Affirm Holdings, Inc. [AFRM] Filings

10-Q 1 afrm-20210930.htm 10-Q afrm-20210930

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, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 001-39888

Affirm Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware									84-2224323
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

650 California Street
San Francisco, California									94108
(Address of principal executive offices)									(Zip Code)

(415) 984-0490

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.00001 per share

AFRM

The Nasdaq Global Select Market

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of November 3, 2021, the number of shares of the registrant’s Class A common stock outstanding was 208,195,315 and the number of shares of the registrant's Class B common stock outstanding was 72,810,224.

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TABLE OF CONTENTS


						Page
Cover						1
Table of Contents						2
Part I - Financial Information						5
Item 1. Unaudited Financial Statements						5
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)						5
CONDENSED CONSOLIDATED BALANCE SHEETS, CONT. (Unaudited)						6
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)						7
CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Unaudited)						8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)						9
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT. (Unaudited)						10
1. Business Description						11
2. Summary of Significant Accounting Policies						11
3. Interest Income						14
4. Loans Held for Investment and Allowance for Credit Losses						15
5. Business Combination						17
6. Balance Sheet Components						18
7. Leases						20
8. Commitments and Contingencies						21
9. Transactions with Related Parties						22
10. Debt						22
11. Securitization and Variable Interest Entities						24
12. Investments						28
13. Fair Value of Financial Assets and Liabilities						30
14. Redeemable Convertible Preferred Stock and Stockholders' Deficit						41
15. Equity and Cash Incentive Plans						42
16. Income Taxes						45
17. Net Loss per Share Attributable to Common Stockholders						45
18. Segments and Geographical Information						48
19. Subsequent Events						48
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations						49
Item 3. Quantitative and Qualitative Disclosures About Market Risk						72
Item 4. Controls and Procedures						73
Part II - Other Information						74
Item 1. Legal Proceedings						75
Item 1A. Risk Factors						76
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						77
Item 3. Defaults Upon Senior Securities						78
Item 4. Mine Safety Disclosures						78
Item 5. Other Information						78
Item 6. Exhibits						82
Signatures						83

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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, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 additional merchants and retain and grow our relationships with our existing merchant 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 product launches;

•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 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 impact of the COVID-19 pandemic; 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. 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 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 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, and conference calls. 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 for convenience only, 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, 2021		June 30, 2021
Assets
Cash and cash equivalents	$	1,439,531	$	1,466,558
Restricted cash	236,282		226,074
Securities available for sale at fair value	456,266		16,170
Loans held for sale	1,808		13,030
Loans held for investment	2,244,826		2,022,320
Allowance for credit losses	(152,021)		(117,760)
Loans held for investment, net	2,092,805		1,904,560
Accounts receivable, net	100,951		91,575
Property, equipment and software, net	84,925		62,499
Goodwill	540,770		516,515
Intangible assets	71,378		67,930
Commercial agreement assets	207,431		227,377
Other assets	169,952		274,679
Total Assets	$	5,402,099	$	4,866,967
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable	$	425,854	$	57,758
Payable to third-party loan owners	38,462		50,079
Accrued interest payable	3,304		2,751
Accrued expenses and other liabilities	450,662		323,577

Notes issued by securitization trusts	1,621,638		1,176,673
Funding debt	484,821		680,602
Total liabilities	3,024,741		2,291,440
Commitments and contingencies (Note 8)
Stockholders’ equity:

Class A common stock, par value $0.00001 per share: 3,030,000,000 shares authorized, 200,336,842 shares issued and outstanding as of September 30, 2021; 3,030,000,000 shares authorized, 181,131,728 shares issued and outstanding as of June 30, 2021	2		2
Class B common stock, par value $0.00001 per share: 140,000,000 shares authorized, 77,380,330 shares issued and outstanding as of September 30, 2021; 140,000,000 authorized, 88,226,376 shares issued and outstanding as of June 30, 2021	1		1

Additional paid in capital	3,579,763		3,467,236
Accumulated deficit	(1,205,100)		(898,485)
Accumulated other comprehensive gain	2,692		6,773
Total stockholders’ equity	2,377,358		2,575,527
Total Liabilities and Stockholders’ Equity	$	5,402,099	$	4,866,967

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, except shares and per share amounts)

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, 2021		June 30, 2021
Assets of consolidated VIEs, included in total assets above
Restricted cash	$	164,868	$	142,385
Loans held for investment	2,035,653		1,743,810
Allowance for credit losses	(127,744)		(94,463)
Loans held for investment, net	1,907,909		1,649,347
Accounts receivable, net	8,195		8,209
Other assets	3,501		3,683
Total assets of consolidated VIEs	$	2,084,473	$	1,803,624
Liabilities of consolidated VIEs, included in total liabilities above
Accounts payable	$	2,873	$	2,927
Accrued interest payable	3,139		2,613
Accrued expenses and other liabilities	3,627		3,820
Notes issued by securitization trusts	1,621,638		1,176,673
Funding debt	374,817		607,394
Total liabilities of consolidated VIEs	2,006,094		1,793,427
Total net assets	$	78,379	$	10,197

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


Other Comprehensive Income (Loss)
Foreign currency translation adjustments	$	(3,802)	$	405
Unrealized gain (loss) on securities available for sale, net	(279)		—
Net Other Comprehensive (Loss) Income	(4,081)		405
Comprehensive Loss	$	(310,696)	$	(3,541)
Per share data:
Net loss per share attributable to common stockholders for Class A and Class B:
Basic	$	(1.13)	$	(0.06)
Diluted	$	(1.13)	$	(0.47)
Weighted average common shares outstanding:
Basic	271,677,516		64,778,024
Diluted	271,677,516		68,256,189

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 REDEEMABLE CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ DEFICIT

(Unaudited)

(in thousands, except share amounts)


	Redeemable Convertible Preferred Stock		Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Deficit
	Shares	Amount	Shares	Amount
Balance as of June 30, 2021	—	—	269,358,104	$	3	$	3,467,236	$	(898,485)	$	6,773	$	2,575,527

Issuance of common stock upon exercise of stock options	—	—	7,403,503	—		37,470		—		—		37,470

Issuance of common stock in acquisition	—	—	183,733	—		10,000		—		—		10,000
Vesting of restricted stock units	—	—	772,653	—		—		—		—		—
Repurchases of common stock	—	—	(821)	—		(5)		—		—		(5)

Stock-based compensation	—	—	—	—		104,879		—		—		104,879
Tax withholding on stock-based compensation	—	—	—	—		(39,817)		—		—		(39,817)

Foreign currency translation adjustments	—	—	—	—		—		—		(3,802)		(3,802)
Unrealized gain (loss) on securities available for sale	—	—	—	—		—		—		(279)		(279)
Net Loss	—	—	—	—		—		(306,615)		—		(306,615)
Balance as of September 30, 2021	—	—	277,717,172	$	3	$	3,579,763	$	(1,205,100)	$	2,692	$	2,377,358


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Deficit
	Shares	Amount		Shares	Amount
Balance as of June 30, 2020	122,115,971	$	804,170	47,684,427	—		80,373		(447,167)		(302)		$	(367,096)
Issuance of common stock	—	—		388,246	—		1,741		—		—		1,741
Repurchases of common stock	—	—		(115,625)	—		(584)		—		—		(584)
Issuance of redeemable convertible preferred stock, net of issuance costs of $440	21,824,141	434,434		—	—		—		—		—		—
Vesting and exercise of warrants for common stock	—	—		5,074,398	—		67,645		—		—		67,645
Stock-based compensation	—	—		—	—		7,175		—		—		7,175
Conversion of convertible debt	4,444,321	88,559		—	—		(42,124)		—		—		(42,124)
Effects of adoption of new accounting standards	—	—		—	—		—		(9,980)		—		(9,980)
Foreign currency translation adjustments	—	—		—	—		—		—		405		405
Net Loss	—	—		—	—		—		(3,946)		—		(3,946)
Balance as of September 30, 2020	148,384,433	1,327,163		53,031,446	$	—	$	114,226	$	(461,093)	$	103	$	(346,764)

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,
	2021		2020
Cash Flows from Operating Activities
Net Loss	$	(306,615)	$	(3,946)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for credit losses	63,647		28,931
Amortization of premiums and discounts on loans, net	(35,708)		(11,123)
Gain on sales of loans	(30,979)		(16,434)




Changes in fair value of assets and liabilities	139,884		(30,202)
Amortization of commercial agreement assets	18,971		14,261
Amortization of debt issuance costs	5,231		1,083
Stock-based compensation	93,189		6,203
Depreciation and amortization	10,541		3,720



Other	4,002		608
Purchases of loans held for sale	(896,786)		(346,878)
Proceeds from the sale of loans held for sale	888,580		338,926
Change in operating assets and liabilities:
Accounts receivable, net	(12,076)		10,175
Other assets	78,086		(64,412)
Accounts payable	368,096		6,110
Payable to third-party loan owners	(11,618)		(3,793)
Accrued interest payable	553		798
Accrued expenses and other liabilities	(11,848)		63,669
Net Cash Provided by (Used in) Operating Activities	365,150		(2,304)
Cash Flows from Investing Activities
Purchases and origination of loans held for investment	(1,847,458)		(1,177,769)
Proceeds from the sale of loans held for investment	195,039		75,049
Principal repayments and other loan servicing activity	1,486,099		749,128
Acquisition, net of cash and restricted cash acquired	(5,999)		—


Additions to property, equipment and software	(16,347)		(4,169)
Purchases of securities available for sale	(443,560)		—
Proceeds from maturities and repayments of securities available for sale	889		—
Other investing cash inflows	4,827		—
Other investing cash outflows	(3,000)		—
Net Cash Used in Investing Activities	(629,510)		(357,761)
Cash Flows from Financing Activities
Proceeds from funding debt	682,106		773,938
Payment of debt issuance costs	(6,609)		(4,617)
Principal repayments of funding debt	(873,778)		(890,556)
Proceeds from issuance of notes and residual trust certificates by securitization trusts	499,789		518,232
Principal repayments of notes issued by securitization trusts	(55,204)		(14,777)

Proceeds from issuance of redeemable convertible preferred stock, net	—		434,434



Proceeds from exercise of common stock options and warrants	37,470		1,741
Repurchases of common stock	(4)		(584)
Payments of tax withholding for stock-based compensation	(39,817)		—
Net Cash Provided by Financing Activities	243,953		817,811
Effect of exchange rate changes on cash, cash equivalents and restricted cash	3,588		—
Net (Decrease) Increase in Cash and Cash Equivalents and Restricted Cash	(16,819)		457,746
Cash and cash equivalents and restricted cash, beginning of period	1,692,632		328,128
Cash and Cash Equivalents and Restricted Cash, end of period	$	1,675,813	$	785,874

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,
	2021		2020
Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	10,195	$	6,934
Cash paid for income taxes	72		—
Cash paid for operating leases	4,475		3,148
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Stock-based compensation included in capitalized internal-use software	$	11,690	$	972
Additions to property and equipment included in accrued expenses	56		15
Issuance of warrants in exchange for commercial agreement	—		67,645
Conversion of convertible debt	—		88,559
Issuance of common stock in connection with acquisition	10,000		—

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 and partnerships with originating banks, 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. The majority of loans are 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 solution. Consumers get the flexibility to buy now and make simple regular payments for their purchases and merchants see increased average order value, repeat purchase rate, 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, 2021. The balance sheet as of June 30, 2021 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. Certain prior period amounts have been reclassified to conform to the current period presentation.

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.

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 the variable consideration for revenue, the allowance for credit losses, capitalized internal-use software development costs, valuation allowance for deferred tax assets, convertible debt derivatives, loss on loan purchase commitment, the fair value of servicing assets and liabilities, discount on self-originated loans, the fair value and useful lives of tangible and intangible assets acquired and liabilities assumed

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resulting from business combinations, the fair value of contingent consideration related to business combinations, the evaluation for impairment of intangible assets and goodwill, the incremental borrowing rate used in discounting our lease liabilities, the fair value of available for sale debt securities including retained interests in our securitizations trusts, the fair value of residual certificates issued by our securitization trusts held by third parties, and stock-based compensation. We base our estimates on historical experience, current events and other factors we believe to be reasonable under the circumstances. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results will be materially 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.

Immaterial Correction of Prior Period Amounts

Subsequent to the issuance of our financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, which was filed with the SEC on September 17, 2021, we identified understatements in certain prior period amounts related to the fair value measurement of contingent consideration and stock-based compensation.

We remeasure the fair value of the contingent consideration liability recorded in connection with the PayBright, Inc. (“PayBright”) acquisition at each reporting date. An incorrect input in the Monte Carlo simulation used to estimate the fair value as of June 30, 2021, resulted in an understatement of accrued expenses and other liabilities of $5.6 million as of June 30, 2021.

We measure stock-based compensation based on the fair value of an award at the grant date and recognize expense over the vesting period of the award based on the estimated portion of the award that is expected to vest. An incorrect determination of the grant date and service inception dates for certain awards granted prior to our initial public offering (“IPO”), as well as incorrect treatment of expense recognition for certain terminated employees, resulted in an understatement of additional paid in capital of $4.5 million as of June 30, 2021.

Accordingly, we are correcting the relevant financial statements and related footnotes as of June 30, 2021 within these interim condensed consolidated financial statements from amounts previously reported. We have evaluated the materiality of these misstatements based on an analysis of quantitative and qualitative factors and concluded they were not material to the prior period financial statements, individually or in aggregate.

The following table provides the impact of the correction on our consolidated balance sheet as of June 30, 2021, as presented below (in thousands):


	As of June 30, 2021
	As Previously Reported	Adjustments	As Corrected
Accrued expenses and other liabilities	317,951	5,626	323,577
Total liabilities	2,285,814	5,626	2,291,440
Additional paid in capital	3,462,762	4,474	3,467,236
Accumulated deficit	(888,381)	(10,104)	(898,485)
Accumulated other comprehensive income	6,769	4	6,773
Total stockholders’ equity	2,581,153	(5,626)	2,575,527

Significant Accounting Policies

Except for the addition of policies described below for marketable securities, there were no material changes to our significant accounting policies as disclosed in Note 2. Summary of Significant Accounting Policies

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of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, which was filed with the SEC on September 17, 2021.

Marketable Securities

During the three months ended September 30, 2021, we purchased certain investments in marketable debt securities which are accounted for under ASC Topic 320, “Investments - Debt Securities” (“ASC 320”). We have classified these investments as available for sale, as defined within ASC 320. These investments are held at fair value with changes in fair value recorded in unrealized gain (loss) on securities available for sale, net within other comprehensive income (loss). As of the end of each reporting period, management reviews each security where the fair value is less than the amortized cost to determine whether any portion of the decline in fair value is due to a credit loss and/or whether or not we intend to sell or will be required to sell such security before recovery of its amortized cost basis. The portion of any decline in fair value which management identifies as a credit loss will be recognized as an allowance for credit losses through other (expense) income, net rather than unrealized gain (loss) on securities available for sale, net. To the extent management intends to sell or may be required to sell a security in an unrealized loss position, we 1) reverse any previously recorded allowance for credit losses with an offsetting entry to reduce the amortized cost basis of the security and 2) write-off any remaining portion of the amortized cost basis to equal its fair value, with this change recorded through other (expense) income, net.

Interest income for available for sale securities is recorded within other (expense) income, net.

Available for sale securities initially purchased with less than 90 days until maturity with quoted transaction prices in an active market are classified as cash and cash equivalents.

Refer to Note 12. Investments for additional information.

Advertising Costs

Advertising costs are expensed as incurred and are included within sales and marketing in our interim condensed consolidated statements of operations and comprehensive loss. For the three months ended September 30, 2021 and 2020, advertising costs totaled $18.3 million and $1.4 million, respectively.

Recently Adopted Accounting Standards

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326)” ("ASC 326"). The amendments replaced the incurred loss impairment methodology with the current expected credit loss model ("CECL"). Subsequent to the issuance of ASU 2016-13, the FASB issued several amendments to ASC 326 to clarify or improve the financial instruments credit losses standard such as codification and targeted improvements in ASUs 2018-19, 2019-04, 2019-05, 2019-11 and 2020-03.

Following the loss of our emerging growth company status in the third quarter of the prior fiscal year, we adopted ASC 326 effective July 1, 2020 using the modified retrospective approach for our loans held for investment. For the three months ended September 30, 2020, this adoption resulted in a decrease in the provision for credit losses of $11.3 million.

Convertible Debt Instruments

In August 2020, the FASB issued Accounting Standard Update (“ASU”) 2020-06, “Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40),” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible

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instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. We early adopted the new standard effective July 1, 2021 on a modified retrospective basis. The adoption of the new standard did not have any material impact on our interim condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

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. We are in the process of reviewing our derivatives agreements, revolving credit agreements and loan sale agreements that utilize LIBOR as the reference rate and evaluating the impact of this new guidance. Throughout the remaining effective period for ASU 2020-04 and ASU 2021-01, we will continue to evaluate the applicable relief measures within each of these amendments and will determine any impact on our interim condensed consolidated financial statements.

3. Interest Income

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


	Three Months Ended September 30,
	2021		2020
Interest income on unpaid principal balance	$	82,941	$	42,502
Amortization of discount on loans held for investment	38,445		14,770
Amortization of premiums on loans	(2,737)		(1,958)
Interest receivable charged-off, net of recoveries	(1,347)		(1,077)
Total interest income	$	117,302	$	54,237

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, 2021 and June 30, 2021, the balance of loans held for investment on non-accrual status was $0.8 million and $1.1 million, respectively.

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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, 2021		June 30, 2021
Unpaid principal balance	$	2,280,315	$	2,058,863
Accrued interest receivable	16,817		15,466
Premiums on loans held for investment	7,175		7,071
Less: Discount due to loss on loan purchase commitment	(53,657)		(53,177)
Less: Fair value adjustment on loans acquired through business combination	(5,824)		(5,903)
Total loans held for investment	$	2,244,826	$	2,022,320

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 $2,244.2 million and $1,524.1 million during the three months ended September 30, 2021 and 2020, 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 evaluate the entire portfolio as a single homogeneous loan portfolio.

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 of our originating bank partners, 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 by fiscal year of origination on loans held for investment (in thousands) as of September 30, 2021:


	Amortized Costs Basis by Fiscal Year of Origination
	2022		2021		2020		2019		2018		Prior		Total
96+	$	50,032	$	5,695	$	11	$	—	$	—	$	—	$	55,738
94 – 96	96,076		74,820		819		8		—		—		171,723
90 – 94	236,342		211,078		4,191		246		2		—		451,859
<90	619,067		697,268		81,346		4,583		2		—		1,402,266
No score(1)	79,039		58,216		9,484		1,201		273		18		148,231
Total loan receivables	$	1,080,556	$	1,047,077	$	95,851	$	6,038	$	277	$	18	$	2,229,817
Current period charge-offs	$	(29,454)	$	(943)	$	(56)	$	(1)	$	—	$	—	$	(30,454)
Current period recoveries	1,200		978		839		385		267		42		3,711
Current period net charge-offs	$	(28,254)	$	35	$	783	$	384	$	267	$	42	$	(26,743)

(1)This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology as well as loan receivables originated by PayBright.

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 on loans held for investment by delinquency status (in thousands):


	September 30, 2021		June 30, 2021
Non-delinquent loans	$	2,111,756	$	1,939,976
4 – 29 calendar days past due	60,191		43,838
30 – 59 calendar days past due	26,499		17,267
60 – 89 calendar days past due	17,558		12,044
90 – 119 calendar days past due	13,813		6,759
Total amortized cost basis	$	2,229,817	$	2,019,884

We maintain an allowance for credit losses at a level that we believe is appropriate to absorb probable losses inherent in our loans. The allowance for credit losses covers estimated losses for individually assessed loans and includes estimates which rely on economic conditions, forecasts, and historical loan performance. When loans are charged off, we recognize this as a charge against the allowance for credit losses. We may continue to attempt to recover amounts from the respective consumers. The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. It is comprised of a specific allowance for individually assessed loans which are regularly evaluated to maintain a level adequate to absorb expected losses inherent in the loans.

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


	Three Months Ended September 30,
	2021		2020
Balance at beginning of period	$	117,760	$	95,137
Adjustment due to adoption of new accounting standard	—		10,083
Provision for credit losses	61,004		29,121
Charge-offs	(30,454)		(14,074)
Recoveries of charged-off receivables	3,711		2,754
Balance at end of period	$	152,021	$	123,021

5. Business Combination

ShopBrain

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

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


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

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

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


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

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


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

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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.

Pro forma adjustments would only include the additional amortization that would have been charged assuming the intangible assets had been recorded as of July 1, 2020. Such adjustments would not be material to the interim condensed consolidated statements of operations and comprehensive loss for the three months ended September 30, 2021 and 2020, respectively.

6. Balance Sheet Components

Accounts Receivable, net

Our accounts receivable consist primarily of amounts due from payment processors, merchant partners, and servicing fees due from third-party loan owners. We evaluate accounts receivable estimated to be uncollectible and provide an allowance, as necessary, for doubtful accounts. This allowance was $7.1 million and $4.1 million as of September 30, 2021 and June 30, 2021, respectively.

Goodwill and Intangible Assets

The changes in the carrying amount of goodwill during the three months ended September 30, 2021 were as follows (in thousands):





Balance as of June 30, 2021	516,515
Additions	30,792
Effect of foreign currency translation	(6,537)
Balance as of September 30, 2021	$	540,770

Refer to Note 5. Business Combination for a description of additions to goodwill during the three months ended September 30, 2021. No impairment losses related to goodwill were recorded during the three months ended September 30, 2021 and 2020.

Intangible assets consisted of the following (in thousands):


	September 30, 2021
	Gross		Accumulated Amortization		Net		Weighted Average Remaining Useful Life
Merchant relationships	$	38,510	$	(4,200)	$	34,310	4.5
Developed technology	39,577		(6,166)		33,411		2.8
Trademarks and domains	3,668		(

Affirm Holdings, Inc. [AFRM] Filings
10-Q	[2021-11-15]
10-K	[2021-09-17]
10-Q	[2021-05-17]
10-Q	[2021-02-17]
S-1	[2020-11-18]