,454)$(465,903)
Income tax (benefit) expense (1,568)276 (1,748)447 
Net Loss$(322,437)$(159,735)$(573,706)$(466,350)
Other Comprehensive Loss
Foreign currency translation adjustments$4,522 $2,341 $(17,024)$(1,461)
Unrealized loss on securities available for sale, net3,069 (657)(2,459)(936)
Net Other Comprehensive Loss7,591 1,684 (19,483)(2,397)
Comprehensive Loss$(314,846)$(158,051)$(593,189)$(468,747)
Per share data:
Net loss per share attributable to common stockholders for Class A and Class B
Basic$(1.10)$(0.57)$(1.96)$(1.70)
Diluted$(1.10)$(0.57)$(1.96)$(1.70)
Weighted average common shares outstanding
Basic293,683,331 281,533,888 292,306,300 273,588,094 
Diluted293,683,331 281,533,888 292,306,300 273,588,094 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share amounts)

Common StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Loss
Total Stockholders’ Equity
SharesAmount
Balance as of June 30, 2022287,365,373 $3 $4,231,303 $(1,605,902)$(7,149)$2,618,255 
Issuance of common stock upon exercise of stock options215,949 — 1,192 — — 1,192 
Forfeiture of common stock related to acquisitions(243,384)— — — — — 
Repurchases of Common Stock(12,437)— (109)— — (109)
Vesting of restricted stock units2,166,715 — — — — — 
Vesting of warrants for common stock— — 108,742 — — 108,742 
Stock-based compensation— — 141,012 — — 141,012 
Tax withholding on stock-based compensation— — (27,311)— — (27,311)
Foreign currency translation adjustments— — — — (21,546)(21,546)
Unrealized loss on securities available for sale— — — — (5,528)(5,528)
Net Loss— — — (251,269)— (251,269)
Balance as of September 30, 2022289,492,216 $3 $4,454,829 $(1,857,171)$(34,223)$2,563,438 
Issuance of common stock upon exercise of stock options300,903 — 1,372 — — 1,372 
Issuance of common stock, employee share purchase plan500,443 — 5,921 — — 5,921 
Vesting of restricted stock units1,798,218 — — — — — 
Vesting of warrants for common stock— — 128,054 — — 128,054 
Stock-based compensation— — 144,218 — — 144,218 
Tax withholding on stock-based compensation— — (18,009)— — (18,009)
Foreign currency translation adjustments— — — — 4,522 4,522 
Unrealized loss on securities available for sale— — — — 3,069 3,069 
Net Loss— — — (322,437)— (322,437)
Balance as of December 31, 2022292,091,780 $3 $4,716,385 $(2,179,608)$(26,632)$2,510,148 


















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AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share amounts)
Common StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Income
Total Stockholders’ Equity
SharesAmount
Balance as of June 30, 2021269,358,104 $3 $3,467,236 $(898,485)$6,773 $2,575,527 
Issuance of common stock upon exercise of stock options7,403,503 — 37,470 — — 37,470 
Issuance of common stock in acquisition183,733 — 10,000 — — 10,000 
Vesting of restricted stock units772,653 — — — — — 
Repurchases of common stock(821)— (4)— — (4)
Stock-based compensation— — 104,879 — — 104,879 
Tax withholding on stock-based compensation— — (39,817)— — (39,817)
Foreign currency translation adjustments— — — — (3,802)(3,802)
Unrealized loss on securities available for sale— — — — (279)(279)
Net Loss— — — (306,615)— (306,615)
Balance as of September 30, 2021277,717,172 $3 $3,579,764 $(1,205,100)$2,692 $2,377,359 
Issuance of common stock upon exercise of stock options4,689,973 — 21,674 — — 21,674 
Vesting of restricted stock units803,263 — — — — — 
Vesting of warrants for common stock— — 198,383 — — 198,383 
Stock-based compensation— — 101,920 — — 101,920 
Tax withholding on stock-based compensation— — (72,963)— — (72,963)
Foreign currency translation adjustments— — — — 2,341 2,341 
Unrealized gain (loss) on securities available for sale— — — — (657)(657)
Net Loss— — — (159,735)— (159,735)
Balance as of December 31, 2021283,210,408 $3 $3,828,778 $(1,364,835)$4,376 $2,468,322 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended December 31,
20222021
Cash Flows from Operating Activities
Net Loss$(573,706)$(466,350)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for credit losses170,939 116,287 
Amortization of premiums and discounts on loans, net(68,853)(87,678)
Gain on sales of loans(123,202)(88,669)
Changes in fair value of assets and liabilities(11,035)104,900 
Amortization of commercial agreement assets43,114 43,885 
Amortization of debt issuance costs1,752 9,568 
Amortization of discount on securities available for sale(14,923)— 
Commercial agreement warrant expense236,796 64,854 
Stock-based compensation241,583 181,726 
Depreciation and amortization43,886 22,505 
Other1,136 (5,198)
Change in operating assets and liabilities:
Purchases of loans held for sale(3,323,750)(2,614,002)
Proceeds from the sale of loans held for sale3,428,673 2,607,759 
Accounts receivable, net(63,416)(48,117)
Other assets(13,727)65,422 
Accounts payable(4,098)(12,169)
Payable to third-party loan owners55,995 21,436 
Accrued interest payable5,903 (131)
Accrued expenses and other liabilities(10,400)8,868 
Net Cash Provided by (Used in) Operating Activities22,667 (75,104)
Cash Flows from Investing Activities
Purchases and origination of loans held for investment(6,535,457)(4,652,346)
Proceeds from the sale of loans held for investment702,987 780,276 
Principal repayments and other loan servicing activity4,628,825 3,563,123 
Acquisition, net of cash and restricted cash acquired— (5,999)
Additions to property, equipment and software(65,401)(38,159)
Purchases of securities available for sale(105,629)(511,724)
Proceeds from maturities and repayments of securities available for sale798,149 59,126 
Other investing cash inflows (outflows)1,588 (13,870)
Net Cash Used in Investing Activities(574,938)(819,573)
Cash Flows from Financing Activities
Proceeds from issuance of convertible debt, net— 1,704,300 
Proceeds from funding debt3,367,729 1,497,674 
Payment of debt issuance costs(4,773)(8,151)
Principal repayments of funding debt(2,147,035)(1,527,568)
Proceeds from issuance of notes and residual trust certificates by securitization trusts250,000 499,640 
Principal repayments of notes issued by securitization trusts(559,383)(102,467)
Proceeds from exercise of common stock options and warrants and contributions to ESPP8,246 59,569 
Repurchases of common stock(109)(4)
Payments of tax withholding for stock-based compensation(45,320)(112,780)
Net Cash Provided by Financing Activities869,355 2,010,213 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(3,098)6,635 
Net Increase in Cash, Cash Equivalents and Restricted Cash313,986 1,122,171 
Cash, Cash equivalents and Restricted cash, Beginning of period1,550,807 1,692,632 
Cash, Cash Equivalents and Restricted Cash, End of Period$1,864,793 $2,814,803 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT.
(Unaudited)
(in thousands)

Six Months Ended December 31,
20222021
Reconciliation to amounts on consolidated balance sheets (as of period end)
Cash and cash equivalents1,440,333 2,567,401 
Restricted cash 424,460 247,402 
Total Cash, Cash Equivalents and Restricted Cash$1,864,793 $2,814,803 

Six Months Ended December 31,
20222021
Supplemental Disclosures of Cash Flow Information
Cash payments for interest expense$55,900 $23,143 
Cash paid for operating leases8,244 8,232 
Cash paid for income taxes212 80 
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Stock-based compensation included in capitalized internal-use software43,647 25,073 
Issuance of common stock in connection with acquisition— 10,000 
Additions to property and equipment included in accrued expenses— 107 
Right of use assets obtained in exchange for operating lease liabilities494 — 

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

Affirm Holdings, Inc. (“Affirm,” the “Company,” “we,” “us,” or “our”), headquartered in San Francisco, California, provides consumers with a simpler, more transparent, and flexible alternative to traditional payment options. Our mission is to deliver honest financial products that improve lives. Through our next-generation commerce platform, agreements with originating banks, and capital markets partners, we enable consumers to confidently pay for a purchase over time, with terms ranging from one to sixty months. When a consumer applies for a loan through our platform, the loan is underwritten using our proprietary risk model, and once approved, the consumer selects their preferred repayment option. Loans are directly originated or funded and issued by our originating bank partners.

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

2.   Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), disclosure requirements for interim financial information, and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended June 30, 2022. The balance sheet as of June 30, 2022 has been derived from the audited financial statements at that date. Management believes these interim condensed consolidated financial statements reflect all adjustments, including those of a normal and recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

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

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

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts in the interim condensed consolidated financial statements and the accompanying notes. Material estimates that are particularly susceptible to significant change relate to determination of variable consideration for revenue, the allowance for credit losses, capitalized internal-use software development costs, valuation allowance for deferred tax assets, loss on loan
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purchase commitment, the fair value of servicing assets and liabilities, discount on directly originated loans, the fair value of assets acquired and any contingent consideration transferred in business combinations, the evaluation for impairment of intangible assets and goodwill, the fair value of available for sale debt securities including retained interests in our securitization trusts, the fair value of residual certificates issued by our securitization trusts held by third parties, and stock-based compensation, including the fair value of warrants issued to nonemployees. We base our estimates on market-based inputs, historical experience, current events, and other factors we believe to be reasonable under the circumstances. These estimates are subjective in nature and to the extent that there are differences between these estimates and actual results, our financial condition or operating results in future periods may be affected.

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

Significant Accounting Policies

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

Recently Adopted Accounting Standards

Financial Instruments - Credit Losses

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

Recent Accounting Pronouncements Not Yet Adopted

Business Combinations

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

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Interbank Offered Rate (“LIBOR”). In January 2021, the FASB also issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope”, which provides additional optional expedients and exceptions applicable to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”, to extend the temporary accounting rules under Topic 848 from December 31, 2022 to December 31, 2024. These ASUs are effective for all entities upon their respective issuance dates through December 31, 2024. We have reviewed all our financial agreements that utilize LIBOR as the reference rate and determined there is no impact to our interim condensed consolidated financial statements as of December 31, 2022. Throughout the remaining effective period for ASU 2020-04, ASU 2021-01 and ASU 2022-06, we will continue to evaluate the available relief measures within each of these amendments and will determine any impact on our consolidated financial statements and disclosures, as applicable.


3.   Revenue

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

Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Merchant network revenue$134,019 $127,087 $247,168 $219,331 
Virtual card network revenue29,117 26,558 55,825 45,953 
Interest income155,321 138,355 292,123 255,657 
Gain on sales of loans59,607 57,690 123,202 88,669 
Servicing income21,494 11,321 42,864 20,786 
Total Revenue, net$399,558 $361,011 $761,182 $630,396 

Merchant Network Revenue

Merchant partners (or integrated merchants) are generally charged a fee based on gross merchandise volume (GMV) processed through the Affirm platform. The fees vary depending on the individual arrangement between us and each merchant and on the terms of the product offering. The fee is recognized at the point in time the merchant successfully confirms the transaction, which is when the terms of the executed merchant agreement are fulfilled. We may originate certain loans via our wholly-owned subsidiaries, with zero or below market interest rates. In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting in a loss, which we record as a reduction to merchant network revenue. In certain cases, the losses incurred on loans originated for a merchant may exceed the total network revenue earned on those loans. To the extent we do not expect to recover the losses in future periods, we record the excess loss amounts as a sales and marketing expense.

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

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For the three and six months ended December 31, 2022, there were no merchants that exceeded 10% of total revenue. For the three and six months ended December 31, 2021, approximately 11% and 10% of total revenue, respectively, was driven by one merchant.

Virtual Card Network Revenue

We have agreements with issuer processors to facilitate transactions through the issuance of virtual debit cards to be used by consumers at checkout. Consumers can apply for a virtual debit card through the Affirm app and, upon approval, receive a single-use virtual debit card to be used for their purchase online or offline at a non-integrated merchant. The virtual debit card is funded at the time a transaction is authorized using cash held by the issuer processor in a reserve fund. Our originating bank partner then originates a loan to the consumer once the transaction is confirmed by the merchant. The non-integrated merchants are charged interchange fees by the issuer processor for virtual debit card transactions, and the issuer processor shares a portion of this revenue with us. We also leverage this issuer processor as a means of integrating certain merchants. Similarly, for these arrangements with integrated merchants, the merchant is charged interchange fees by the issuer processor and the issuer processor shares a portion of this revenue with us.

Interest Income

Interest income consisted of the following components (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Interest income on unpaid principal balance$125,858 $88,674 $231,996 $171,615 
Amortization of discount on loans38,838 54,965 77,807 93,410 
Amortization of premiums on loans(4,580)(2,995)(8,954)(5,732)
Interest receivable charged-off, net of recoveries(4,795)(2,289)(8,726)(3,636)
Total interest income$155,321 $138,355 $292,123 $255,657 

We accrue interest income using the effective interest method. Interest income on a loan is accrued daily, based on the finance charge disclosed to the consumer, over the term of the loan based upon the principal outstanding. The accrual of interest on a loan is suspended if a formal dispute with the consumer involving either Affirm or the merchant of record is opened, or a loan is 120 days past due. Upon the resolution of a dispute with the consumer, the accrual of interest is resumed, and any interest that would have been earned during the disputed period is retroactively accrued. As of December 31, 2022 and June 30, 2022, the balance of loans held for investment on non-accrual status was $1.8 million and $1.7 million, respectively.

Gain on Sales of Loans

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



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Servicing Income

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

4.   Loans Held for Investment and Allowance for Credit Losses

    Loans held for investment consisted of the following (in thousands):
December 31, 2022June 30, 2022
Unpaid principal balance$3,691,398 $2,516,733 
Accrued interest receivable32,855 20,697 
Premiums on loans held for investment9,081 8,911 
Less: Discount due to loss on loan purchase commitment (38,615)(20,692)
Less: Discount due to loss on directly originated loans(38,381)(20,443)
Less: Fair value adjustment on loans acquired through business combination(834)(1,645)
Total loans held for investment$3,655,504 $2,503,561 

Loans held for investment includes loans originated through our originating bank partners and directly originated loans. The majority of the loans that are underwritten using our technology platform and originated by our originating bank partners are later purchased by us. We purchased loans from our originating bank partners in the amount of $4.4 billion and $7.9 billion during the three and six months ended December 31, 2022, respectively, and $3.4 billion and $5.6 billion during the three and six months ended December 31, 2021, respectively.

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

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

Our proprietary score (“ITACs”) is assigned to most loans facilitated through our technology platform, ranging from zero to 100, with 100 representing the highest credit quality and therefore the lowest likelihood of loss. The ITACs model analyzes the characteristics of a consumer’s attributes that are shown to be predictive of both willingness and ability to repay including, but not limited to: basic features of a consumer’s credit profile, a consumer’s prior repayment performance with other creditors, current credit utilization, and legal and policy changes. When a consumer passes both fraud and credit policy checks, the application is assigned an ITACs score. ITACs is also used for portfolio performance monitoring. Our credit risk team closely tracks the distribution of ITACs at the portfolio level, as well as ITACs at the individual loan level to monitor for signs of a changing credit profile within the portfolio. Repayment performance within each ITACs band is also monitored to support both the integrity of the risk scoring models and to measure possible changes in consumer behavior amongst various credit tiers.
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The following table presents an analysis of the credit quality, by ITACS score, of the amortized cost basis excluding accrued interest receivable, by fiscal year of origination on loans held for investment and loans held for sale (in thousands) as of December 31, 2022 and June 30, 2022:
December 31, 2022
Amortized Costs Basis by Fiscal Year of Origination
20232022202120202019PriorTotal
96+$1,900,886 $239,706 $53,982 $16,500 $10 $1 $2,211,085 
94-96770,581 127,269 2,079 360 6 2 900,297 
90-9486,105 40,435 530 2 4 — 127,076 
<9023,650 5,315 12 2 — — 28,979 
No score(1)
217,011 110,920 24,002 3,266 328 29 355,556 
Total amortized cost basis$2,998,233 $523,645 $80,605 $20,130 $348 $32 $3,622,993 
(1)This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology including loan receivables originated in Canada and Australia. 

Net Charge-offs by Fiscal Year of Origination
20232022202120202019PriorTotal
Current period charge-offs(15,426)(131,629)(5,142)(337)(45)(19)(152,598)
Current period recoveries1,106 7,963 3,107 1,017 684 494 14,371 
Current period net charge-offs$(14,320)$(123,666)$(2,035)$680 $639 $475 $(138,227)

June 30, 2022
Amortized Costs Basis by Fiscal Year of Origination
20222021202020192018PriorTotal
96+$1,218,104 $122,503 $33,458 $157 $1 $— $1,374,223 
94-96620,403 11,240 773 13 2 — 632,431 
90-94220,056 3,886 6 4 — — 223,952 
<9044,300 135 2 — — — 44,437 
No score186,044 20,554 3,368 444 79 2 210,491 
Total amortized cost basis$2,288,907 $158,318 $37,607 $618 $82 $2 $2,485,534 

Loan receivables are defined as past due if either the principal or interest have not been received within four calendars days of when they are due in accordance with the agreed upon contractual terms. The following table presents an aging analysis of the amortized cost basis excluding accrued interest receivable of loans held for investment and loans held for sale by delinquency status (in thousands):
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December 31, 2022June 30, 2022
Non-delinquent loans$3,445,851 $2,322,919 
4 – 29 calendar days past due79,930 77,963 
30 – 59 calendar days past due38,952 34,669 
60 – 89 calendar days past due29,261 26,919 
90 – 119 calendar days past due (1)
28,999 23,064 
Total amortized cost basis$3,622,993 $2,485,534 
(1)Includes $27.8 million and $22.7 million of loan receivables as of December 31, 2022 and June 30, 2022, respectively, that are 90 days or more past due, but are not on nonaccrual status. 

We maintain an allowance for credit losses at a level sufficient to absorb expected credit losses based on evaluating known and inherent risks in our loan portfolio. The allowance for credit losses is determined based on our current estimate of expected credit losses over the remaining contractual term, historical credit losses, consumer payment trends, estimates of recoveries, and future expectations as of each balance sheet date. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses are recognized in earnings through the provision for credit losses presented on our interim condensed consolidated statements of operations and comprehensive loss. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. Loans are charged-off in accordance with our charge-off policy, as the contractual principal becomes 120 days past due. Subsequent recoveries of the unpaid principal balance, if any, are credited to the allowance for credit losses.

The following table details activity in the allowance for credit losses, including charge-offs, recoveries and provision for loan losses (in thousands):
Three Months Ended
December 31,		Six Months Ended
December 31,
2022202120222021
Balance at beginning of period$153,025 $152,021 $155,392 $117,760 
Provision for credit losses103,066 49,695 164,935 110,699 
Charge-offs(81,562)(47,573)(152,598)(78,027)
Recoveries of charged-off receivables7,571 4,146 14,371 7,857 
Balance at end of period$182,100 $158,289 $182,100 $158,289 

5. Acquisitions

There were no acquisitions accounted for as business combinations completed in the three and six months ended December 31, 2022. During the three and six months ended December 31, 2021, we completed one acquisition accounted for as business combinations, discussed further below.

Acquisitions completed during the three and six months ended December 31, 2021

ShopBrain

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

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

Cash$30,000 
Fair value of Class A common stock transferred10,000 
Total acquisition date fair value of the consideration transferred$40,000 

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

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

Intangible assets$9,488 
Total net assets acquired9,488 
Goodwill30,512 
Total purchase price$40,000 

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
Fair ValueUseful Life
(in years)
Developed technology$9,488 3.0

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

The transaction costs associated with the acquisition were approximately $0.1 million and $0.2 million for the three and six months ended December 31, 2021, respectively, which are included in general and administrative expense within the interim condensed consolidated statements of operations and comprehensive loss.
            

Other acquisitions

Fast

On April 19, 2022, Affirm completed the closing of the transaction contemplated by a Release and Waiver Agreement entered into with Fast AF, Inc., (“Fast”) relating to the hiring of certain of its employees or service providers and an option to acquire certain of its assets. The purchase price was comprised of (i) $10.0 million in cash and (ii) forgiveness of a $15.0 million senior secured note issued to Fast in April 2022 prior to the closing.
The acquisition was accounted for as an asset acquisition in accordance with ASC 805 since the assets acquired do not meet the definition of a business. The acquired identifiable intangible assets have been recorded at a total cost of $25.4 million, which includes approximately $0.4 million of transaction costs associated with the acquisition. The excess of the total cost of the assets over their total fair value was allocated between the assets on the basis of their relative fair values. The fair values of the intangible assets were determined by applying the replacement cost method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represent Level 3 measurements.
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The following table sets forth the identifiable intangible assets acquired and the cost allocated to each asset as of the date of acquisition (in thousands):

Assembled workforce$12,490 
Option to purchase developed technology$12,925 
Total $25,415 

The assembled workforce intangible asset has an expected useful life of 1.5 years. The developed technology asset will be amortized over its expected useful life if the associated assets are purchased and entered into service.


6.   Balance Sheet Components

Accounts Receivable, net

Our accounts receivable consist primarily of amounts due from payment processors, merchant partners, affiliate network partners and servicing fees due from third-party loan owners. We evaluate accounts receivable to determine management’s current estimate of expected credit losses based on historical experience and future expectations and record an allowance for credit losses, as applicable. Our allowance for credit losses with respect to accounts receivable was $11.8 million and $13.9 million as of December 31, 2022 and June 30, 2022, respectively.

Property, Equipment and Software, net

Property, equipment and software, net consisted of the following (in thousands):

December 31, 2022June 30, 2022
Internally developed software$298,683 $200,621 
Leasehold improvements19,394 16,169 
Computer equipment12,192 10,751 
Furniture and equipment6,827 4,279 
Total Property, equipment and software, at cost$337,096 $231,820 
Less: Accumulated depreciation and amortization(88,157)(60,338)
Total Property, equipment and software, net$248,939 $171,482 

Depreciation and amortization expense on property, equipment and software was $15.6 million and $29.1 million for the three and six months ended December 31, 2022, respectively, and $6.5 million and $11.5 million for the three and six months ended December 31, 2021, respectively. Depreciation expense on leasehold improvements, furniture and equipment, and computer equipment is allocated between general and administrative, technology and data analytics, sales and marketing, and processing and servicing based on employee headcount in the interim condensed consolidated statements of operations and comprehensive loss. Amortization expense on internally developed software is included as a component of technology and data analytics in the interim condensed consolidated statements of operations and comprehensive loss.

No impairment losses related to property, equipment and software were recorded during the three and six months ended December 31, 2022 and 2021.

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Goodwill and Intangible Assets

The changes in the carrying amount of goodwill during the six months ended December 31, 2022 were as follows (in thousands):

Balance as of June 30, 2022$539,534 
Additions— 
Effect of foreign currency translation(11,904)
Balance as of December 31, 2022$527,630 

No impairment losses related to goodwill were recorded during the three and six months ended December 31, 2022 and 2021.

Intangible assets consisted of the following (in thousands):
December 31, 2022
GrossAccumulated AmortizationNetWeighted Average Remaining Useful Life
(in years)
Merchant relationships$37,932 $(14,133)$23,799 3.1
Developed technology (1)
39,499 (22,173)17,326 1.4
Assembled workforce12,490 (5,857)6,633 0.8
Trademarks and domains, definite1,460 (884)576 2.0
Trademarks and domains, indefinite 2,146 — 2,146 Indefinite
Other intangibles350 — 350 Indefinite
Total intangible assets$93,877 $(43,047)$50,830 

June 30, 2022
GrossAccumulated AmortizationNetWeighted Average
Remaining Useful Life
(in years)
Merchant relationships$38,371 $(10,281)$28,090 3.6
Developed technology (1)
39,782 (15,882)23,900 1.9
Assembled workforce12,490 (1,664)10,826 1.3
Trademarks and domains, definite 1,507 (802)705 2.4
Trademarks and domains, indefinite2,146 — 2,146 Indefinite
Other intangibles350 — 350 Indefinite
Total intangible assets$94,646 $(28,629)$66,017 

(1)Excludes an intangible asset in the amount of $12.9 million which represents the right to purchase developed technology in connection with the Fast asset acquisition. Amortization of this asset will begin when the purchase of the developed technology assets is complete and are placed into service. Refer to Note 5. Acquisitions for more information.

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Amortization expense for intangible assets was $7.4 million and $14.8 million for the three and six months ended December 31, 2022, respectively, and $5.5 million and $11.0 million for the three and six months ended December 31, 2021, respectively. No impairment losses related to intangible assets were recorded during the three and six months ended December 31, 2022 and 2021.

The expected future amortization expense of these intangible assets as of December 31, 2022 is as follows (in thousands):

2023 (remaining six months)$14,644 
202421,520 
20257,167 
20264,988 
2027 and thereafter15 
Total amortization expense$48,334 

Commercial Agreement Assets

During the year ended June 30, 2022, we granted warrants in connection with our commercial agreements with certain subsidiaries of Amazon.com, Inc. (“Amazon”). The warrants were granted in exchange for certain performance provisions and the benefit of acquiring new users. We recognized an asset of $133.5 million associated with the portion of the warrants that were fully vested upon grant. The asset was valued based on the fair value of the warrants and represents the probable future economic benefit to be realized over the approximate 3.2 year term of the commercial agreement at the grant date. For the three and six months ended December 31, 2022, we recognized amortization expense of $10.5 million and $20.9 million, respectively, and $5.8 million for both the three and six months ended December 31, 2021 in our interim condensed consolidated statements of operations and comprehensive loss as a component of sales and marketing expense. Refer to Note 14. Stockholders’ Equity for further discussion of the warrants.

During the year ended June 30, 2021, we recognized an asset in connection with a commercial agreement with Shopify Inc. (“Shopify”), in which we granted warrants in exchange for the opportunity to acquire new merchant partners. This asset represents the probable future economic benefit to be realized over the expected benefit period and is valued based on the fair value of the warrants on the grant date. We recognized an asset of $270.6 million associated with the fair value of the warrants, which were fully vested as of December 31, 2022. The expected benefit period of the asset was initially estimated to be four years, and the remaining useful life of the asset is reevaluated each reporting period. During fiscal year 2022, the remaining expected benefit period was extended by two years upon the execution of an amendment to the commercial agreement with Shopify which extended the term of the agreement. During the three and six months ended December 31, 2022, we recorded amortization expense related to the commercial agreement asset of $9.1 million and $18.1 million, respectively, and $17.0 million and $34.0 million for the three and six months ended December 31, 2021, respectively, in our interim condensed consolidated statements of operations and comprehensive loss as a component of sales and marketing expense.

During the year ended June 30, 2021, we recognized an asset in connection with a commercial agreement with an enterprise partner, in which we granted stock appreciation rights in exchange for the benefit of acquiring access to the partner's consumers. This asset represents the probable future economic benefit to be realized over the three-year expected benefit period and is valued based on the fair value of the stock appreciation rights on the grant date. We initially recognized an asset of $25.9 million associated with the fair value of the stock appreciation rights. During the three and six months ended December 31, 2022, we recorded amortization expense related to the asset of $2.1 million and $4.2 million, respectively, and $2.1 million and $4.0 million for the three and six months ended December 31, 2021, respectively, in our interim condensed consolidated statements of operations and comprehensive loss as a component of sales and marketing expense.
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Other Assets

    Other assets consisted of the following (in thousands):
December 31, 2022June 30, 2022
Derivative instruments$69,615 $49,983 
Operating lease right-of-use assets43,614 50,671 
Equity securities, at cost43,172 43,172 
Processing reserves35,411 26,483 
Prepaid expenses34,306 37,497 
Prepaid payroll taxes for stock-based compensation14,338 35,172 
Other receivables21,739 17,221 
Other assets27,064 21,368 
Total other assets$289,259 $281,567 

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following (in thousands)

December 31, 2022June 30, 2022
Collateral held for derivative instruments $68,374 $55,779 
Operating lease liability57,492 65,713 
Accrued expenses52,865 67,343 
Contingent consideration liability12,510 23,348 
Other liabilities29,378 25,415 
Total accrued expenses and other liabilities$220,619 $237,598 

7. Leases

We lease facilities under operating leases with various expiration dates through 2030. We have the option to renew or extend our leases. Certain lease agreements include the option to terminate the lease with prior written notice ranging from nine months to one year. As of December 31, 2022, we have not considered such provisions in the determination of the lease term, as it is not reasonably certain these options will be exercised. Leases have remaining terms that range from less than one year to eight years.

Several leases require us to obtain standby letters of credit, naming the lessor as a beneficiary. These letters of credit act as security for the faithful performance by us of all terms, covenants and conditions of the lease agreement. The cash collateral and deposits for the letters of credit have been recognized as restricted cash in the interim condensed consolidated balance sheets and totaled $9.7 million as of both December 31, 2022 and June 30, 2022.

There was no impairment expense incurred related to leases during the three and six months ended December 31, 2022 and 2021.

The components of operating lease expenses are as follows (in thousands):

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Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Operating lease expense$3,672$3,692$7,516$7,500

We have subleased a portion of our leased facilities. Sublease income totaled $0.9 million and $1.7 million during the three and six months ended December 31, 2022, respectively, and $0.9 million and $1.5 million during the three and six months ended December 31, 2021, respectively.

Lease term and discount rate information are summarized as follows:
December 31, 2022
Weighted average remaining lease term (in years)4.3
Weighted average discount rate4.7%

Maturities of lease liabilities as of December 31, 2022 are as follows (in thousands) for the years ended:
2023 (remaining six months)$6,291 
202416,503 
202516,317 
202615,371 
2027 and thereafter10,368 
Total lease payments64,850 
Less imputed interest(7,358)
Present value of lease liabilities$57,492 

8.   Commitments and Contingencies

Repurchase Obligation

Under the normal terms of our whole loans sales to third-party investors, we may become obligated to repurchase loans from investors in certain instances where a breach in representation and warranties is identified. Generally, a breach in representation and warranties would occur where a loan has been identified as subject to verified or suspected fraud, or in cases where a loan was serviced or originated in violation of Affirm’s guidelines. We would only experience a loss if the contractual repurchase price of the loan exceeds the fair value on the repurchase date. This amount was not material as of December 31, 2022.

Legal Proceedings

From time to time, we are subject to legal proceedings and claims in the ordinary course of business. The results of such matters often cannot be predicted with certainty. In accordance with applicable accounting guidance, we establish an accrued liability for legal proceedings and claims when those matters present loss contingencies which are both probable and reasonably estimable.

Toole v. Affirm Holdings, Inc.

On February 28, 2022, plaintiff Jeffrey Toole filed a putative class action against Affirm and Max Levchin in the U.S. District Court for the Northern District of California (the “Toole action”). The Toole action alleged that Affirm violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder by issuing and then subsequently deleting a tweet from its official Twitter account on February 10, 2022, which omitted full details of Affirm’s second quarter fiscal 2022 financial results. Plaintiff sought class certification, unspecified
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compensatory and punitive damages, and costs and expenses. On September 28, 2022, the Court granted Affirm’s motion to dismiss for failure to state a claim with leave to amend within 21 days. No amended complaint was filed by the deadline. On October 20, 2022, the Court dismissed the putative class action and entered judgment in Affirm’s favor.

Vallieres v Levchin, et al.

On April 25, 2022, plaintiff Michael Vallieres filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of California (the “Vallieres action”) against Affirm, as a nominal defendant, and certain of Affirm’s current officers and directors as defendants based on allegations substantially similar to those in the Toole action. The Vallieres complaint purported to assert claims on Affirm's behalf for breach of fiduciary duty, gross mismanagement, abuse of control, unjust enrichment, and contribution under the federal securities laws, and sought corporate reforms, unspecified damages and restitution, and fees and costs. On January 12, 2023, the Court dismissed the derivative action without prejudice.

Williams v. Levchin, et al.

On September 16, 2022, plaintiff Ron Williams filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of California (the “Williams action”) against Affirm, as a nominal defendant, and certain of Affirm’s current and former officers and directors as defendants based on allegations substantially similar to those in the Toole action and Vallieres action. The Williams complaint purported to assert six causes of action on Affirm's behalf—violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The plaintiff in the Williams action also alleged a cause of action against defendant Levchin for contribution under 10(b) and 21D of the Exchange Act. The Williams complaint sought corporate reforms, unspecified damages and restitution, and fees and costs. On December 22, 2022, the Court dismissed the derivative action without prejudice.

Kusnier v. Affirm Holdings, Inc.

On December 8, 2022, plaintiff Mark Kusnier filed a putative class action lawsuit against Affirm, Max Levchin, and Michael Linford in the U.S. District Court for the Northern District of California (the “Kusnier action”). The Kusnier action alleges that Defendants caused Affirm to make materially false and/or misleading statements and/or failed to disclose that (i) Affirm’s BNPL service facilitated excessive consumer debt, regulatory arbitrage, and data harvesting; which (ii) subjected Affirm to a heightened risk of regulatory scrutiny and enforcement action; and (iii) as a result, Affirm’s public statements were materially false and misleading. In light of the above, Plaintiff asserts that Affirm violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and that Levchin and Linford violated Section 20(a) of the Exchange Act. Plaintiff seeks class certification, unspecified compensatory and punitive damages, and costs and expenses.

We have determined, based on current knowledge, that the aggregate amount or range of losses that are estimable with respect to our legal proceedings, including the matters described above, would not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Amounts accrued as of December 31, 2022 were not material. The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties, and cannot be predicted with certainty.


9.   Transactions with Related Parties

In the ordinary course of business, we may enter into transactions with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties). Some of our directors, principal officers, and their immediate families have received loans facilitated by us, in accordance with our regular consumer loan offerings. As of December 31, 2022, the outstanding balance and interest earned on such accounts is immaterial.

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10.   Debt

Debt encompasses funding debt, convertible senior notes and our revolving credit facility.

Funding Debt

Funding debt and its aggregate future maturities consists of the following (in thousands):
December 31, 2022June 30, 2022
2023$177,864 $158,547 
2024520,794 421,484 
2025460,715 — 
2026193,954 — 
2027 and thereafter541,125 103,364 
Total$1,894,452 $683,395 
Deferred debt issuance costs(11,782)(10,818)
Total funding debt, net of deferred debt issuance costs$1,882,670 $672,577 

Warehouse Credit Facilities

Through subsidiaries, we entered into warehouse credit facilities with certain lenders to finance the purchase and origination of our loans.Borrowings under these agreements are referred to as funding debt and proceeds from the borrowings can only be used for the purposes of facilitating loan funding and origination, with advance rates ranging from 82% to 87% of the total collateralized balance. These revolving facilities mature between fiscal years 2023 and 2029, and subject to covenant compliance, generally permit borrowings up to 12 months prior to the final maturity date of each respective facility. As of December 31, 2022, the aggregate commitment amount of these facilities was $3.4 billion on a revolving basis, of which $1.9 billion was drawn, with $1.6 billion remaining available. Some of the loans originated by us or purchased from the originating bank partners are pledged as collateral for borrowings in our facilities. The unpaid principal balance of these loans totaled $2.1 billion and $549.6 million as of December 31, 2022 and June 30, 2022, respectively. Our U.S, based warehouse credit facilities and certain lending facilities funding the origination of loans outside of the U.S., have been classified as VIEs and are bankruptcy-remote special-purpose vehicles in which creditors do not have recourse against the general credit of Affirm. Funding debt, net of deferred issuance costs, within out VIEs represents $1.9 billion and $672.6 million, as of December 31, 2022 and June 30, 2022, respectively.

We accrue monthly interest expense on each warehouse based on the contractual terms set forth in the applicable credit agreement. Interest expense also includes capitalized transaction fees which are amortized on a straight-line basis over the term of the warehouse agreement. The contractual interest rate varies across each warehouse facility and is either based on a benchmark interest rate (such as LIBOR, SOFR, Canadian Prime Rate, CDOR, or the Government of Canada Central Bank Rate), or an alternative commercial paper rate (which is 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), plus a spread ranging from 1.25% to 4.25%. In addition, these agreements require payment of a monthly unused commitment fee ranging from 0.00% to 0.75% per annum on the undrawn portion available.

These agreements contain certain customary negative covenants and financial covenants including maintaining certain levels of minimum liquidity, maximum leverage, and minimum tangible net worth. As of December 31, 2022, we were in compliance with all applicable covenants in the agreements.



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Repurchase Agreements

We entered into certain sale and repurchase agreements pursuant to our retained interests in our off-balance sheet securitizations where we have sold these securities to a counterparty with an obligation to repurchase at a future date and price. The repurchase agreements each have an initial term of three months and subject to mutual agreement by Affirm and the counterparty, we may enter into a repurchase date extension for an additional three month term at market interest rates on such extension date. As of December 31, 2022, the interest rates were 4.06% on the senior pledged securities and 5.71% on the residual certificate pledged securities. We had $25.2 million and $27.0 million in debt outstanding under our repurchase agreements disclosed within funding debt on the interim condensed consolidated balance sheets as of December 31, 2022 and June 30, 2022, respectively. The debt will be amortized through regular principal and interest payments on the pledged securities. The outstanding debt relates to $32.8 million and $32.4 million in pledged securities disclosed within securities available for sale at fair value on the interim condensed consolidated balance sheets as of December 31, 2022 and June 30, 2022, respectively.

Convertible Senior Notes

On November 23, 2021, we issued $1,725 million in aggregate principal amount of 0% convertible senior notes due 2026 (the “2026 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The total net proceeds from this offering, after deducting debt issuance costs, were approximately $1,704 million. The 2026 Notes represent senior unsecured obligations of the Company. The 2026 Notes do not bear interest except in special circumstances described below, and the principal amount of the 2026 Notes does not accrete. The 2026 Notes mature on November 15, 2026.

Each $1,000 of principal of the 2026 Notes will initially be convertible into 4.6371 shares of our common stock, which is equivalent to an initial conversion price of approximately $215.65 per share, subject to adjustment upon the occurrence of certain specified events set forth in the indenture governing the 2026 Notes (the “Indenture”). Holders of the 2026 Notes may convert their 2026 Notes at their option at any time on or after August 15, 2026 until close of business on the second scheduled trading day immediately preceding the maturity date of November 15, 2026. Further, holders of the 2026 Notes may convert all or any portion of their 2026 Notes at their option prior to the close of business on the business day immediately preceding August 15, 2026, only under the following circumstances:

1) during any calendar quarter commencing after March 31, 2022 (and only during such calendar quarter), if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the indenture governing the 2026 Notes) per $1,000 principal amount of the 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day;

3) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

4) upon the occurrence of certain specified corporate events.

Upon conversion of the 2026 Notes, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election. If we satisfy our conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of our common stock, the amount of cash and shares of common stock, if any, due
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upon conversion will be based on a daily conversion value (as set forth in the Indenture) calculated on a proportionate basis for each trading day in a 40 trading day observation period.

No sinking fund is provided for the 2026 Notes. We may not redeem the notes prior to November 20, 2024. We may redeem for cash all or part of the notes on or after November 20, 2024 if the last reported sale price of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid special interest, if any.

If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, holders of the 2026 Notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the 2026 Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date. In addition, if specific corporate events occur prior to the maturity date of the 2026 Notes, we will be required to increase the conversion rate for holders who elect to convert their 2026 Notes in connection with such corporate events.
The convertible senior notes outstanding as of December 31, 2022 consisted of the following (in thousands):
Principal AmountUnamortized Discount and Issuance Cost Net Carrying Amount
Convertible Senior Notes$1,725,000 $(16,221)$1,708,779 

The 2026 Notes do not bear interest. During the three and six months ended December 31, 2022, we recognized $1.1 million and $2.1 million, respectively, of interest expense related to the amortization of debt discount and issuance costs in the interim condensed consolidated statement of operations and comprehensive loss within other (expense) income, net. As of December 31, 2022, the remaining life of the 2026 Notes is approximately 47 months.

Revolving Credit Facility

On February 4, 2022, we entered into a revolving credit agreement with a syndicate of commercial banks for a $165.0 million unsecured revolving credit facility. On May 16, 2022, we increased unsecured revolving commitments under the facility to $205.0 million. This facility bears interest at a rate equal to, at our option, either (a) a Secured Overnight Financing Rate (“SOFR”) rate determined by reference to the forward-looking term SOFR rate for the interest period, plus an applicable margin of 1.85% 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 forward-looking term SOFR rate plus 1.0% per annum, in each case, plus an applicable margin of 0.85% per annum. The revolving credit agreement has a final maturity date of February 4, 2025. The facility contains certain covenants and restrictions, including certain financial maintenance covenants, and requires payment of a monthly unused commitment fee of 0.20% per annum on the undrawn balance available. There are no borrowings outstanding under the facility as of December 31, 2022.

11.   Securitization and Variable Interest Entities

Consolidated VIEs

Warehouse Credit Facilities

We established certain entities, deemed to be VIEs, to enter into warehouse credit facilities for the purpose of purchasing loans from our originating bank partners and funding directly originated loans. Refer to Note 10. Debt
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for additional information. The creditors of the VIEs have no recourse to the general credit of Affirm and the liabilities of the VIEs can only be settled by the respective VIEs’ assets; however, as the servicer of the loans pledged to our warehouse funding facilities, we have the power to direct the activities that most significantly impact the VIEs' economic performance. In addition, we retain significant economic exposure to the pledged loans and therefore, we are the primary beneficiary.

Securitizations

In connection with our asset-backed securitization program, we sponsor and establish trusts (deemed to be VIEs) 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. For these VIEs, the creditors have no recourse to the general credit of Affirm and the liabilities of the VIEs can only be settled by the respective VIEs’ assets. Additionally, the assets of the VIEs can be used only to settle obligations of the VIEs.

We consolidate securitization VIEs when we are deemed to be the primary beneficiary and therefore have the power to direct the activities that most significantly affect the VIEs’ economic performance and a variable interest that could potentially be significant to the VIE. Through our role as the servicer, we have the power to direct the activities that most significantly affect the VIEs’ economic performance. In evaluating whether we have a variable interest that could potentially be significant to the VIE, we consider our retained interests. We also earn a servicing fee which has a senior distribution priority in the payment waterfall.

In evaluating whether we are the primary beneficiary, management considers both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIEs. Management assesses whether we are the primary beneficiary of the VIEs on an ongoing basis.

Where we consolidate the securitization trusts, the loans held in the securitization trusts are included in loans held for investment, and the notes sold to third-party investors are recorded in notes issued by securitization trusts in the interim condensed consolidated balance sheets.

For each securitization, the residual certificates represent the right to receive excess cash on the loans each collection period after all fees and required distributions have been made to the note holders on the related payment date. For the majority of consolidated securitization VIEs, we retain 100% of the residual trust certificates issued by the securitization trust. Any portion of the residual trust certificates sold to third-party investors are measured at fair value, using a discounted cash flow model, and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets. In addition to the retained residual certificates, our continued involvement includes loan servicing responsibilities over the life of the underlying loans.

We defer and amortize debt issuance costs for consolidated securitization trusts on a straight-line basis over the expected life of the notes.

The following tables present the aggregate carrying value of financial assets and liabilities within consolidated VIEs (in thousands):
December 31, 2022
AssetsLiabilitiesNet Assets
Warehouse credit facilities$1,911,540 $1,734,754 $176,786 
Securitizations1,367,950 1,316,053 51,897 
Total consolidated VIEs$3,279,490 $3,050,807 $228,683 

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June 30, 2022
AssetsLiabilitiesNet Assets
Warehouse credit facilities$563,207 $534,422 $28,785 
Securitizations1,679,062 1,632,107 46,955 
Total consolidated VIEs$2,242,269 $2,166,529 $75,740 

Unconsolidated VIEs

Our transactions with unconsolidated VIEs include securitization trusts where we did not retain significant economic exposure through our variable interests and therefore we determined that we are not the primary beneficiary as of December 31, 2022.

The following information pertains to unconsolidated VIEs where we hold a variable interest but are not the primary beneficiary (in thousands):
December 31, 2022
AssetsLiabilitiesNet AssetsMaximum Exposure to Losses
Securitizations$653,754 $635,677 $18,077 $32,719 
Total unconsolidated VIEs$653,754 $635,677 $18,077 $32,719 

June 30, 2022
AssetsLiabilitiesNet AssetsMaximum Exposure to Losses
Securitizations$996,242 $965,909 $30,333 $51,248 
Total unconsolidated VIEs$996,242 $965,909 $30,333 $51,248 

Maximum exposure to losses represents our exposure through our continuing involvement as servicer and through our retained interests. For unconsolidated VIEs, this includes $32.8 million in retained notes and residual certificates disclosed within securities available for sale at fair value in our interim condensed consolidated balance sheets and $47.0 thousand related to our net servicing assets and liabilities disclosed within our interim condensed consolidated balance sheets as of December 31, 2022.

Additionally, we may experience a loss due to future repurchase obligations resulting from breaches in representations and warranties in our securitization and third-party sale agreements. This amount was not material as of December 31, 2022.

Retained Beneficial Interests in Unconsolidated VIEs

The investors of the securitizations have no direct recourse to the assets of Affirm, and the timing and amount of beneficial interest payments is dependent on the performance of the underlying loan assets held within each trust. We have classified our retained beneficial interests in unconsolidated securitization trusts as “available for sale” and as such they are disclosed at fair value in our interim condensed consolidated balance sheets.

See Note 12. Investments and Note 13. Fair Value of Financial Assets and Liabilities for additional information on the fair value sensitivity of the notes receivable and residual certificates. Additionally, as of December 31, 2022, we have pledged each of our retained beneficial interests as collateral in a sale and repurchase agreement as described in Note 10. Debt.

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12.   Investments

Marketable Securities

Marketable securities include certain investments classified as cash and cash equivalents and securities available for sale, at fair value, and consist of the following as of each date presented within the interim condensed consolidated balance sheets (in thousands):

December 31, 2022June 30, 2022
Cash and cash equivalents:
Money market funds$899,736 $162,483 
Certificates of deposit— 16,026 
Commercial paper— 229,272 
Government bonds
US29,967 58,541 
Securities available for sale:
Certificates of deposit181,758 300,390 
Corporate bonds314,014 368,671 
Commercial paper156,459 478,293 
Government bonds
Non-US11,967 17,955 
US216,956 378,386 
Securitization notes receivable and certificates (1)
32,766 51,678 
Other1,003 $— 
Total marketable securities:$1,844,626 $2,061,695 
(1)These securities have been pledged as collateral in connection with sale and repurchase agreements as discussed within Note 10. Debt.

Securities Available for Sale, at Fair Value

The amortized cost, gross unrealized gains and losses, allowance for credit losses, and fair value of securities available for sale as of December 31, 2022 and June 30, 2022 were as follows (in thousands):
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December 31, 2022
Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Credit LossesFair Value
Certificates of deposit (1)
$182,547 $27 $(816)$— $181,758 
Corporate bonds (1)
319,023 3 (5,012)— 314,014 
Commercial paper (1)
156,766 12 (319)— 156,459 
Government bonds
  Non-US12,180 — (213)— 11,967 
 US (1)
250,095 10 (3,182)— 246,923 
Securitization notes receivable and certificates (2)
34,093 — (991)(336)32,766 
Other1,003 — — — 1,003 
Total securities available for sale$955,707 $52 $(10,533)$(336)$944,890 
June 30, 2022
Amortized CostGross Unrealized GainsGross Unrealized LossesAllowance for Credit LossesFair Value
Certificates of deposit (1)
$317,331 $6 $(921)$— $316,416 
Corporate bonds (1)
371,907 7 (3,243)— 368,671 
Commercial paper (1)
708,694 16 (1,145)— 707,565 
Government bonds
 Non-US18,196 — (241)— 17,955 
US (1)
438,947 — (2,020)— 436,927 
Securitization notes receivable and certificates (2)
52,180 178 (659)(21)51,678 
Total securities available for sale$1,907,255 $207 $(8,229)$(21)$1,899,212 
(1)Certificates of deposit, corporate bonds, US government bonds, and commercial paper include $30.0 million and $303.8 million as of December 31, 2022 and June 30, 2022, respectively, classified as cash and cash equivalents within the interim condensed consolidated balance sheets.
(2)These securities have been pledged as collateral in connection with sale and repurchase agreements as discussed within Note 10. Debt

As of December 31, 2022 and June 30, 2022, there were no material reversals of prior period allowance for credit losses recognized for available for sale securities.
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A summary of securities available for sale with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and the length of time that individual securities have been in a continuous loss position as of December 31, 2022 and June 30, 2022, are as follows (in thousands):

December 31, 2022
Less than or equal to 1 yearGreater than 1 yearTotal
Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Certificates of deposit$120,276 $(816)$— $— $120,276 $(816)
Corporate bonds258,665 (4,459)46,305 (553)304,970 (5,012)
Commercial paper114,004 (319)— — 114,004 (319)
Government bonds
Non-US2,092 (55)9,876 (158)11,968 (213)
US190,023 (3,041)26,933 (141)216,956 (3,182)
Total securities available for sale (1)
$685,060 $(8,690)$83,114 $(852)$768,174 $(9,542)
June 30, 2022
Less than or equal to 1 yearGreater than 1 yearTotal
Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Certificates of deposit$290,169 $(921)$— $— $290,169 $(921)
Corporate bonds351,088 (3,243)— — 351,088 (3,243)
Commercial paper679,272 (1,145)— — 679,272 (1,145)
Government bonds
Non-US17,955 (241)— — 17,955 (241)
US431,903 (2,020)— — 431,903 (2,020)
Securitization notes receivable and certificates722 (45)— — 722 (45)
Total securities available for sale (1)
$1,771,109 $(7,615)$— $— $1,771,109 $(7,615)
(1)The number of positions with unrealized losses for which an allowance for credit losses has not been recorded totaled 135 and 270 as of December 31, 2022 and June 30, 2022, respectively.
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The length of time to contractual maturities of securities available for sale as of December 31, 2022 and June 30, 2022 were as follows (in thousands):
December 31, 2022
Within 1 yearGreater than 1 year, less than or equal to 5 yearsTotal
Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Certificates of deposit (2)
$182,547 $181,758 $— $— $182,547 $181,758 
Corporate bonds (2)
176,257 174,773 142,766 139,241 319,023 314,014 
Commercial paper (2)
156,766 156,459 — — 156,766 156,459 
Government bonds
Non-US10,033 9,875 2,147 2,092 12,180 11,967 
US (2)
205,898 204,097 44,197 42,826 250,095 246,923 
Securitization notes receivable and certificates (1)
— — 34,093 32,766 34,093 32,766 
Other1,003 1,003 — — 1,003 1,003 
Total securities available for sale$732,504 $727,965 $223,203 $216,925 $955,707 $944,890 

June 30, 2022
Within 1 yearGreater than 1 year, less than or equal to 5 yearsTotal
Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Certificates of deposit (2)
$317,331 $316,416 $— $— $317,331 $316,416 
Corporate bonds (2)
206,208 204,614 165,699 164,057 371,907 368,671 
Commercial paper (2)
708,694 707,565 — — 708,694 707,565 
Government bonds
  Non-US11,895 11,813 6,301 6,142 18,196 17,955 
  US (2)
360,757 359,242 78,190 77,685 438,947 436,927 
Securitization notes receivable and certificates (1)
— — 52,180 51,678 52,180 51,678 
Total securities available for sale$1,604,885 $1,599,650 $302,370 $299,562 $1,907,255 $1,899,212 
(1)Based on weighted average life of expected cash flows as of December 31, 2022 and June 30, 2022.
(2)Certificates of deposit, corporate bonds, US government bonds, and commercial paper include $30.0 million and $303.8 million as of December 31, 2022 and June 30, 2022, respectively, classified as cash and cash equivalents within the interim condensed consolidated balance sheets.

Gross proceeds from matured or redeemed securities were $473.3 million and $2,154.4 million for the three and six months ended December 31, 2022, respectively, and $584.9 million and $635.6 million for the three and six months ended December 31, 2021, respectively.

For available for sale securities realized gains and losses from portfolio sales were not material for the three and six months ended December 31, 2022. There were no portfolio sales or associated realized gains or losses for the three and six months ended December 31, 2021.



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Non-marketable Equity Securities

Equity investments without a readily determinable fair value held at cost were $43.2 million as of both December 31, 2022 and June 30, 2022 and are included in other assets within the interim condensed consolidated balance sheets.

There have been no unrealized or realized gains and losses due to observable changes in orderly transactions and we did not record any impairment for the three and six months ended December 31, 2022 and 2021.

13.   Fair Value of Financial Assets and Liabilities

ASC Topic 820, “Fair Value Measurement” (“ASC 820”) establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

•Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

•Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
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Financial Assets and Liabilities Recorded at Fair Value

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2022 and June 30, 2022 (in thousands):
December 31, 2022
Level 1Level 2Level 3Total
Assets:
Cash and cash equivalents:
Money market funds$899,736 $— $— $899,736 
Government bonds - U.S.— 29,967 — 29,967 
Securities available for sale:
Certificate of deposit — 181,758 — 181,758 
Corporate bonds — 314,014 — 314,014 
Commercial paper — 156,459 — 156,459 
Government bonds:
Non-U.S.— 11,967 — 11,967 
U.S.— 216,956 — 216,956 
Securitization notes receivable and residual trust certificates— — 32,766 32,766 
Other— — 1,003 1,003 
Servicing assets— — 1,093 1,093 
Derivative instruments— 69,615 — 69,615 
Total assets$899,736 $980,736 $34,862 $1,915,334 
Liabilities:
Servicing liabilities$— $— $3,680 $3,680 
Performance fee liability— — 1,876 1,876 
Residual trust certificates, held by third-parties— — 242 242 
Contingent consideration— — 12,510 12,510 
Profit share liability— — 3,697 3,697 
Total liabilities$— $— $22,005 $22,005 

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June 30, 2022
Level 1Level 2Level 3Total
Assets:
Cash and cash equivalents:
Money market funds$162,483 $— $— $162,483 
Certificates of deposit— 16,026 — 16,026 
Commercial paper— 229,272 — 229,272 
Government bonds - U.S.— 58,541 — 58,541 
Securities available for sale:
Certificate of deposit— 300,390 — 300,390 
Corporate bonds— 368,671 — 368,671 
Commercial paper— 478,293 — 478,293 
Government bonds:
Non-U.S.— 17,955 — 17,955 
U.S.— 378,386 — 378,386 
Securitization notes receivable and residual trust certificates— — 51,678 51,678 
Servicing assets— — 1,192 1,192 
Derivative instruments— 49,983 — 49,983 
Total assets$162,483 $1,897,517 $52,870 $2,112,870 
Liabilities:
Servicing liabilities$— $— $2,673 $2,673 
Performance fee liability— — 1,710 1,710 
Residual trust certificates, held by third-parties— — 377 377 
Contingent consideration— — 23,348 23,348 
Profit share liability— — 1,987 1,987 
Total liabilities$— $— $30,095 $30,095 

There were no transfers between levels during the periods ended December 31, 2022 and June 30, 2022.

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

Securities Available for Sale

As of December 31, 2022, we held marketable securities classified as available for sale. Management obtains pricing from one or more third-party pricing services for the purpose of determining fair value. Whenever available, the fair value is based on quoted bid prices as of the end of the trading day. When quoted prices are not available, other methods may be utilized including evaluated prices provided by third-party pricing services.

Derivative Instruments

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

As of December 31, 2022, we used a combination of interest rate cap agreements and interest rate swaps to manage interest costs and the risk associated with variable interest rates. Neither the interest rate caps or the interest rate swaps have been designated as hedging instruments.

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As of December 31, 2022 and June 30, 2022, the interest rate caps and interest rate swaps are in a net asset position, and classified as Level 2 within the fair value hierarchy, based on prices quoted for similar financial instruments in markets that are not active. The fair values are presented gross within other assets and offsetting collateral received by the counterparty is presented as a liability within accrued expenses and other liabilities on the interim condensed consolidated balance sheets. Any changes in the fair value of these financial instruments are reflected in other (expense) income, net, on the interim condensed consolidated statements of operations and comprehensive loss.

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

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

Servicing Assets and Liabilities

We sold loans with an unpaid balance of $2.1 billion and $4.1 billion for the three and six months ended December 31, 2022, respectively, and $2.5 billion and $3.6 billion for the three and six months ended December 31, 2021, respectively, for which we retained servicing rights.

As of December 31, 2022 and June 30, 2022, we serviced loans which we sold with a remaining unpaid principal balance of $4.6 billion and $4.5 billion, respectively.

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

Adequate Compensation

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

Discount Rate

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

Net Default Rate

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

We earned $21.5 million and $42.9 million of servicing income for the three and six months ended December 31, 2022, respectively, and $11.3 million and $20.8 million for the three and six months ended December 31, 2021, respectively.

As of December 31, 2022 and June 30, 2022, the aggregate fair value of the servicing assets was measured at $1.1 million and $1.2 million, respectively, and presented within other assets on the interim condensed consolidated balance sheets. As of December 31, 2022 and June 30, 2022, the aggregate fair value of the servicing
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liabilities was measured at $3.7 million and $2.7 million, respectively, and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets.

The following table summarizes the activity related to the aggregate fair value of our servicing assets (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Fair value at beginning of period$1,142 $2,287 $1,192 $2,349 
Initial transfers of financial assets404 645 433 1,114 
Subsequent changes in fair value(453)(754)(532)(1,285)
Fair value at end of period$1,093 $2,178 $1,093 $2,178 

The following table summarizes the activity related to the aggregate fair value of our servicing liabilities (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Fair value at beginning of period$3,152 $3,610 $2,673 $3,961 
Initial transfers of financial assets2,207 6,749 4,195 8,724 
Subsequent changes in fair value(1,679)(1,733)(3,188)(4,059)
Fair value at end of period$3,680 $8,626 $3,680 $8,626 

The following tables presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of servicing assets and liabilities as of December 31, 2022 and June 30, 2022:

December 31, 2022
Unobservable InputMinimumMaximumWeighted Average
Servicing assetsDiscount rate30.00 %30.00 %30.00 %
Adequate compensation (1)
0.75 %3.00 %1.01 %
Gross default rate (2)
1.84 %10.56 %4.08 %
Servicing liabilitiesDiscount rate30.00 %30.00 %30.00 %
Adequate compensation (1)
0.75 %3.00 %2.22 %
Gross default rate (2)
6.72 %36.55 %14.22 %
June 30, 2022
Unobservable InputMinimumMaximumWeighted Average
Servicing assetsDiscount rate30.00 %30.00 %30.00 %
Adequate compensation(1)
0.78 %1.85 %1.10 %
Gross default rate (2)
0.59 %50.59 %1.59 %
Servicing liabilitiesDiscount rate30.00 %30.00 %30.00 %
Adequate compensation(1)
2.13 %2.34 %2.21 %
Gross default rate (2)
9.03 %24.44 %13.81 %
(1)Estimated annual cost of servicing a loan as a percentage of unpaid principal balance 
(2)Annualized estimated gross charge-offs as a percentage of unpaid principal balance

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The following table summarizes the effect that adverse changes in estimates would have on the fair value of the servicing assets and liabilities given hypothetical changes in significant unobservable inputs (in thousands):
December 31, 2022June 30, 2022
Servicing assets
Gross default rate assumption:
Gross default rate increase of 25%$(1)$11 
Gross default rate increase of 50%$(2)$22 
Adequate compensation assumption:
Adequate compensation increase of 10%$(801)$— 
Adequate compensation increase of 20%$(1,602)$— 
Adequate compensation increase of 25%$— $(3,513)
Adequate compensation increase of 50%$— $(7,026)
Discount rate assumption:
Discount rate increase of 25%$(40)$(57)
Discount rate increase of 50%$(77)$(109)
Servicing liabilities
Gross default rate assumption:
Gross default rate increase of 25%$(15)$(10)
Gross default rate increase of 50%$(31)$(21)
Adequate compensation assumption:
Adequate compensation increase of 10%$3,181 $— 
Adequate compensation increase of 20%$6,363 $— 
Adequate compensation increase of 25%$— $6,139 
Adequate compensation increase of 50%$— $12,278 
Discount rate assumption:
Discount rate increase of 25%$(75)$(50)
Discount rate increase of 50%$(145)$(98)

Performance Fee Liability

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

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The following table summarizes the activity related to the fair value of the performance fee liability (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Fair value at beginning of period$1,763 $1,335 $1,710 $1,290 
Purchases of loans572 503 1,051 833 
Settlements Paid(501)— (501)— 
Subsequent changes in fair value42 (308)(384)(593)
Fair value at end of period$1,876 $1,530 $1,876 $1,530 

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

The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability as of December 31, 2022 and June 30, 2022:

December 31, 2022
Unobservable InputMinimumMaximumWeighted Average
Discount rate10.00%10.00%10.00%
Refund rate4.50%4.50%4.50%
Default rate1.78%3.34%2.63%
June 30, 2022
Unobservable InputMinimumMaximumWeighted Average
Discount rate10.00%10.00%10.00%
Refund rate4.50%4.50%4.50%
Default rate1.78%3.10%2.42%

Residual Trust Certificates Held by Third-Parties in Consolidated VIEs

Residual trust certificates held by third-party investor(s) are measured at fair value, using a discounted cash flow model, and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets. Any changes in the fair value of the liability are reflected in other (expense) income, net, on the interim condensed consolidated statements of operations and comprehensive loss. 

The following table summarizes the activity related to the fair value of the residual trust certificates held by third-parties (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Fair value at beginning of period$308 $745 $377 $914 
Repayments(78)(148)(177)(403)
Subsequent changes in fair value12 22 42 108 
Fair value at end of period$242 $619 $242 $619 


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

The following table present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties as of December 31, 2022 and June 30, 2022:

December 31, 2022
Unobservable InputMinimumMaximumWeighted Average
Discount rate10.00%15.00%10.00%
Loss rate0.71%1.07%0.71%
Prepayment rate6.50%13.00%13.00%

June 30, 2022
Unobservable InputMinimumMaximumWeighted Average
Discount rate10.00%10.00%10.00%
Loss rate0.75%0.75%0.75%
Prepayment rate8.00%8.00%8.00%

Retained Beneficial Interests in Unconsolidated VIEs

As of December 31, 2022, the Company held notes receivable and residual trust certificates with an aggregate fair value of $32.8 million in connection with unconsolidated securitizations. The balances correspond to the 5% economic risk retention the Company is required to maintain as the securitization sponsor.

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

The following table summarizes the activity related to the fair value of the residual trust certificates (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Fair value at beginning of period$41,503 $13,744 $51,678 $16,170 
Additions— 13,695 — 13,695 
Cash received (due to payments or sales)(9,063)(2,080)(18,835)(4,384)
Change in unrealized gain (loss)138 (73)(510)(184)
Accrued interest295 84 748 70 
Reversal of (impairment on) securities available for sale(107)(51)(315)(48)
Fair value at end of period$32,766 $25,319 $32,766 $25,319 

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

The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates as of December 31, 2022 and June 30, 2022:

December 31, 2022
Unobservable InputMinimumMaximumWeighted Average
Discount rate4.45%37.77%7.28%
Loss rate0.99%15.30%3.38%
Prepayment rate6.75%26.40%18.35%
June 30, 2022
Unobservable InputMinimumMaximumWeighted Average
Discount rate3.68%22.50%5.37%
Loss rate0.61%10.95%2.65%
Prepayment rate5.25%35.00%18.48%

The following table summarizes the effect that adverse changes in estimates would have on the fair value of the securitization residual trust certificates given hypothetical changes in significant unobservable inputs (in thousands):
December 31, 2022June 30, 2022
Discount rate assumption:
Discount rate increase of 25%$(417)$(1,410)
Discount rate increase of 50%$(820)$(2,295)
Loss rate assumption:
Loss rate increase of 25%$(297)$(729)
Loss rate increase of 50%$(460)$(964)
Prepayment rate assumption:
Prepayment rate decrease of 25%$(59)$(545)
Prepayment rate decrease of 50%$(119)$(519)

Contingent Consideration

Our acquisition of PayBright, Inc. (“PayBright”) on January 1, 2021 included consideration transferred and 2,587,362 shares of our common stock held in escrow, contingent upon the achievement of future milestones. At the acquisition date, we classified the contingent consideration as a liability and estimated its fair value using a Monte Carlo simulation utilizing assumptions of simulated revenue, equity volatility, and a discount rate. The liability is remeasured to its fair value at each reporting date, utilizing a Monte Carlo simulation for periods in which actual revenues are unknown, until the contingency is resolved. During the year ended June 30, 2022, one of these milestones was achieved and 1,293,681 shares of our Class A common stock were released from escrow, resulting in a reduction to the contingent liability. During the three and six months ended December 31, 2022, an additional milestone was achieved and the fair value was estimated based on the shares expected to be released from escrow multiplied by the estimated share price. The fair value estimate represents a Level 3 measurement, as the revenue milestone represents a significant unobservable input. The change in fair value of the contingent consideration at
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each reporting date is recognized as a component of other (expense) income, net in the interim condensed consolidated statements of operations and comprehensive loss for the respective period.

The following table summarizes the activity related to the fair value of the PayBright contingent consideration (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Fair value at beginning of period$24,269 $290,719 $23,348 $153,447 
Subsequent changes in fair value(12,062)(34,026)(9,302)107,567 
Effect of foreign currency translation303 (2,943)(1,536)(7,264)
Fair value at end of period$12,510 $253,750 $12,510 $253,750 

Profit Share Liability

On January 1, 2021, we entered into a commercial agreement with an enterprise partner, in which we are obligated to share in the profitability of transactions facilitated by our platform. Upon capture of a loan under this program, we record a liability associated with the estimated future profit to be shared over the life of the loan based on estimated program profitability levels. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets.

The following table summarizes the activity related to the fair value of the profit share liability (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
Fair value at beginning of period$1,876 $1,400 $1,987 $2,464 
Facilitation of loans2,342 2,534 3,475 3,574 
Actual performance612 (1,011)(2,264)(1,011)
Subsequent changes in fair value(1,133)(871)499 (2,975)
Fair value at end of period$3,697 $2,052 $3,697 $2,052 

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

The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the profit sharing liability as of December 31, 2022 and June 30, 2022:

December 31, 2022
Unobservable InputMinimumMaximumWeighted Average
Discount rate30.00%30.00%30.00%
Program profitability0.07%1.82%1.72%
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June 30, 2022
Unobservable InputMinimumMaximumWeighted Average
Discount rate30.00%30.00%30.00%
Program profitability1.25%3.54%1.28%


Financial Assets and Liabilities Not Recorded at Fair Value

The following tables present the fair value hierarchy for financial assets and liabilities not recorded at fair value as of December 31, 2022 and June 30, 2022 (in thousands):

December 31, 2022
Carrying AmountLevel 1Level 2Level 3Balance at Fair Value
Assets:
Loans held for sale$344 $— $344 $— $344 
Loans held for investment, net3,473,404 — — 3,613,246 3,613,246 
Other assets11,367 — 11,367 — 11,367 
Total assets$3,485,115 $— $11,711 $3,613,246 $3,624,957 
Liabilities:
Convertible senior notes, net (1)
$1,708,779 $— $948,778 $— $948,778 
Notes issued by securitization trusts1,314,212 — — 1,253,937 1,253,937 
Funding debt (2)
1,894,452 — — 1,894,401 1,894,401 
Total liabilities$4,917,443 $— $948,778 $3,148,338 $4,097,116 
June 30, 2022
Carrying AmountLevel 1Level 2Level 3Balance at Fair Value
Assets:
Loans held for sale$2,670 $— $2,670 $— $2,670 
Loans held for investment, net2,348,169 — — 2,412,871 2,412,871 
Other assets12,661 — 12,661 — 12,661 
Total assets$2,363,500 $— $15,331 $2,412,871 $2,428,202 
Liabilities:
Convertible senior notes, net (1)
$1,706,668 $— $984,285 $— $984,285 
Notes issued by securitization trusts1,627,580 — — 1,529,401 1,529,401 
Funding debt (2)
683,395 — — 683,388 683,388 
Total liabilities$4,017,643 $— $984,285 $2,212,789 $3,197,074 
(1)The estimated fair value of the convertible senior notes is determined based on a market approach, using the estimated or actual bids and offers of the notes in an over-the-counter market on the last business day of the period.
(2)As of December 31, 2022 and June 30, 2022, debt issuance costs in the amount of $11.8 million and $10.8 million, respectively, was included within funding debt.    


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14.   Stockholders’ Equity

Common Stock

The Company had shares of common stock reserved for issuance as follows:
December 31, 2022June 30, 2022
Available outstanding under stock option plan54,689,282 53,158,233 
Available for future grant under stock option plan39,443,744 31,156,746 
Total94,133,026 84,314,979 

The common stock is not redeemable. We have two classes of common stock: Class A common stock and Class B common stock. Each holder of Class A common stock has the right to one vote per share of common stock. Each holder of Class B common stock has the right to 15 votes and can be converted at any time into one share of Class A common stock. Holders of Class A and Class B common stock are entitled to notice of any stockholders’ meeting in accordance with the bylaws of the corporation, and are entitled to vote upon such matters and in such manner as may be provided by law. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the common stock are entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefore, such dividends as may be declared from time to time by the Board of Directors.

Common Stock Warrants

Common stock warrants are included as a component of additional paid in capital within the interim condensed consolidated balance sheets.

In November 2021, we granted warrants to purchase 22,000,000 shares of common stock in connection with our commercial agreements with Amazon. 7,000,000 of the warrant shares have an exercise price of $0.01 per share and a term of 3.5 years, while the remaining 15,000,000 warrant shares have an exercise price of $100 per share and a term of 7.5 years. We valued the warrants at the grant date using the Black-Scholes-Merton option pricing model with the following assumptions: a dividend yield of zero; years to maturity of 3.5 and 7.5 years, respectively; volatility of 45%; and a risk-free rate of 0.93% and 1.47%, respectively. We recognized an asset of $133.5 million associated with the portion of the warrants that were fully vested at the grant date. Refer to Note 6. Balance Sheet Components for more information on the asset and related amortization during the period. The remaining grant-date fair value of the warrants will be recognized within our interim condensed consolidated statements of operations and comprehensive loss as a component of sales and marketing expense as the warrants vest, based upon Amazon’s satisfaction of the vesting conditions. During the three and six months ended December 31, 2022, a total of $138.6 million and $257.7 million, respectively, was recognized within sales and marketing expense which included $10.5 million and $20.9 million, respectively, in amortization expense of the commercial agreement asset and $128.1 million and $236.8 million, respectively, in expense based upon the grant-date fair value of the warrant shares that vested. During both the three and six months ended December 31, 2021, a total of $70.6 million was recognized within sales and marketing expense which included $5.8 million in amortization expense of the commercial agreement asset and $64.9 million in expense based upon the grant-date fair value of the warrant shares that vested.


15.   Equity Incentive Plans

2012 Stock Plan

Under our Amended and Restated 2012 Stock Plan (the “Plan”), we may grant incentive and nonqualified stock options, restricted stock, and restricted stock units (“RSUs”) to employees, officers, directors, and consultants. As of December 31, 2022, the maximum number of shares of common stock which may be issued under the Plan is
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146,209,197 Class A shares. As of December 31, 2022 and June 30, 2022, there were 39,443,744 and 31,156,746 shares of Class A common stock, respectively, available for future grants under the Plan.

Stock Options

For stock options granted before our IPO in January 2021, the minimum expiration period is seven years after termination of employment or 10 years from the date of grant. For stock options granted after our IPO, the minimum expiration period is three months after termination of employment or 10 years from the date of grant. Stock options generally vest over a period of four years or with 25% vesting on the 12 month anniversary of the vesting commencement date, and the remainder vesting on a pro-rata basis each month over the next three years.

The following table summarizes our stock option activity for the six months ended December 31, 2022:
Number of OptionsWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value (in thousands)
Balance as of June 30, 2022
19,310,706 $15.22 6.94
Granted1,523,736 21.22 
Exercised(533,393)4.55 
Forfeited, expired or cancelled(908,703)39.09 
Balance as of December 31, 2022
19,392,346 14.87 6.67
Vested and exercisable, December 31, 2022
13,649,028 $10.10 5.79$43,193 
Vested and exercisable, and expected to vest thereafter(1) December 31, 2022
19,342,618 $14.87 6.64$44,086 
(1)Options expected to vest reflect the application of an estimated forfeiture rate.

The weighted-average grant date fair value of options granted during the six months ended December 31, 2022 was $11.81. As of December 31, 2022, unrecognized compensation expense related to unvested stock options was approximately $58.0 million, which is expected to be recognized over a remaining weighted-average period of 2.2 years.

When an employee exercises stock options, we collect and remit taxes on the employee’s behalf to applicable taxing authorities. As of December 31, 2022 and June 30, 2022, the balance of equity exercise taxes payable was $1.9 million and $10.9 million, respectively, which is included in accounts payable on the interim condensed consolidated balance sheets.

Value Creation Award

In November 2020, in connection with an overall review of the compensation of Max Levchin, our Chief Executive Officer, in advance of the IPO, and taking into account Mr. Levchin’s leadership since the inception of the Company, the comparatively modest level of cash compensation he had received from the Company during his many years of service, and that he did not hold any unvested equity awards, the Company’s Board of Directors approved a long-term, multi-year performance-based stock option grant providing Mr. Levchin with the opportunity to earn the right to purchase up to 12,500,000 shares of the Company’s Class A common stock (the “Value Creation Award”). We recognize stock-based compensation on these awards based on the grant date fair value using an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable of being satisfied. During the three and six months ended December 31, 2022, we incurred stock-based compensation expense of $27.5 million and $55.0 million, respectively, associated with the Value Creation Award as a component of general and administrative expense within the interim condensed consolidated
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statements of operations and comprehensive loss. For the three and six months ended December 31, 2021, we incurred stock-based compensation expense of $42.3 million and $84.5 million, respectively.

As of December 31, 2022, unrecognized compensation expense related to the Value Creation Award was approximately $152.5 million, which is expected to be recognized over a remaining weighted-average period of 3.0 years.

Restricted Stock Units

RSUs granted prior to the IPO were subject to two vesting conditions: a service-based vesting condition (i.e., employment over a period of time) and a performance-based vesting condition (i.e., a liquidity event in the form of either a change of control or an initial public offering, each as defined in the Plan), both of which must be met in order to vest. The performance-based condition was met upon the IPO. We record stock-based compensation expense for those RSUs on an accelerated attribution method over the requisite service period, which is generally four years. RSUs granted after IPO are subject to a service-based vesting condition. We record stock-based compensation expense for service-based RSUs on a straight-line basis over the requisite service period, which is generally one to four years.

The following table summarizes our RSU activity during the six months ended December 31, 2022:
Number of SharesWeighted Average Grant Date Fair Value
Non-vested as of June 30, 2022
21,387,592 $38.41 
Granted9,860,752 27.48 
Vested(6,263,666)34.50 
Forfeited, expired or cancelled(2,106,144)39.77 
Non-vested as of December 31, 2022
22,878,534 $34.64 

As of December 31, 2022, unrecognized compensation expense related to unvested RSUs was approximately $675.8 million, which is expected to be recognized over a remaining weighted-average period of 2.0 years.

2020 Employee Stock Purchase Plan

On November 18, 2020, our Board of Directors adopted and approved the 2020 Employee Stock Purchase Plan (“ESPP”). The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum effort towards the success of the Company and that of its affiliates. A total of 11.3 million shares of Class A common stock are reserved and available for issuance under the ESPP and 649,580 shares have been issued as of December 31, 2022. The ESPP provides for six-month offering periods beginning December 1 and June 1 of each year, with the initial six-month offering period beginning December 1, 2021. At the end of each offering period, shares of our Class A common stock are purchased on behalf of each ESPP participant at a price per share equal to 85% of the lesser of (1) the fair market value of the Class A common stock on first day of the offering period (the grant date) or (2) the fair market value of the Class A common stock on the last day of the offering period (the purchase date). We use the Black-Scholes-Merton option pricing model to measure the fair value of the purchase rights issued under the ESPP at the first day of the offering period, which represents the grant date. We record stock-based compensation expense on a straight-line basis over each six-month offering period, the requisite service period of the award.
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Stock-Based Compensation Expense

The following table presents the components and classification of stock-based compensation (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
General and administrative$66,659 $61,947 $133,999 $129,689 
Technology and data analytics48,534 21,427 91,962 41,494 
Sales and marketing5,549 4,633 13,677 9,657 
Processing and servicing1,033 530 1,945 886 
Total stock-based compensation in operating expenses121,775 88,537 241,583 181,726 
Capitalized into property, equipment and software, net22,443 13,383 43,647 25,073 
Total stock-based compensation expense$144,218 $101,920 $285,230 $206,799 

In connection with the acquisition of Returnly on May 1, 2021, we issued 304,364 shares of our Class A common stock, which are held in escrow. Because the future payment of the escrowed shares is contingent on continued employment of certain employees, the arrangement represents stock-based compensation in the post combination period. The grant-date fair value was estimated based on the value of the shares at the date of closing. The escrowed shares have a requisite service period of two years and contain a performance-based vesting condition (i.e., the achievement of certain revenue targets). We record stock-based compensation expense on a straight-line basis for each tranche over the requisite service period, as long as the performance-based conditions are considered probable of being satisfied. During the six months ended December 31, 2022, the arrangement was modified, resulting in the release of 45,459 shares from escrow and the remittance of 243,384 shares back to the Company. The modification resulted in the recognition of $2.0 million of incremental compensation cost within general and administrative expenses in our interim condensed statement of operations. As of December 31, 2022, 15,521 shares remain in escrow.

16.   Income Taxes

The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’s quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors, including variability in the pre-tax jurisdictional mix of earnings and the impact of discrete items.

For the three and six months ended December 31, 2022, we recorded income tax expense (benefit) of $(1.6) million and $(1.7) million, respectively, which was primarily attributable to the effects of foreign income taxes on our Canadian subsidiary and partially offset by various U.S state and other foreign income taxes, as well as the tax amortization of certain intangibles. For the three and six months ended December 31, 2021, we recorded income tax expense (benefit) of $0.3 million and $0.4 million, respectively, which was primarily attributable to various U.S. state and foreign income taxes and the tax amortization of certain intangibles.

As of December 31, 2022, we continue to recognize a full valuation allowance against our U.S. federal and state net deferred tax assets. This determination was based on the assessment of the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Company for the prior three fiscal years. The presence of a three-year cumulative loss limits the ability to consider other subjective evidence, such as our expectations of future taxable income and projections for growth.

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As a result of the integration and consolidation of our PayBright business into and with Affirm’s Canadian business and the expansion of our overall business in Canada, as well as other objectively verifiable positive evidence, all of which we have concluded is sufficient to outweigh the existing negative evidence – including the presence of a three-year cumulative loss attributable to the related foreign jurisdiction, we have determined that it is more likely than not that our Canadian deferred tax assets will be realized and a valuation allowance is not required.

On August 16, 2022, the Inflation Reduction Act was enacted into U.S. federal law. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes.

17.   Net Loss per Share Attributable to Common Stockholders

The following table presents basic and diluted net loss per share attributable to common stockholders for Class A and Class B common stock (in thousands, except share and per share data):

Three Months Ended December 31,Six Months Ended December 31,
20222022
Class AClass BClass AClass B
Numerator:
Net loss$(256,451)$(65,986)$(455,739)$(117,967)
Net loss attributable to common stockholders - basic and diluted$(256,451)$(65,986)$(455,739)$(117,967)
Denominator:
Weighted average shares of common stock - basic233,581,678 60,101,653 232,201,361 60,104,939 
Weighted average shares of common stock - diluted233,581,678 60,101,653 232,201,361 60,104,939 
Net loss per share:
Basic$(1.10)$(1.10)$(1.96)$(1.96)
Diluted$(1.10)$(1.10)$(1.96)$(1.96)

Three Months Ended December 31,Six Months Ended December 31,
20212021
Class AClass BClass AClass B
Numerator:
Net loss$(121,609)$(38,126)$(332,251)$(134,099)
Net loss attributable to common stockholders - basic and diluted$(121,609)$(38,126)$(332,251)$(134,099)
Denominator:
Weighted average shares of common stock - basic214,335,757 67,198,131 194,918,082 78,670,012 
Weighted average shares of common stock - diluted214,335,757 67,198,131 194,918,082 78,670,012 
Net loss per share:
Basic$(0.57)$(0.57)$(1.70)$(1.70)
Diluted$(0.57)$(0.57)$(1.70)$(1.70)
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The following common stock equivalents, presented based on amounts outstanding, were excluded from the calculation of diluted net loss per share attributable to common stockholders because their inclusion would have been anti-dilutive:
As of December 31,
20222021
Restricted stock units22,878,534 13,345,552 
Stock options, including early exercise of options19,392,346 18,851,935 
Common stock warrants6,178,730 6,075,005 
Employee stock purchase plan shares1,121,878 123,093 
Total49,571,488 38,395,585 

18.   Segments and Geographical Information

We conduct our operations through a single operating segment and, therefore, one reportable segment.

Revenue

Revenue by geography is based on the billing addresses of the borrower or the location of the merchant’s national headquarters. The following table sets forth revenue by geographic area (in thousands):
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
United States$390,389 $350,486 $742,974 $612,089 
Canada9,121 10,525 18,135 18,307 
Other48 — 73 — 
Total$399,558 $361,011 $761,182 $630,396 

Long-Lived Assets

The following table sets forth our long-lived assets, consisting of property, equipment and software, net and operating lease right-of-use assets, by geographic area (in thousands):
December 31, 2022June 30, 2022
United States$288,989 $217,532 
Canada3,195 4,390 
Other$369 $231 
Total$292,553 $222,153 
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19.   Subsequent Events

The Company has evaluated the impact of events that have occurred subsequent to December 31, 2022, through the date of the interim condensed consolidated financial statements were filed with the SEC. There were no significant subsequent events identified other than the matters described below.
Business Combination

On February 1, 2023, we completed the closing of the transaction contemplated by a share purchase agreement entered into with certain sellers (as set forth therein) to acquire the entire issued share capital of Butter Holdings Ltd., a buy now, pay later company based in the United Kingdom. The purchase price was comprised of $14.9 million in cash, subject to adjustments in accordance with the purchase agreement, and $1.5 million settlement of subordinated secured notes. The initial accounting for the business combination is incomplete at the time of this filing due to the limited amount of time between the acquisition date and the date that these financial statements are issued. As a result, it is impracticable for us to provide all of the disclosures required for a business combination pursuant to ASC 805.
Restructuring

On February 8, 2023, we committed to a restructuring plan (the “Plan”) designed to manage our operating expenses in response to current macroeconomic conditions and ongoing business prioritization efforts. The Plan provides for a reduction of our workforce by approximately 500 employees, representing approximately 19% of our employees. In connection with the Plan, we are reevaluating our need for leased office space and have made the decision to fully vacate a portion of our San Francisco office. We expect implementation of the Plan to be substantially complete by the end of fiscal 2023.
We expect to incur approximately $35 million to $39 million in total restructuring costs, which includes cash expenditures of $24 million to $28 million relating to one-time employee severance and other employment termination benefits and non-cash expenditures of approximately $11 million relating to the acceleration of amortization expense for the lease asset that we expect to incur in connection with the partial office closure. We expect to record the majority of the associated charges and the majority of the associated cash expenditures in the third fiscal quarter of 2023.
The estimates of the costs and expenses that we expect to incur are subject to a number of assumptions and actual expenses may differ materially from the estimates disclosed above. We may also incur costs and expenses not currently contemplated due to unanticipated events that may occur with the implementation of the Plan.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2022 included in our Annual Report on Form 10-K. 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 solutions allow consumers to pay for purchases in fixed amounts without deferred interest, late 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.

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Our total revenue, net was approximately $399.6 million and $761.2 million for the three and six months ended December 31, 2022, respectively, and $361.0 million and $630.4 million for the three and six months ended December 31, 2021, respectively. We incurred net losses of $322.4 million and $573.7 million for the three and six months ended December 31, 2022, respectively, and $159.7 million and $466.4 million for the three and six months ended December 31, 2021, respectively.
Our business is designed to scale efficiently. Our partnerships with a diverse set of capital partners, including our warehouse facilities, securitization trusts and forward flow arrangements, have allowed us to remain equity capital efficient though market cycles. Since July 1, 2016, we have processed approximately $43.0 billion of GMV on our platform. As of December 31, 2022, we had over $10.5 billion in funding capacity from our capital partners, a decrease of $0.1 billion from $10.6 billion as of June 30, 2022.
The equity capital required to build our total platform portfolio has increased from approximately 3% of the total platform portfolio as of June 30, 2022, to approximately 5% as of December 31, 2022. This metric measures the equity intensity of our business or the amount of capital used in relation to the scale of our enterprise. 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 loans held for investment, loans held for sale, and loans owned by third-parties. This amount totaled $8.4 billion and $7.1 billion as of December 31, 2022 and June 30, 2022, 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 $459.0 million and $206.1 million as of December 31, 2022 and June 30, 2022, respectively. Equity capital required as a percent of the last twelve months’ GMV was 2% and 1% as of December 31, 2022 and June 30, 2022, 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, 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.
Our Financial Model

Our Revenue Model
From merchants, we earn a fee when we help them convert a sale and facilitate a transaction. We have two loan product offerings: Pay-in-4 and Core loans. Pay-in-4 is a short-term payment plan with four biweekly 0% APR installments, while Core loans include all interest bearing installment loans and 0% APR monthly installment loans. 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 and six months ended December 31, 2022, Pay-in-4 represented 23% and 21% of total GMV facilitated through our platform, respectively, while 0% APR Core loans represented 10% and 13%, respectively. For the three and six months ended December 31, 2021, Pay-in-4 represented 18% and 17% of total GMV facilitated through our platform, respectively, while 0% APR Core loans represented 26% and 27%, respectively.
From consumers, we earn interest income on the simple interest loans that we originate or 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 addition, interest income includes the amortization of any discounts or premiums on loan receivables created upon either the purchase of a loan from one of our originating bank partners or the origination of a loan.
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.
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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/their preferred repayment option. A portion of these loans are funded and issued by 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 through its own funding sources 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 such 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 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. For the three and six months ended December 31, 2022, we originated approximately $261.3 million, or 5%, and $430.4 million, or 4%, respectively, of loans in Canada compared to approximately $293.4 million, or 7%, and $429.7 million, or 6%, of loans for the three and six months ended December 31, 2021, respectively. For the three and six months ended December 31, 2022, we directly originated $807.7 million, or 14%, and $1,512.4 million, or 15%, respectively, of loans in the U.S. pursuant to our state licenses, compared to approximately $728.3 million and $1,114.6 million, or 16%, of loans for both the three and six months ended December 31, 2021, respectively.
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.
Key Operating Metrics

We focus on several key operating metrics to measure the performance of our business and help determine strategic direction. In addition to revenue, net (loss) income, and other results under U.S. GAAP, the following tables set forth key operating metrics we use to evaluate our business.
Three Months Ended
December 31,		Six Months Ended December 31,
20222021% Change20222021% Change
(in thousands, except per consumer data)
Gross Merchandise Volume (GMV)$5,658,286 $4,457,574 27 %$10,047,703 $7,170,513 40 %
GMV
We measure GMV 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 December 31, 2022, GMV was $5.7 billion, which represented an increase of approximately 27% as compared to $4.5 billion for the same period in 2021.
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For the six months ended December 31, 2022, GMV was $10.0 billion, which represented an increase of approximately 40% as compared to $7.2 billion for the same period in 2021. The increase in GMV was driven by the strong network effects of the expansion of our active merchant base, an increase in active consumers, and an increase in average transactions per consumer.

December 31, 2022December 31, 2021% Change
(in thousands, except per consumer data)
Active Consumers15,615 11,231 39 %
Transactions per Active Consumer (x)3.5 2.538 %
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 December 31, 2022, we had 15.6 million active consumers, representing an increase of approximately 39% compared to 11.2 million as of December 31, 2021.
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 December 31, 2022, we had approximately 3.5 transactions per active consumer, an increase of approximately 38% compared to December 31, 2021, primarily as a result of platform growth and higher frequency repeat users driven by consumer engagement.
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. While we have continued to improve our equity capital efficiency, the percentage of our equity capital required as a percent of the last twelve months’ GMV increased from approximately 1% as of June 30, 2022, to approximately 2% as of December 31, 2022. The increase is due to an increase in on-balance sheet loans, and a lower percentage of our on balance sheet loans funded through securitizations, which generally require a lower percentage of equity capital compared to our warehouse credit facilities. We have elected this shift in our funding mix in response to the current market environment given our ability to allocate loans to warehouse facilities with better economic terms at a given time to support the growth of our business while optimizing cost of funds. The mix of on-balance sheet and off-balance sheet funding is a function of how we choose to allocate loan volume, which is determined by the economic arrangements and supply of capital available to us, both of which may also impact our results in any given period.
Mix of Business on Our Platform
The shifts in volume among merchants and the mix of products that our merchants offer and our consumers purchase in any period affects our operating results. These mix impacts affect GMV, revenue, our financial results, and our key operating metric performance for that period. Differences in product mix relate to different loan durations, APR mix, and varying proportion of 0% APR versus interest-bearing financings.
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Product and economic terms of commercial agreements vary among our merchants. 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. Merchant mix shifts are driven in part by the products offered by the merchant, the economic terms negotiated with the merchant, 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. Our revenue as a percentage of GMV in any given period varies across products. As such, as we continue to expand our network to include more merchants, revenue as a percentage of GMV will vary. In addition, our commercial agreement with Shopify to offer Shop Pay Installments powered by Affirm and our Pay-in-4 offering will continue to impact 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 Pay-in-4 and other low-AOV offerings.
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. Adverse events that occur during these months could have a disproportionate effect on our financial results for the fiscal year.
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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 December 31,Six Months Ended December 31,
20222021$%20222021$%
(in thousands, except percentages)
Revenue
Merchant network revenue$134,019 $127,087 $6,932 5 %$247,168 $219,331 $27,837 13 %
Virtual card network revenue29,117 26,558 2,559 10 %55,825 45,953 9,872 21 %
Total network revenue163,136 153,645 9,491 6 %302,993 265,284 37,709 14 %
Interest income (1)
155,321 138,355 16,966 12 %292,123 255,657 36,466 14 %
Gain on sales of loans (1)
59,607 57,690 1,917 3 %123,202 88,669 34,533 39 %
Servicing income21,494 11,321 10,173 90 %42,864 20,786 22,078 106 %
Total Revenue, net$399,558 $361,011 $38,547 11 %$761,182 $630,396 $130,786 21 %
Operating Expenses (2)
Loss on loan purchase commitment$38,422 $65,265 $(26,843)(41)%$74,032 $116,943 $(42,911)(37)%
Provision for credit losses106,689 52,640 54,049 103 %170,939 116,287 54,652 47 %
Funding costs43,751 17,700 26,051 147 %68,817 34,453 34,364 100 %
Processing and servicing66,508 41,849 24,659 59 %120,867 67,050 53,817 80 %
Technology and data analytics156,747 94,989 61,758 65 %301,708 173,002 128,706 74 %
Sales and marketing188,334 143,476 44,858 31 %352,207 207,436 144,771 70 %
General and administrative158,639 141,292 17,347 12 %319,611 277,496 42,115 15 %
Total Operating Expenses759,090 557,211 201,879 36 %1,408,181 992,667 415,514 42 %
Operating Loss$(359,532)$(196,200)$(163,332)83 %$(646,999)$(362,271)$(284,728)79 %
Other income (expense), net35,527 36,741 (1,214)(3)%71,545 (103,632)175,177 (169)%
Loss Before Income Taxes$(324,005)$(159,459)$(164,546)103 %$(575,454)$(465,903)$(109,551)24 %
Income tax (benefit) expense (1,568)276 (1,844)(668)%(1,748)447 (2,195)(491)%
Net Loss$(322,437)$(159,735)$(162,702)102 %$(573,706)$(466,350)$(107,356)23 %
(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 or off-balance sheet securitization trust, the unamortized discount is released in full at the time of sale and recognized as part of the
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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:

Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
(in thousands)
Balance at the beginning of the period$57,477 $53,657 $42,780 $53,177 
Additions from loans purchased or originated, net of refunds72,650 121,603 143,044 198,873 
Amortization of discount(38,838)(54,965)(77,807)(93,410)
Unamortized discount released on loans sold(13,779)(72,335)(28,953)(110,680)
Impact of foreign currency translation320 — (1,234)— 
Balance at the end of the period$77,830 $47,960 $77,830 $47,960 
(2) Amounts include stock-based compensation as follows:
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
(in thousands)
General and administrative$66,659 $61,947 $133,999 $129,689 
Technology and data analytics48,534 21,427 91,962 41,494 
Sales and marketing5,549 4,633 13,677 9,657 
Processing and servicing1,033 530 1,945 886 
Total stock-based compensation in operating expenses121,775 88,537 241,583 181,726 
Capitalized into property, equipment and software, net22,443 13,383 43,647 25,073 
Total stock-based compensation expense$144,218 $101,920 $285,230 $206,799 
Comparison of the Three and Six Months Ended December 31, 2022 and 2021

Total Revenue, net

Total Revenue, net increased by $38.5 million, or 11%, and $130.8 million, or 21%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. The increase is primarily attributable to an increase of $1.2 billion and $2.9 billion in GMV on our platform, from $4.5 billion and $7.2 billion for the three and six months ended December 31, 2021 to $5.7 billion and $10.0 billion for the three and six months ended December 31, 2022. The increase in GMV was driven by the strong network effects of the expansion of our active merchant base from 168,030 as of December 31, 2021 to 243,371 as of December 31, 2022, an increase in active consumers from 11.2 million as of December 31, 2021 to 15.6 million as of December 31, 2022, and an increase in average transactions per consumer from 2.5 as of December 31, 2021 to 3.5 as of December 31, 2022.
No single merchant partner represented 10% or more of total revenue during the three or the six months ended December 31, 2022 or during the three and six months ended December 31, 2021. However, GMV from loans facilitated on our platform relating to consumer purchases from Amazon, our largest merchant partner based on fiscal 2023 GMV, represented approximately 23% and 20% of total GMV during the three and six months ended December 31, 2022, respectively, while GMV from such loans represented less than 10% of total GMV during both
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the three and six months ended December 31, 2021. The year-over-year increase in Amazon GMV is due primarily to Affirm being an available payment option to Amazon consumers throughout the first half of fiscal 2023, while Affirm was a payment option to Amazon consumers only during a portion of the first half of fiscal 2022.
Merchant network revenue increased by $6.9 million, or 5%, and $27.8 million, or 13%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. 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 higher AOVs.
The increase in merchant network revenue during the three and six month period was primarily driven by an increase in GMV, partially offset by reductions in the concentration of long-term 0% APR loans, our highest merchant fee category, which decreased from 13% of total GMV during both the three and six months ended December 31, 2021, to 4% and 5% during the three and six months ended December 31, 2022, respectively, driven by the increased adoption of our Pay-in-4 product and a more diversified merchant base with a larger concentration of GMV coming from partnerships with merchants that primarily offer interest-bearing loans. During the three and six months ended December 31, 2022, approximately 2% of total revenue was associated with one of our largest merchant partners by merchant network revenue for which we facilitate long-term 0% APR and long-term interest-bearing loans with higher merchant fees, compared with 11% and 10% of total revenue in the prior-year periods, respectively. More broadly, for the three and six months ended December 31, 2022, loans with term lengths greater than 12 months accounted for 18% of GMV compared to 21% for the same period in 2021. AOV was lower at $307 and $317 for the three and six months ended December 31, 2022, respectively, compared to $365 and $379 for the same period in 2021, respectively, primarily as a result of the increased adoption of our Pay-in-4 product during the period.
Additionally, during the three and six months ended December 31, 2022, the reduction of merchant fee revenue was $16.1 million and $29.6 million, respectively, associated with the creation of discounts upon direct origination of loans with par values in excess of the fair value of such loans, compared to $28.7 million and $42.2 million during the same period in 2021. For the three and six months ended December 31, 2022, we directly originated $1.1 billion and $1.9 billion of loans, an increase of 4.6% and 25.9%, respectively, compared to $1.0 billion and $1.5 billion for the same period in 2021. While the discounts created upon the direct origination of a loan reduce merchant network revenue at the time of origination, the discounts are amortized into interest income over the life of the respective loans when retained on the balance sheet and any unamortized discount is reflected in the cost basis when determining gain on sale of loans.
Virtual card network revenue increased by $2.6 million, or 10%, and $9.9 million, or 21%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021, primarily driven by an increase in GMV processed through our issuer processor as a result of increased activity on our virtual card-enabled mobile application, as well as growth in existing and new merchants integrated using our virtual card platform, growing from 966 merchants as of December 31, 2021 to 1,175 merchants as of December 31, 2022. Virtual card network revenue is also impacted by the mix of merchants as different merchants can have different interchange rates depending on their industry or size, among other factors.
Interest income increased by $17.0 million, or 12%, and 36.5 million, or 14%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. 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 36% to $3.2 billion and 33% to $2.9 billion for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. The increase was partially offset by a decrease in the average concentration of 0% APR loans held on our interim consolidated balance sheet, which decreased from 41% for the three and six months ended December 31, 2021 to 36% and 37% for three and six months ended December 31, 2022.
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Gain on sales of loans increased by $1.9 million, or 3%, for the three months ended December 31, 2022 compared to the same period in 2021. We sold loans with an unpaid balance of $2.1 billion for the three months ended December 31, 2022 compared to $2.5 billion for the same period in 2021, for which we retained servicing rights. This decrease in volume was offset by favorable loan sale pricing terms.
Gain on sales of loans increased by $34.5 million, or 39%, for the six months ended December 31, 2022, compared to the same period in 2021, mainly driven by increased loan sale activity to third-party loan buyers. We sold loans with an unpaid balance of $4.1 billion for the six months ended December 31, 2022 compared to $3.6 billion for the same period in 2021, for which we retained servicing rights. This increase was driven by higher loan sale volume to third-party loan buyers, favorable loan sale pricing terms, and optimizing the allocation of loans to loan buyers with higher pricing terms.
Servicing income increased by $10.2 million, or 90%, and 22.1 million, or 106%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021, driven primarily by an increase in the average unpaid principal balance of loans owned by third-party loan owners, which increased from $3.3 billion and $3.0 billion during the three and six months ended December 31, 2021, respectively, to $4.7 billion and $4.0 billion during the three and six months ended December 31, 2022, respectively. Additionally, during the three and six months ended December 31, 2022, an increase of $2.5 million and $3.7 million, respectively, related to the changes in fair value of servicing assets and liabilities contributed to the overall increase in servicing income, compared to the same period in 2021.
Loss on Loan Purchase Commitment
We purchase certain loans from our originating bank partners that are processed through our platform and our originating bank partners put 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.
Loss on loan purchase commitment decreased by $26.8 million, or 41%, and $42.9 million, or 37%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. 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. The difference between fair value and purchase price for our loans is generally correlated with the term length and APR of the loan. As such, the reduction in long term 0% loans purchased from our bank partner contributed to the decline in loss on loan purchase commitment. During the three and six months ended December 31, 2022, we purchased $353.8 million and $750.4 million, respectively, of long-term 0% APR loan receivables from our originating bank partners, representing a decrease of $273.5 million, or 44%, and $335.0 million, or 31%, respectively, compared to the same period in 2021.
Provision for Credit Losses
Provision for credit losses generally represents the amount of expense required to maintain the allowance for credit losses on our interim 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.

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Provision for credit losses increased by $54.0 million, or 103%, and $54.7 million, or 47%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021, driven by growth in the volume of loans held for investment, partially offset by improvements in credit quality of loans outstanding and updates to the assumptions used in our credit loss valuation model, including a refinement to the application of our stress loss multiple. Total loans held for investment was $3.7 billion and $2.4 billion as of December 31, 2022 and 2021, respectively. The allowance for credit losses as a percentage of loans held for investment decreased from 6.3% as of December 31, 2021 to 5.0% as of December 31, 2022, primarily driven by a decrease in allowance loss rate.
Funding Costs
Funding costs consist of interest expense and the amortization of fees for certain borrowings collateralized by our loans including on balance sheet VIEs, sale and repurchase agreements collateralized by our retained securitization interests, and other costs incurred in connection with funding the purchases and originations of loans. 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.
Funding costs increased by $26.1 million, or 147%, and $34.4 million, or 100%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. The increase was primarily due to higher benchmark interest rates, increased utilization fees and an increase of funding debt during the current fiscal year. Additionally, the increase is attributable to a larger volume of on-balance sheet loans being retained during the period. The average balance of notes issued by securitization trusts during the three and six months ended December 31, 2022 was $1.5 billion and $1.6 billion, respectively, compared with $1.6 billion and $1.5 billion during the same periods in 2021, respectively. The average balance of funding debt for the three and six months ended December 31, 2022 was $1.3 billion and $1.1 billion, respectively, compared with $565.4 million and $603.8 million during the same periods in 2021, respectively. Additionally, the average loan balance on-balance sheet was $3.2 billion and $3.0 billion for the three and six months ended December 31, 2022, respectively, compared to $2.3 billion and $2.2 billion during the same period in 2021, respectively. Average total funding debt from warehouses and securitizations for the three and six months ended December 31, 2022 increased by $690.3 million, or 32%, and $607.8 million, or 29%, respectively, compared to the same period in 2021

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, platform fees, and allocated overhead.
Processing and servicing expense increased by $24.7 million, or 59%, and $53.8 million, or 80%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. This increase was primarily driven by an increase in payment processing fees related to increased payment volume of $11.1 million, or 49%, and $39.3 million, or 167%, for the three and six months ended December 31, 2022, respectively, and an increase of $6.6 million and $15.0 million, respectively, in processing fees paid to our platform partners due to platform integrations, as well as short term promotions during the period. Additionally, during the three and six months ended December 31, 2022, third-party customer support and collections spend increased by $4.9 million, or 50%, and $11.7 million, or 77%, respectively, compared to the same period in 2021 due to increased loan volume and transaction growth during the period.
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 internally-developed software.

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Technology and data analytics expense increased by $61.8 million, or 65%, and $128.7 million, or 74%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. This increase is primarily driven by an increase of $39.5 million, or 74%, and $74.6 million, or 72%, in payroll and personnel-related costs for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021, resulting from increased headcount as we continue to support our growth and technology platform. Additionally, data infrastructure and hosting costs increased by $8.4 million, or 34%, and $24.3 million, or 61%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021, due to increased capacity requirements of our technology platform driven by increases in active users and transactions per active consumer.
Furthermore, amortization of internally-developed software increased by $8.9 million, or 168%, and $17.2 million, or 194%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021, primarily as a result of an increase in the number of capitalized projects during the period due to our ongoing investment in software development. Capitalized projects grew by 129% from 170 projects to 389 projects as of December 31, 2022, compared to the same period in 2021.
Sales and Marketing
Sales and marketing costs consist of the expense related to warrants and other share-based payments granted to our enterprise partners, salaries and personnel-related costs, as well as costs of general marketing and promotional activities, promotional event programs, sponsorships, and allocated overhead.
Sales and marketing expense increased by $44.9 million, or 31%, and $144.8 million, or 70%, during the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. The increase was primarily driven by expense related to warrants which was $138.5 million and $257.7 million for the three and six months ended December 31, 2022, respectively. During the prior year period, we recognized expense associated with the warrants of $70.6 million for both the three and six months ended December 31, 2021. The increase was partially offset by a $12.5 million, or 58%, and $21.0 million, or 63%, decrease in brand and consumer marketing spend associated with our brand-activation, holiday shopping, lifestyle, and travel marketing campaigns, as well as a decrease of $3.1 million, or 79%, and $7.6 million, or 76%, in business-to-business marketing spend during the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. Additionally, the sales and marketing expenses related to our Shopify commercial agreement decreased by $8.0 million and $16.0 million, or 47%, during both the three and six months ended December 31, 2022, respectively, compared to the same period in 2021 driven by an extension of our partnership agreement, which also extended the amortization period.
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, allocated overhead, and certain discretionary expenses incurred from operating our technology platform.
General and administrative expense increased by $17.3 million, or 12% and $42.1 million, or 15%, during the three and six months ended December 31, 2022 compared to the same period in 2021, primarily due to an increase of $17.2 million and $35.3 million, respectively in payroll and personnel-related costs resulting from an increased headcount during the period. The largest component of these personnel costs was stock-based compensation, which increased by $4.7 million, or 8%, and $4.3 million, or 3%, for the three and six months ended December 31, 2022, respectively, compared to the same period in 2021. For the three months ended December 31, 2022, the increase was partially offset by a $6.6 million, or 76%, decrease in professional service fees.

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Other Income (Expense), net
Other income (expense), net consists primarily 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 on derivative agreements driven by increases in fair value, amortization of convertible debt issuance cost and revolving credit facility issuance costs, and fair value adjustments resulting from changes in the fair value of our contingent consideration liability, primarily driven by changes in the market price of our Class A common stock.
Other income (expense), net decreased by $1.2 million, or 3%, during the three months ended December 31, 2022 compared to the same period in 2021. The decrease is primarily driven by a $12.1 million gain related to a decrease in the fair value of our contingent consideration liability, as compared to a gain of $34.0 million in the same period in 2021, a change of $22.0 million. The gain in both periods was primarily due to changes in the fair value of our common stock. This was partially offset by an increase in interest income on investments of $15.9 million and a gain of $3.5 million on derivative instruments.
Other income (expense), net increased by $175.2 million, or 169%, during the six months ended December 31, 2022 compared to the same period in 2021. The increase is primarily drive by a $9.3 million gain related to the fair value of our contingent consideration liability as compared to a loss of $107.6 million in the same period in 2021, a change of $116.9 million. The gain in both periods was primarily due to changes in the fair value of our common stock. Additionally, interest income on investments increased by $27.3 million, and the gain on derivative instruments increased by $30.7 million compared to the prior year period, primarily due to additional derivative instruments being entered into during the period and increases in their fair value associated with upward shifts in forward curves and positive market adjustments.
Liquidity and Capital Resources

Sources and Uses of Funds
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. We proactively manage the allocation of loans on our platform across various funding channels based on several factors including, but not limited to, internal risk limits and policies, capital market conditions and channel economics. With rising interest rates and inflation, our excess funding capacity and committed and long-term relationships with a diverse group of existing funding partners help provide flexibility as we optimize our funding to support the growth in loan volume.
Our principal sources of liquidity are cash and cash equivalents, available for sale securities, available capacity from warehouse and revolving credit facilities, revolving securitizations, forward flow loan sale arrangements, and certain cash flows from our operations. As of December 31, 2022, we had $2.4 billion in cash and cash equivalents and available for sale securities, $1.6 billion in funding capacity remaining across our primary funding channels and $205.0 million in borrowing capacity available under our revolving credit facility.




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The following table summarizes our cash, cash equivalents and investments in debt securities (in thousands):
December 31, 2022June 30, 2022
Cash and cash equivalents (1)
$1,440,333 $1,255,171 
Investments in short-term debt securities (2)
697,998 1,295,811 
Investments in long-term debt securities (2)
216,925 299,562 
  Cash, cash equivalent and investments in debt securities $2,355,256 $2,850,544 
(1)Cash and cash equivalents consist of bank accounts, money market funds, certificates of deposits, other commercial paper, and government bonds with maturities less than three months.
(2)Securities available for sale at fair value primarily consist of certificates of deposits, corporate bonds, commercial paper, and government bonds. Short-term securities have maturities less than or equal to one year, and long-term securities range from greater than one year to less than five years.

Available Credit and Funding Debt

Our available capacity as of December 31, 2022 primarily include warehouse credit facilities, convertible senior notes, revolving credit facilities and repurchase liabilities. A detailed description of each of our borrowing arrangements is included in Note 10. Debt in the notes to the interim condensed consolidated financial statements.
The following table summarizes our funding credit facilities as of December 31, 2022. The funding debt consists of warehouse credit facilities, revolving credit facilities, and repurchase liabilities:
Maturity Fiscal YearBorrowing CapacityPrincipal Outstanding
(in thousands)
2023$184,551 $177,864 
2024953,006 520,794 
2025850,000 460,715 
2026584,551 193,954 
2027 and thereafter850,000 541,125 
Total$3,422,108 $1,894,452 
Warehouse Credit Facilities
Our warehouse credit facilities, which allow us to borrow up to an aggregate of $3.4 billion, mature between 2023 and 2029 and subject to covenant compliance, generally permit borrowings up to 12 months prior to the final maturity date. As of December 31, 2022, we have drawn an aggregate of $1.9 billion on our warehouse facilities. As of December 31, 2022, we were in compliance with all applicable covenants in the agreements. Refer to Note 10. Debt in the notes to the interim condensed consolidated financial statements included elsewhere in this Form 10-Q for further details on our warehouse credit facilities.
Convertible Senior Notes
In November 2021, we closed on the issuance of $1.7 billion aggregate principal amount of a convertible senior note which does not bear regular interest, and will mature on November 15, 2026 unless earlier converted, redeemed, or repurchased in accordance with their terms. Refer to Note 10. Debt in the notes to the interim condensed consolidated financial statements for further details on our convertible debt note.
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Revolving Credit Facility
In February 2022, we entered into a revolving credit agreement for a $165.0 million unsecured revolving credit facility, maturing on February 4, 2025, which was subsequently amended to increase the unsecured revolving commitments to $205.0 million. The facility contains certain covenants and restrictions, including certain financial maintenance covenants. As of December 31, 2022, we were in compliance with all applicable covenants in the agreements. To date, there are no borrowings outstanding under the facility. Refer to Note 10. Debt in the notes to the interim condensed consolidated financial statements for further details on our revolving credit facility.
Securitizations
In connection with asset-backed securitizations, we sponsor and establish trusts (deemed to be VIEs) 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. We consolidate securitization VIEs when we are deemed to be the primary beneficiary and therefore have the power to direct the activities that most significantly affect the VIEs’ economic performance and a variable interest that could potentially be significant to the VIE. Where we consolidate the securitization trusts, the loans held in the securitization trusts are included in loans held for investment, and the notes sold to third-party investors are recorded in notes issued by securitization trusts in the interim condensed consolidated balance sheets. Refer to Note 11. Securitization and Variable Interest Entities.
Factors Impacting Liquidity
We believe our current levels of cash, cash equivalents, marketable debt securities, available borrowing capacity under our revolving credit facilities and other liquidity actions currently available to us are sufficient to meet our liquidity requirements for at least the next 12 months. However, we cannot provide assurance 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.
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, and fluctuations in our financial performance. If our available cash balances are insufficient to satisfy our liquidity requirements, we will seek additional equity or debt financing. In a rising interest rate environment, our ability to issue additional equity or incur debt may be impaired and our borrowing costs may increase. Additionally, 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 the necessary cash flows, our results of operations and financial condition could be materially and adversely impacted.


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Cash Flow Analysis

The following table provides a summary of cash flow data during the periods indicated:
Six Months Ended
December 31,
20222021
(in thousands)
Net Cash Provided by (Used in) Operating Activities22,667 (75,104)
Net Cash Used in Investing Activities(574,938)(819,573)
Net Cash Provided by Financing Activities(1)
869,355 2,010,213 
(1)Amounts include net cash provided by the issuance of convertible debt as follows:
Six Months Ended December 31,
20222021
(in thousands)
Proceeds from issuance of common stock, net of repurchases8,137 59,565 
Proceeds from issuance of convertible debt, net— 1,704,300 
Net cash provided by equity-related financing activities$8,137 $1,763,865 
Net cash provided by debt-related financing activities906,538 359,128 
Payments of tax withholding for stock-based compensation(45,320)(112,780)
Net cash provided by financing activities$869,355 $2,010,213 

Cash Flows from 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.
For the six months ended December 31, 2022, net cash provided by operating activities of $22.7 million stemmed from a favorable change in net proceeds from sale and purchase of loans of $104.9 million and a positive adjustment for non-cash items of $521.2 million, offset by a net loss of $573.7 million and change in our operating assets net of operating liabilities of $75.2 million. The change in operating assets net of operating liabilities was primarily a result of our purchase and sale of loans held for sale activities. We purchased loans of $3.3 billion, which was offset by proceeds from loan sales of $3.4 billion. The positive adjustment for non-cash items was primarily driven by commercial agreement assets of $236.8 million which increased compared to the second quarter of the prior year as a result of our commercial agreements with Amazon, provision for credit losses of $170.9 million which increased by $54.7 million compared to the second quarter of the prior year, and stock-based compensation of $241.6 million which increased by $59.9 million compared to the second quarter of the prior year resulting from incremental compensation recognized from award modifications and increased headcount.
For the six months ended December 31, 2021, net cash used in operating activities was $75.1 million. This reflects a net loss of $466.4 million, adjusted for non-cash charges of $362.2 million, net cash outflows of $6.2 million from the purchase and sale of loans held for sale, partially offset by net cash inflows of $35.3 million provided by changes in our operating assets and liabilities.
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Cash Flows from Investing Activities
For the six months ended December 31, 2022, net cash used in investing activities of $574.9 million was primarily attributable to purchases and origination of loans held for investment of $6.5 billion, partially offset by repayments of loans and proceeds from sale of loans of $5.3 billion. During the period we originated loans of $1.9 billion and purchased loans of $4.7 billion, representing a combined increase of $1.9 billion compared to the same period in 2021, due partly to continued growth in GMV. Loan repayments and sale of loans of $5.3 billion during the period, represented an increase of $1.0 billion, compared to the same period in 2021, due in part to shifting of the length of loan terms on our balance sheet netted of by higher average balance of loans held for investment. The additional offset during the six months ended December 31, 2022 related to the net proceeds from maturities of securities available for sale of $0.7 billion, representing an increase of $1.1 billion compared to the same period in 2021.
For the six months ended December 31, 2021, net cash used in investing activities of $819.6 million was primarily attributable $4.7 billion of purchases of loans, due partly to continued growth in GMV. We recorded cash outflows of approximately $511.7 million related to purchases of available for sale securities in the current period. These cash outflows were partially offset by repayments of loans of $3.6 billion, due to a higher average balance of loans held for investment and generally increasing credit quality of the portfolio. Additionally, we obtained $780.3 million in cash from selling loans to whole loan buyers and securitization investors.
Cash Flows from Financing Activities
For the six months ended December 31, 2022, net cash provided by financing activities of $869.4 million, was primarily attributable to net cash inflows from funding debt of $1.2 billion, partially offset by net cash outflows from the issuance and repayment of notes and certificates issued by securitization trust of $309.4 million. Our payments of debt issuance costs were in the normal course of business and reflective of our recurring debt warehouse facility activity, which involves securing new warehouse facilities and extending existing warehouse facilities. Finally, we paid taxes related to RSU vesting of $45.3 million.
For the six months ended December 31, 2021, net cash provided by financing activities of $2,010.2 million, was primarily driven by the issuance of convertible debt which resulted in net cash inflows of $1,704.3 million, net of debt issuance costs. Additionally, the issuance of notes by securitization trusts resulted in net cash inflows of $397.2 million, net of in-period principal repayments. These cash inflows were partially offset by $29.9 million of net cash outflows from funding debt as principal repayments on debt exceeded proceeds from draws on these revolving credit facilities. Additionally, we paid taxes related to RSU vesting of $112.8 million.
Contractual Obligations

There were no material changes outside of the ordinary course of business in our commitments and contractual obligations for the three and six months ended December 31, 2022 from the commitments and contractual obligations disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations,” set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, which was filed with the SEC on August 29, 2022.
Off-Balance Sheet Arrangements

In the ordinary course of business, we engage in activities that are not reflected on our condensed consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities involve transactions with unconsolidated VIEs, including our sponsored securitization transactions, which we contractually service.

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For off-balance sheet loan sales 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. For unconsolidated securitization transactions where Affirm is the sponsor and risk retention holder, Affirm could experience a loss of up to 5% of both the senior notes and residual certificates. As of December 31, 2022, the aggregate outstanding balance of loans held by third-party investors or off-balance sheet VIEs was $4.6 billion. In the unlikely event principal payments on the loans backing any off-balance sheet securitization are insufficient to pay note holders, including any retained interest, then any amounts the Company contributed to the securitization reserve accounts may be depleted. Refer to 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 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing our condensed consolidated financial statements, we make judgments, estimates and assumptions that affect reported amounts of assets and liabilities, as well as revenues and expenses. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly evaluate our estimates, assumptions and judgments, particularly those that include the most difficult, subjective or complex judgments and are often about matters that are inherently uncertain. We evaluate our critical accounting policies and estimates on an ongoing basis and update them as necessary based on changes in market conditions or factors specific to us. There have been no material changes in our significant accounting policies or critical accounting estimates during the three and six months ended December 31, 2022.
For a complete discussion of our significant accounting policies and critical accounting estimates, refer to our Annual Report on Form 10-K for the year ended June 30, 2022 within Note 2 to the Notes to Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates”.
Recent Accounting Standards Issued, But Not Yet Adopted

Refer to Note 2. Summary of Significant Accounting Policies within the notes to the interim condensed consolidated financial statements.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations within the United States, Canada and Australia, and we are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and interest rates. Our market risk exposure is primarily the result of fluctuations in interest rates. Foreign currency exchange rates do not pose a material market risk exposure, as most of our revenue is earned in U.S. dollars.
Interest Rate Risk
Our cash and cash equivalents and certain of our restricted cash as of December 31, 2022 were held primarily in checking, money market, and savings accounts. As of December 31, 2022, we had $929.7 million of cash equivalents invested in money market funds, certificates of deposit, government bonds, and other commercial paper with maturities less than three months. Our cash and cash equivalents are held for working capital purposes. The fair value of our cash and cash equivalents and certain restricted cash would not be significantly affected by a change in interest rates due to their short-term nature.
Our securities available for sale at fair value as of December 31, 2022 included $913.9 million of marketable debt securities with maturities greater than three months. A rise in interest rates would have an adverse impact on the fair market value of our fixed rate securities while floating rate securities would produce less income than expected if interest rates were to decrease. Because our investment policy is to invest in conservative, liquid investments and because our business strategy does not rely on generating material returns from our investment portfolio, we do not expect our market risk exposure on marketable debt securities to be significant.
Continued volatility in interest rates and potentially inflation, which may persist longer than previously expected, may adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates may lead to higher payment obligations on our future credit products, or to their lenders under mortgage, credit card, and other loans. Therefore, higher interest rates may lead to increased delinquencies, charge-offs, and allowances for loans and interest receivable, which could have an adverse effect on our operating results.
We rely on a variety of funding sources with varying degrees of interest rate sensitivities. Certain of our funding arrangements bear a variable interest rate. Given the fixed interest rates charged on the loans that we purchase from our originating bank partners or originate ourselves, a rising variable interest rate would reduce our interest margin earned in these funding arrangements. Additionally, certain of our loan sale agreements are repriced on a recurring basis using a mechanism tied to interest rates as well as loan performance. Increases in interest rates could reduce our loan sale economics. We also rely on securitization transactions, with notes typically bearing a fixed coupon. Increases in interest rates may result in higher coupons and therefore lower interest income received on securitizations where we retain the residual interest and a lower gain on sale for securitizations in which we sell the equity interest. We maintain an interest rate hedging program which eliminates some, but not all, of the interest rate risk. Factoring in this program, as of December 31, 2022, we estimate that a hypothetical instantaneous 100 basis point upward parallel shock to interest rates would have a less than $20.0 million adverse impact on our annual financial results over the next 12 months.
Credit Risk
We have credit risk primarily related to our consumer loans held for investment. We are exposed to default risk on both loan receivables purchased from our originating bank partners and loan receivables that are directly originated. The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions. To manage this risk, we utilize our ITACs models to underwrite, score, and price loans in a manner that we believe is reflective of the credit risk. Other credit levers such as user limits and/or down payment requirements are used to ensure a sufficient expectation of a customer’s ability to repay.
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To monitor portfolio performance, we utilize a wide range of internal and external metrics to review user and loan populations. Each week management reviews performance for each customer segment, typically split by ITACs model score, financial product originated, age of loan, and delinquency status. Internal performance trendlines are measured against external factors such as unemployment, CPI, and consumer sentiment to determine what changes, if any, in risk strategy is warranted.

As of December 31, 2022 and June 30, 2022, we were exposed to credit risk on $3.7 billion and $2.5 billion, respectively, of loans held on our interim condensed consolidated balance sheet. Loan receivables are diversified geographically. As of December 31, 2022 and June 30, 2022, approximately 11% and 12% of loan receivables related to customers residing in the state of California, respectively. No other states or provinces exceeded 10%.

We are also exposed to credit risk in the event of nonperformance by the financial institutions holding our cash and the issuers of our cash equivalents and available for sale securities. We maintain our cash deposits and cash equivalents in highly-rated, federally-insured financial institutions in excess of federally insured limits. We manage this risk by conducting business with well established financial institutions, diversifying our counterparties and having guidelines regarding credit rating and investment maturities to safeguard liquidity. We have not historically experienced any credit losses related to these financial instruments and do not believe we are exposed to significant credit risk in these accounts.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our CEO and CFO concluded that such disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q and designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Control

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, no matter how well designed and operated, can only provide reasonable, not absolute assurance that its objectives will be met. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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Part II - Other Information
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Item 1. Legal Proceedings

Please refer to Note 8. “Commitments and Contingencies” of the accompanying notes to our interim condensed consolidated financial statements.

From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. We are not presently a party to any such other legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

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Item 1A. Risk Factors

The risks described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 could materially and adversely affect our business, financial condition, and results of operations, future prospects, and the trading price of our Class A common stock could decline. The risks and uncertainties described therein are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that adversely affect our business.
You should carefully read and consider such risks, together with all of the other information in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, in this Quarterly Report on Form 10-Q (including the disclosures in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our interim condensed consolidated financial statements and related notes), and in the other documents that we file with the SEC.

Except as may be reflected in the updated risk factors included below, there have been no material changes from the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

We operate in a highly competitive industry, and our inability to compete successfully would materially and adversely affect our business, results of operations, financial condition, and future prospects.

We operate in a highly competitive and dynamic industry. Our technology platform faces competition from a variety of players, including those who enable transactions and commerce via digital payments. Our primary competition consists of: legacy payment methods, such as credit and debit cards, including those provided by card issuing banks such as Synchrony, J.P. Morgan Chase, Citibank, Bank of America, Capital One, Goldman Sachs and American Express; technology solutions provided by payment companies such as Visa and MasterCard; mobile wallets such as Apple and PayPal; other pay-over-time solutions offered by companies such as Block and Klarna; and new pay-over-time offerings by legacy financial and payments companies, including those mentioned above. Additionally, merchants are increasingly offering proprietary pay-over-time options to customers, and in some cases, these are presented parallel to our offerings at checkout. We expect competition to intensify in the future, especially as the pay-over-time industry has low barriers to entry, both as emerging technologies continue to enter the marketplace and as large financial incumbents increasingly seek to innovate the services that they offer to compete with our platform. Technological advances and the continued growth of e-commerce activities have increased consumers’ accessibility to products and services and led to the expansion of competition in digital payment options such as pay-over-time solutions. We expect that our pay-over-time offerings may increasingly be presented alongside competitor options at checkout.

Some of our competitors, particularly the credit issuing banks set forth above, are substantially larger than we are and have longer operating histories than we do, which gives those competitors advantages we do not have, such as a more diversified products, a broader consumer and merchant base, greater brand recognition and brand loyalty, the ability to reach more consumers, the ability to cross sell their products, operational efficiencies, the ability to cross-subsidize their offerings through their other business lines, more versatile technology platforms, broad-based local distribution capabilities, and lower-cost funding. In addition, because many of our competitors are large financial institutions that fund themselves through low-cost insured deposits and continue to own the loans that they originate, they have certain revenue and funding opportunities not available to us.

Increased competition could result in the need for us to alter the pricing we offer to merchants or consumers. If we are unable to successfully compete, the demand for our platform and products could stagnate or substantially decline, and we could fail to retain or grow the number of consumers or merchants using our platform, which would reduce the attractiveness of our platform to other consumers and merchants, and which would materially and adversely affect our business, results of operations, financial condition, and future prospects.


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We rely on a small number of merchant partners and e-commerce platforms, and the loss of any of these significant relationships would adversely affect our business, results of operations, financial condition, and future prospects.

As discussed in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, and as may be updated from time to time in the Company’s future periodic reports and other filings with the SEC, a single merchant partner or e-commerce platform, or a small number of merchant partners or e-commerce platforms, may represent a disproportionately large amount of our revenue and/or GMV during any given fiscal period. The loss of, or decrease in business with, any one of our significant merchant partner or e-commerce platform relationships, such as with Amazon or Shopify, due to a lapse in exclusivity or otherwise, would adversely affect our business. To the extent that any merchant partner or e-commerce platform constitutes a material portion of our total revenue or GMV for a fiscal period for which financial results are being reported in a Quarterly Report on Form 10-Q or Annual Report on Form 10-K, we will disclose the respective percentage contribution in our Management’s Discussion and Analysis of Financial Condition and Results of Operations for that period.

The concentration of a significant portion of our business and transaction volume with a limited number of merchant partners or e-commerce platforms, or type of merchant or industry, exposes us disproportionately to any of those merchants choosing to no longer partner with us or choosing to partner with a competitor, to the economic performance of those merchants or industry or to any events, circumstances, or risks affecting such merchants or industry. In addition, a material modification in the production levels (including supply chain issues impacting component parts of products sold by our merchant partners) and/or financial operations of any significant merchant partner could affect the results of our operations, financial condition, and future prospects.

The success of our business depends on our ability to work with our originating bank partners to enable effective underwriting of loans facilitated through our platform and accurately price credit risk. We currently rely on Celtic Bank to originate a majority of the loans facilitated through our platform. If our agreement with Celtic Bank is terminated, and we are unable to engage another originating partner on a timely basis or at all, our business, results of operations, financial condition, and future prospects would be materially and adversely affected.

We believe that one of our core competitive advantages, and a core tenet of our platform, is our ability to work with originating bank partners to use our data-driven risk model to enable the effective underwriting of loans facilitated through our platform and to accurately and effectively price credit risk. Any deterioration in the performance of the loans facilitated through our platform, or unexpected losses on such loans, would materially and adversely affect our business and results of operations. Loan repayment underperformance would impact our interest-related and gain-on-sale income generated from loans we purchase from our originating bank partners, which are underwritten in accordance with each bank’s credit policy. Additionally, incremental charge-offs may affect future credit decisioning, growth of transaction volume, and the amount of provisions for underperforming loans we will need to take.

As of the end of the second quarter of fiscal 2023, we relied on Cross River Bank and Celtic Bank to originate a majority of the loans facilitated through our platform and to comply with various federal, state, and other laws, with the balance of the loans facilitated on our platform being originated directly under our lending, servicing, and brokering licenses in Canada and across various states in the United States through our consolidated subsidiaries. During the first half of fiscal 2023, we began accelerating the execution of an existing strategy of identifying and engaging new originating bank partners in order to diversify our sources of loan originations. In January 2023, we made the strategic decision to begin reducing the volume of loans originated by Cross River Bank on our platform while at the same time continuing our ongoing work to identify and engage new originating bank partners. Consequently, as of January 31, 2023, a majority of the loans facilitated through our platform are originated by Celtic Bank. As a result, the risks discussed in the paragraphs below relating to our reliance on Celtic Bank have increased and will remain as such unless and until we complete the process of engaging and onboarding one or more new originating bank partners. The process of engaging and onboarding new originating bank partners is inherently uncertain, and there can be no assurances as to when we will be able to complete that process, if at all.

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Celtic Bank handles a variety of consumer and commercial financing programs. The Celtic Bank loan program agreement has an initial three-year term, which is scheduled to expire in calendar year 2023. In addition, upon the occurrence of certain early termination events, either we or Celtic Bank may terminate the loan program agreement immediately upon written notice to the other party. Our Celtic Bank loan program agreement does not prohibit Celtic Bank from working with our competitors or from offering competing services, and Celtic Bank currently offers loan programs through other competing platforms. Celtic Bank could decide not to work with us for any reason, could make working with us cost-prohibitive, or could decide to enter into an exclusive or more favorable relationship with one or more of our competitors. In addition, Celtic Bank may not perform as expected under our loan program agreement. We could in the future have disagreements or disputes with Celtic Bank, which could negatively impact or threaten our relationship with other originating banks with whom we may seek to partner. For a further discussion of our relationship with Celtic Bank, particularly the regulations applicable to this relationship, see “Business — Regulatory Environment” in the Annual Report on Form 10-K we filed with the SEC on August 29, 2022.

If Celtic Bank were to suspend, limit, or cease its operations, or if our relationship with Celtic Bank were to otherwise terminate for any reason (including, but not limited to, its failure to comply with regulatory actions), we may need to implement an additional substantially similar arrangement with another bank, obtain additional state licenses, or curtail our operations. If we need to enter into alternative arrangements with a different bank to replace our existing arrangement, we may not be able to negotiate a comparable alternative arrangement in a timely manner or at all. In addition, transitioning loan originations to a new bank is untested and may result in delays in the issuance of loans or, if our platform becomes inoperable, may result in the inability to facilitate loans through our platform. If we are unable to enter into an alternative arrangement with different banks to fully replace or supplement our relationship with Celtic Bank, we would potentially need to obtain additional state licenses to enable us to originate loans directly, as well as comply with other state and federal laws, which would be costly and time consuming, and there can be no assurances that any such licenses could be obtained in a timely manner or at all.

Our business depends on our ability to attract and retain highly skilled employees.

Our future success depends on our ability to identify, hire, develop, motivate, and retain highly qualified personnel for all areas of our organization, in particular, a highly experienced sales force, data scientists, and engineers. Competition for these types of highly skilled employees is extremely intense, particularly in the San Francisco Bay Area. Trained and experienced personnel are in high demand and may be in short supply. Many of the companies with which we compete for experienced employees have greater resources than we do and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors that may seek to recruit them. We may not be able to attract, develop, and maintain the skilled workforce necessary to operate our business, and labor expenses may increase as a result of a shortage in the supply of qualified personnel. If we are unable to maintain and build our highly experienced sales force, or are unable to continue to attract experienced engineering and technology personnel, our business, results of operations, financial condition, and future prospects could be materially and adversely affected.
In addition, in March 2020, we transitioned our entire staff to a remote working environment. Over time such remote operations may decrease the cohesiveness of our teams and our ability to maintain our culture, both of which are critical to our success. Additionally, a remote working environment may impede our ability to undertake new business projects, to foster a creative environment, to hire new team members, and to retain existing team members. Such effects may adversely affect the productivity of our team members and overall operations, which could have a material adverse effect on our business, results of operations, financial condition, and future prospects.

Furthermore, we have at times undertaken workforce reductions to better align our operations with our strategic priorities. For example, to manage operating expenses in response to current macroeconomic conditions and ongoing business prioritization efforts, we recently took certain cost-saving measures, including a reduction of our workforce. There can be no assurance that these actions will not adversely affect employee morale, our culture, our ability to attract and retain employees and our ability to grow in accordance with our overall strategy. If we are not able to maintain our culture, our business, results of operations, financial condition, and future prospects could be materially and adversely affected.
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Our business is subject to extensive regulation, examination, and oversight in a variety of areas, all of which are subject to change and uncertain interpretation. Changing international, federal, state, and local laws, as well as changing regulatory enforcement policies and priorities, including changes that may result from changes in the political landscape, may negatively impact our business, results of operations, financial condition, and future prospects.

We are subject to extensive regulation, supervision, and examination by federal and state governmental authorities under United States federal and state laws and regulations. As we continue to expand our operations internationally, we may also become subject to extensive regulation, supervision, and examination by international authorities. We are required to comply with constantly changing international, federal, state, and local laws and regulations that regulate, among other things, the terms of the loans that we and our originating bank partners originate and the associated fees that may be charged. A change in these laws that enables our credit scoring and pricing model, including our ability to export interest rates across state lines, could have a material impact on our business model and financial position.

New laws or regulations could also require us to incur significant expenses and devote significant management attention to ensure compliance. In addition, our failure to comply (or to ensure that our agents and third-party service providers comply) with these laws or regulations may result in litigation or enforcement actions, the penalties for which could include: revocation of licenses; fines and other monetary penalties; civil and criminal liability; substantially reduced payments by borrowers; modification of the original terms of loans, permanent forgiveness of debt, or inability to, directly or indirectly, collect all or a part of the principal of or interest on loans; and increased purchases of loan receivables for loans originated by our originating bank partners and indemnification claims.

We are subject to the regulatory and enforcement authority of the CFPB as a facilitator, servicer, acquirer or originator of consumer credit. In December 2021, the CFPB issued a Request for Information to five of the largest BNPL providers, including Affirm, requesting information by March 1, 2022. Affirm timely complied with that Request for Information, but Affirm expects to receive additional Requests for Information from time to time in the future. For further discussion on the CFPB's enforcement authority, see “ Business — Regulatory Environment — U.S. federal consumer protection requirements” included in our Annual Report on Form 10-K filed with the SEC on August 29, 2022.

In conducting an investigation, the CFPB or state attorneys general may issue a civil investigative demand requiring a target company to prepare and submit, among other items, documents, written reports, answers to interrogatories, and deposition testimony. If we become subject to such investigation, the required response could result in substantial costs and a diversion of the attention and resources of our management.

Further, we are regulated by many international and state regulatory agencies through licensing and other supervisory or enforcement authority, which includes regular examination by international and state governmental authorities.

Such regulatory actions could result in penalties and reputational harm to us and a loss of consumers participating in our platform, and our compliance costs and litigation exposure could increase if the CFPB, for instance, or other regulatory agencies enact new regulations, change regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing regulations in a manner different or stricter than have been previously interpreted, any of which could adversely affect our ability to perform. Further, in some cases, regardless of fault, it may be less time-consuming or costly to settle these matters, which may require us to implement certain changes to our business practices, provide remediation to certain individuals or make a settlement payment to a given party or regulatory body.

Further, we may not be able to respond quickly or effectively to regulatory, legislative, and other developments, and these changes may in turn impair our ability to offer our existing or planned features, products, and services and/or increase our cost of doing business. In addition, if our practices are not consistent or viewed as not consistent with legal and regulatory requirements, we may become subject to audits, inquiries, whistleblower
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complaints, adverse media coverage, investigations, or criminal or civil sanctions, all of which may have an adverse effect on our reputation, business, results of operations, and financial condition.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.
Item 4. Mine Safety Disclosures

Not applicable.
Item 5. Other Information

None.
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Item 6. Exhibits

Incorporated by Reference
Exhibit Number
Description
Form
File No.
Exhibit
Filing Date
Filed Herewith
10.1
X
10.2
X
10.3
X
31.1
X
31.2
X
32.1
X
32.2
X
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
X
101.SCH
Inline XBRL Taxonomy Extension Schema Document
X
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
X
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
X
*Portions of the exhibit have been omitted as the Company has determined that: (i) the omitted information is not material; and (ii) the omitted information would likely cause competitive harm to the Company if publicly disclosed.
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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized,
AFFIRM HOLDINGS, INC.
Date: February 8, 2023
By:/s/ Max Levchin
Max Levchin
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Michael Linford
Michael Linford
Chief Financial Officer
(Principal Financial Officer)

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