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

FORM 10-Q

(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022

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




TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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Part I - Financial Information

Item 1. Unaudited Financial Statements

AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except shares and per share amounts)
September 30, 2022June 30, 2022
Assets
Cash and cash equivalents$1,530,132 $1,255,171 
Restricted cash383,406 295,636 
Securities available for sale at fair value1,237,291 1,595,373 
Loans held for sale7,112 2,670 
Loans held for investment2,681,637 2,503,561 
Allowance for credit losses(153,025)(155,392)
Loans held for investment, net2,528,612 2,348,169 
Accounts receivable, net147,757 142,052 
Property, equipment and software, net208,460 171,482 
Goodwill525,000 539,534 
Intangible assets71,037 78,942 
Commercial agreement assets241,639 263,196 
Other assets284,614 281,567 
Total Assets$7,165,060 $6,973,792 
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable$34,534 $33,072 
Payable to third-party loan owners90,811 71,383 
Accrued interest payable5,292 6,659 
Accrued expenses and other liabilities249,812 237,598 
Convertible senior notes, net1,707,724 1,706,668 
Notes issued by securitization trusts1,720,812 1,627,580 
Funding debt792,637 672,577 
Total liabilities4,601,622 4,355,537 
Commitments and contingencies (Note 8)
Stockholders’ equity:
    Class A common stock, par value $0.00001 per share: 3,030,000,000 shares authorized, 229,388,460 shares issued and outstanding as of September 30, 2022; 3,030,000,000 shares authorized, 227,255,529 shares issued and outstanding as of June 30, 2022
2 2 
    Class B common stock, par value $0.00001 per share: 140,000,000 shares authorized, 60,103,756 shares issued and outstanding as of September 30, 2022; 140,000,000 authorized, 60,109,844 shares issued and outstanding as of June 30, 2022
1 1 
Additional paid in capital4,454,829 4,231,303 
Accumulated deficit(1,857,171)(1,605,902)
Accumulated other comprehensive loss(34,223)(7,149)
Total stockholders’ equity2,563,438 2,618,255 
Total Liabilities and Stockholders’ Equity $7,165,060 $6,973,792 

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

    The following table presents the assets and liabilities of consolidated variable interest entities (“VIEs”), which are included in the interim condensed consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. The liabilities in the table below include liabilities for which creditors do not have recourse to the general credit of the Company. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate upon consolidation.
September 30, 2022June 30, 2022
Assets of consolidated VIEs, included in total assets above
Restricted cash$231,353 $164,530 
Loans held for investment2,309,638 2,179,026 
Allowance for credit losses(124,000)(124,052)
Loans held for investment, net2,185,638 2,054,974 
Accounts receivable, net8,195 8,195 
Other assets17,639 14,570 
Total assets of consolidated VIEs$2,442,825 $2,242,269 
Liabilities of consolidated VIEs, included in total liabilities above
Accounts payable$2,752 $2,897 
Accrued interest payable5,249 6,525 
Accrued expenses and other liabilities14,335 15,494 
Notes issued by securitization trusts1,720,812 1,627,580 
Funding debt621,660 514,033 
Total liabilities of consolidated VIEs2,364,808 2,166,529 
Total net assets$78,017 $75,740 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended September 30,
20222021
Revenue
Merchant network revenue$113,149 $92,244 
Virtual card network revenue26,708 19,395 
Total network revenue139,857 111,639 
Interest income136,802 117,302 
Gain on sales of loans63,595 30,979 
Servicing income21,370 9,465 
Total Revenue, net$361,624 $269,385 
Operating Expenses
Loss on loan purchase commitment$35,610 $51,678 
Provision for credit losses64,250 63,647 
Funding costs25,066 16,753 
Processing and servicing54,359 25,201 
Technology and data analytics144,961 78,013 
Sales and marketing163,873 63,960 
General and administrative160,972 136,204 
Total Operating Expenses649,091 435,456 
Operating Loss$(287,467)$(166,071)
Other (expense) income, net36,018 (140,373)
Loss Before Income Taxes$(251,449)$(306,444)
Income tax expense (benefit)(180)171 
Net Loss$(251,269)$(306,615)
Other Comprehensive Loss
Foreign currency translation adjustments$(21,546)$(3,802)
Unrealized loss on securities available for sale, net(5,528)(279)
Net Other Comprehensive Loss(27,074)(4,081)
Comprehensive Loss$(278,343)$(310,696)
Per share data:
Net loss per share attributable to common stockholders for Class A and Class B
Basic$(0.86)$(1.13)
Diluted$(0.86)$(1.13)
Weighted average common shares outstanding
Basic290,929,270 271,677,516 
Diluted290,929,270 271,677,516 

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

Common StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal 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 

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)— (5)— — (5)
Stock-based compensation— — 104,879 — — 104,879 
Tax withholding on stock-based compensation— — (39,817)— — (39,817)
Foreign currency translation adjustments— — — — (3,802)(3,802)
Unrealized loss on securities available for sale— — — — (279)(279)
Net Loss— — — (306,615)— (306,615)
Balance as of September 30, 2021277,717,172 $3 $3,579,763 $(1,205,100)$2,692 $2,377,358 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended September 30,
20222021
Cash Flows from Operating Activities
Net Loss$(251,269)$(306,615)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for credit losses64,250 63,647 
Amortization of premiums and discounts on loans, net(34,595)(35,708)
Gain on sales of loans(63,595)(30,979)
Changes in fair value of assets and liabilities3,906 139,884 
Amortization of commercial agreement assets21,557 18,971 
Amortization of debt issuance costs1,076 5,231 
Amortization of discount on securities available for sale(7,620) 
Commercial agreement warrant expense108,743  
Stock-based compensation119,808 93,189 
Depreciation and amortization20,882 10,541 
Other2,053 4,002 
Change in operating assets and liabilities:
Purchases of loans held for sale(1,655,213)(896,786)
Proceeds from the sale of loans held for sale1,707,838 888,580 
Accounts receivable, net(6,649)(12,076)
Other assets(3,000)78,086 
Accounts payable1,462 368,096 
Payable to third-party loan owners19,428 (11,618)
Accrued interest payable(1,078)553 
Accrued expenses and other liabilities3,231 (11,848)
Net Cash Provided by (Used in) Operating Activities51,215 365,150 
Cash Flows from Investing Activities
Purchases and origination of loans held for investment(2,744,825)(1,847,458)
Proceeds from the sale of loans held for investment326,713 195,039 
Principal repayments and other loan servicing activity2,206,725 1,486,099 
Acquisition, net of cash and restricted cash acquired (5,999)
Additions to property, equipment and software(31,151)(16,347)
Purchases of securities available for sale(104,629)(443,560)
Proceeds from maturities and repayments of securities available for sale464,492 889 
Other investing cash inflows (outflows)(52)1,827 
Net Cash Provided by (Used in) Investing Activities117,273 (629,510)
Cash Flows from Financing Activities
Proceeds from funding debt1,193,761 682,106 
Payment of debt issuance costs(7,423)(6,609)
Principal repayments of funding debt(1,059,607)(873,778)
Proceeds from issuance of notes and residual trust certificates by securitization trusts249,931 499,789 
Principal repayments of notes issued by securitization trusts(150,713)(55,204)
Proceeds from exercise of common stock options and warrants and contributions to ESPP1,013 37,470 
Repurchases of common stock(109)(4)
Payments of tax withholding for stock-based compensation(27,311)(39,817)
Net Cash Provided by Financing Activities199,542 243,953 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(5,299)3,588 
Net Increase in Cash, Cash Equivalents and Restricted Cash362,731 (16,819)
Cash, Cash equivalents and Restricted cash, Beginning of period1,550,807 1,692,632 
Cash, Cash Equivalents and Restricted Cash, End of Period$1,913,538 $1,675,813 

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

Three Months Ended September 30,
20222021
Reconciliation to amounts on consolidated balance sheets (as of period end)
Cash and cash equivalents1,530,132 1,439,531 
Restricted cash 383,406 236,282 
Total Cash, Cash Equivalents and Restricted Cash$1,913,538 $1,675,813 

Three Months Ended September 30,
20222021
Supplemental Disclosures of Cash Flow Information
Cash payments for interest expense$22,819 $10,195 
Cash paid for operating leases4,167 4,475 
Cash paid for income taxes138 72 
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Stock-based compensation included in capitalized internal-use software21,204 11,690 
Issuance of common stock in connection with acquisition 10,000 
Additions to property and equipment included in accrued expenses 56 

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

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

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

2.   Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

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

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

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

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts in the interim condensed consolidated financial statements and the accompanying notes. Material estimates that are particularly susceptible to significant change relate to determination of variable consideration for revenue, the allowance for credit losses, capitalized internal-use software development costs, valuation allowance for deferred tax assets, loss on loan
11

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

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

Significant Accounting Policies

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

Recently Adopted Accounting Standards

Financial Instruments - Credit Losses

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

Recent Accounting Pronouncements Not Yet Adopted

Business Combinations

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

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


3.   Revenue

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

Three Months Ended September 30,
20222021
Merchant network revenue$113,149 $92,244 
Virtual card network revenue26,708 19,395 
Interest income136,802 117,302 
Gain on sales of loans63,595 30,979 
Servicing income21,370 9,465 
Total Revenue, net$361,624 $269,385 

Merchant Network Revenue

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

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

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

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

Interest Income

Interest income consisted of the following components (in thousands):
Three Months Ended September 30,
20222021
Interest income on unpaid principal balance$106,138 $82,941 
Amortization of discount on loans38,969 38,445 
Amortization of premiums on loans(4,374)(2,737)
Interest receivable charged-off, net of recoveries(3,931)(1,347)
Total interest income$136,802 $117,302 

We accrue interest income using the effective interest method. Interest income on a loan is accrued daily, based on the finance charge disclosed to the consumer, over the term of the loan based upon the principal outstanding. The accrual of interest on a loan is suspended if a formal dispute with the consumer involving either Affirm or the merchant of record is opened, or a loan is 120 days past due. Upon the resolution of a dispute with the consumer, the accrual of interest is resumed, and any interest that would have been earned during the disputed period is retroactively accrued. As of September 30, 2022 and June 30, 2022, the balance of loans held for investment on non-accrual status was $2.4 million and $1.7 million, respectively.

Gain on Sales of Loans

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

Servicing Income

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

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4.   Loans Held for Investment and Allowance for Credit Losses

    Loans held for investment consisted of the following (in thousands):
September 30, 2022June 30, 2022
Unpaid principal balance$2,706,883 $2,516,733 
Accrued interest receivable23,365 20,697 
Premiums on loans held for investment8,866 8,911 
Less: Discount due to loss on loan purchase commitment (26,682)(20,692)
Less: Discount due to loss on directly originated loans(29,641)(20,443)
Less: Fair value adjustment on loans acquired through business combination(1,154)(1,645)
Total loans held for investment$2,681,637 $2,503,561 

Loans held for investment includes loans originated through our originating bank partners and directly originated loans. The majority of the loans that are underwritten using our technology platform and originated by our originating bank partners are later purchased by us. We purchased loans from our originating bank partners in the amount of $3,491.9 million and $2,244.2 million during the three months ended September 30, 2022 and 2021, respectively.

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

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

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

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The following table presents an analysis of the credit quality, by ITACS score, of the amortized cost basis excluding accrued interest receivable, by fiscal year of origination on loans held for investment and loans held for sale (in thousands) as of September 30, 2022:
Amortized Costs Basis by Fiscal Year of Origination
20232022202120202019PriorTotal
96+$900,877 $531,930 $81,877 $24,676 $12 $2 $1,539,374 
94-96357,155 301,358 4,854 548 6 2 663,923 
90-9459,343 100,989 1,545 2 4  161,883 
<9021,476 13,270 47 2   34,795 
No score(1)
80,491 147,410 31,816 5,273 372 47 265,409 
Total amortized cost basis$1,419,342 $1,094,957 $120,139 $30,501 $394 $51 $2,665,384 
(1)This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology including loan receivables originated in Canada and Australia. 

Net Charge-offs by Fiscal Year of Origination
20232022202120202019PriorTotal
Current period charge-offs(251)(66,889)(3,709)(162)(16)(9)(71,036)
Current period recoveries4 3,590 1,858 650 419 279 6,800 
Current period net charge-offs$(247)$(63,299)$(1,851)$488 $403 $270 $(64,236)

Loan receivables are defined as past due if either the principal or interest have not been received within four calendars days of when they are due in accordance with the agreed upon contractual terms. The following table presents an aging analysis of the amortized cost basis excluding accrued interest receivable of loans held for investment and loans held for sale by delinquency status (in thousands):
September 30, 2022June 30, 2022
Non-delinquent loans$2,473,859 $2,322,919 
4 – 29 calendar days past due89,460 77,963 
30 – 59 calendar days past due42,128 34,669 
60 – 89 calendar days past due31,736 26,919 
90 – 119 calendar days past due (1)
28,201 23,064 
Total amortized cost basis$2,665,384 $2,485,534 
(1)Includes $29.0 million and $22.7 million of loan receivables as of September 30, 2022 and June 30, 2022, respectively, that are 90 days or more past due, but are not on nonaccrual status. 

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

The following table details activity in the allowance for credit losses (in thousands):
Three Months Ended
September 30,
20222021
Balance at beginning of period$155,392 $117,760 
Provision for credit losses61,869 61,004 
Charge-offs(71,036)(30,454)
Recoveries of charged-off receivables6,800 3,711 
Balance at end of period$153,025 $152,021 

5. Acquisitions

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

Acquisitions completed during the three months ended September 30, 2021

ShopBrain

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

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

Cash$30,000 
Fair value of Class A common stock 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 

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The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
Fair 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 for the three months ended September 30, 2021, which are included in general and administrative expense within the interim condensed consolidated statements of operations and 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.

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 $10.2 million and $13.9 million as of September 30, 2022 and June 30, 2022, respectively.


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Property, Equipment and Software, net

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

September 30, 2022June 30, 2022
Internally developed software$248,296 $200,621 
Leasehold improvements16,377