AFFIRM HOLDINGS, INC. DISCUSSION AND ANALYSIS OF MANAGEMENT’S FINANCIAL POSITION AND PERFORMANCE (Form 10-Q)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the interim condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q ("Form 10-Q") and our audited consolidated financial
statements and the related notes and the discussion under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the fiscal year ended June 30, 2021 included in our Annual
Report on Form 10-K (our "Annual Report"). Some of the information contained in
this discussion and analysis, including information with respect to our planned
investments to drive future growth, includes forward-looking statements that
involve risks and uncertainties. You should review the sections titled
"Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" of
this Form 10-Q and our most recently filed Annual Report on Form 10-K for a
discussion of forward-looking statements and important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis. For the periods presented, references to originating bank partners are
to Cross River Bank and Celtic Bank.
Overview

We are building the next generation platform for digital and mobile-first
commerce. We believe that by using modern technology, the very best engineering
talent, and a mission-driven approach, we can reinvent payments and commerce.
Our solutions, which are built on trust and transparency, make it easier for
consumers to spend responsibly and with confidence, easier for merchants to
convert sales and grow, and easier for commerce to thrive.
Our point-of-sale solutions allow consumers to pay for purchases in fixed
amounts without deferred interest, hidden fees, or penalties. We empower
consumers to pay over time rather than paying for a purchase entirely upfront.
This increases consumers' purchasing power and gives them more control and
flexibility. Our platform facilitates both true 0% APR payment options and
interest-bearing loans. On the merchant side, we offer commerce enablement,
demand generation, and customer acquisition tools. Our solutions empower
merchants to more efficiently promote and sell their products, optimize their
customer acquisition strategies, and drive incremental sales. We also provide
valuable product-level data and insights - information that merchants cannot
easily get elsewhere - to better inform their strategies. Finally, our consumer
app unlocks the full suite of Affirm products for a delightful end-to-end
consumer experience. Consumers can use our app to manage payments, open a
high-yield savings account, and access a personalized marketplace.
Our company is predicated on the principles of simplicity, transparency, and
putting people first. By adhering to these principles, we have built enduring,
trust-based relationships with consumers and merchants that we believe will set
us up for long-term, sustainable success. We believe our innovative approach
uniquely positions us to define the future of commerce and payments.
Technology and data are at the core of everything we do. Our expertise in
sourcing, aggregating, and analyzing data has been what we believe to be the key
competitive advantage of our platform since our founding. We believe our
proprietary technology platform and data give us a unique advantage in pricing
risk. We use data to inform our risk scoring in order to generate value for our
consumers, merchants, and capital partners. We collect and store petabytes of
information that we carefully structure and use to regularly recalibrate and
revalidate our models, thereby getting to risk scoring and pricing faster, more
efficiently, and with a higher degree of confidence. We also prioritize building
our own technology and investing in product and engineering talent as we believe
these are enduring competitive advantages that are difficult to replicate. Our
solutions use the latest in machine learning, artificial intelligence,
cloud-based technologies, and other modern tools to create differentiated and
scalable products.
We have achieved significant growth in recent periods. Our total revenue, net
was approximately $361.0 million and $630.4 million for the three and six months
ended December 31, 2021, respectively, and $204.0
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million and $378.0 million for the three and six months ended December 31, 2020,
respectively. We incurred net losses of $159.7 million and $466.4 million for
the three and six months ended December 31, 2021, respectively, and $26.6
million and $30.6 million for the three and six months ended December 31, 2020,
respectively.
The combination of our differentiated product offering, efficient go-to-market
strategy, and strong monetization engine has resulted in fast growth.
•Rapid GMV growth. We grew our Gross Merchandise Volume ("GMV") by approximately
115% period-over-period to $4.5 billion during the three months ended
December 31, 2021 from $2.1 billion during the three months ended December 31,
2020. During the six months ended December 31, 2021, GMV was $7.2 billion, which
represented 102% growth over the six months ended December 31, 2020.
•Increased consumer engagement. The number of active consumers on our platform
grew by 6.7 million consumers from December 31, 2020 to December 31, 2021, an
increase of 150%, to a total of 11.2 million.
•Expanded merchant network. We have also continued to scale the breadth and
reach of our platform. From December 31, 2020 to December 31, 2021, our merchant
base expanded by 2,030% to 168,030 active merchants due primarily to continued
expansion to merchants related to the Shopify partnership.
Our business is designed to scale efficiently. Our partnerships with banks and
other funding relationships have allowed us to remain equity capital efficient.
Since July 1, 2016, we have processed approximately $24.7 billion of GMV on our
platform. As of December 31, 2021, we had over $8.8 billion in funding capacity
from a diverse set of capital partners, including through our warehouse
facilities, securitization trusts, and forward flow arrangements, an increase of
$2.3 billion from $6.5 billion as of June 30, 2021.
Through the diversity of these funding relationships, the equity capital
required to build our total platform portfolio has remained stable at
approximately 4% of the total platform portfolio from June 30, 2021 to
December 31, 2021. This metric measures the equity intensity of our business or
the amount of capital used in relation to the scale of our enterprise. We define
our total platform portfolio as the unpaid principal balance outstanding of all
loans facilitated through our platform as of the balance sheet date, including
both those loans held for investment and those loans owned by third-parties.
This amount totaled $6.3 billion and $4.7 billion as of December 31, 2021 and
June 30, 2021, respectively. Additionally, we define the equity capital required
as the balance of loans held for investment plus loans held for sale less
funding debt and notes issued by securitization trusts, per our interim
condensed consolidated balance sheet. This amount totaled $229.7 million and
$178.1 million as of December 31, 2021 and June 30, 2021, respectively. Equity
capital required as a percent of the last twelve months' GMV was 2% as of both
December 31, 2021 and June 30, 2021.
We believe that our continued success will depend on many factors, including our
ability to attract additional merchant partners, retain our existing merchant
partners, and grow and develop our relationships with new and existing merchant
partners (including our relationship with Amazon), help our merchants grow their
revenue on our platform, and develop new innovative solutions to establish the
ubiquity of our network and breadth of our platform. For a further discussion of
trends, uncertainties and other factors that could impact our operating results,
see the section entitled "Risk Factors" in Item 1A, which is incorporated herein
by reference.
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Our Financial Model

Our Revenue Model
From merchants, we earn a fee when we help them convert a sale and facilitate a
transaction. While merchant fees depend on the individual arrangement between us
and each merchant and vary based on the terms of the product offering, we
generally earn larger merchant fees on 0% APR financing products. For both the
three and six months ended December 31, 2021, 0% APR financing represented 44%
of total GMV facilitated through our platform. For both the three and six months
ended December 31, 2020, 0% APR financing represented 46% of total GMV
facilitated through our platform.
From consumers, we earn interest income on the simple interest loans that we
originate or purchase from our originating bank partners. Interest rates charged
to our consumers vary depending on the transaction risk, creditworthiness of the
consumer, the repayment term selected by the consumer, the amount of the loan,
and the individual arrangement with a merchant. Because our consumers are never
charged deferred or compounding interest, late fees, or penalties on the loans,
we are not incentivized to profit from our consumers' hardships. In addition,
interest income includes the amortization of any discounts or premiums on loan
receivables created upon either the purchase of a loan from our originating bank
partners or the origination of a loan.
In order to accelerate our ubiquity, we facilitate the issuance of virtual cards
directly to consumers through our app, allowing them to shop with merchants that
may not yet be fully integrated with Affirm. When these virtual cards are used
over established card networks, we earn a portion of the interchange fee from
the transaction.
Our Loan Origination and Servicing Model
When a consumer applies for a loan through our platform, the loan is
underwritten using our proprietary risk model. Once approved for the loan, the
consumer then selects his/her preferred repayment option. The substantial
majority of these loans are funded and issued by our originating bank partners.
A substantial majority of the loans facilitated through our platform are
originated through our originating bank partners: Cross River Bank, an
FDIC-insured New Jersey state-chartered bank, and Celtic Bank, an FDIC-insured
Utah state-chartered industrial bank. These partnerships allow us to benefit
from our partners' ability to originate loans under their banking licenses while
complying with various federal, state, and other laws. Under this arrangement,
we must comply with our originating bank partners' credit policies and
underwriting procedures, and our originating bank partners maintain ultimate
authority to decide whether to originate a loan or not. When an originating bank
partner originates a loan, it funds the loan through its own funding sources and
may subsequently offer and sell the loan to us. Pursuant to our agreements with
these partners, we are obligated to purchase the loans facilitated through our
platform that our partner offers us and our obligation is secured by cash
deposits. To date, we have purchased all of the loans facilitated through our
platform and originated by our originating bank partners. When we purchase a
loan from an originating bank partner, the purchase price is equal to the
outstanding principal balance of the loan, plus a fee and any accrued interest.
The originating bank partner also retains an interest in the loans purchased by
us through a loan performance fee that is payable by us on the aggregate
principal amount of a loan that is paid by a consumer. See Note 13. Fair Value
of Financial Assets and Liabilities for more information on the performance fee
liability.
We are also able to originate loans directly under our lending, servicing, and
brokering licenses in Canada and across various states in the U.S. through our
consolidated subsidiaries. For the three and six months ended December 31, 2021,
we originated approximately $293.4 million and $429.7 million of loans in
Canada, respectively, compared to approximately $61.3 million for both the three
and six months ended December 31, 2020. For the three and six months ended
December 31, 2021, we directly originated $728.3 million and $1,114.6 million of
loans in the U.S. pursuant to our state licenses, compared to approximately
$72.6 million for both the three and six months ended December 31, 2020. For the
three and six months ended December 31, 2021, we self-originated 23% and 22% of
total loans through our state and other licenses, respectively, compared to 6%
and 4% for the three and six months ended December 31, 2020, respectively.
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We act as the servicer on all loans that we originate directly or purchase from
our originating bank partners and earn a servicing fee on loans we sell to our
funding sources. We do not sell the servicing rights on any of the loans,
allowing us to control the consumer experience end-to-end. To allow for flexible
staffing to support overflow and seasonal traffic, we partner with several
sub-servicers to manage customer care, first priority collections, and
third-party collections in accordance with our policies and procedures.
Our Funding Sources
We maintain a capital-efficient model through a diverse set of funding sources.
When we originate a loan directly or purchase a loan originated by our
originating bank partners, we often utilize warehouse facilities with certain
lenders to finance our lending activities or loan purchases. We sell the loans
we originate or purchase from our originating bank partners to whole loan buyers
and securitization investors through forward flow arrangements and
securitization transactions, and earn servicing fees from continuing to act as
the servicer on the loans.
Key Operating Metrics

We collect and analyze operating and financial data of our business to assess
our performance, formulate financial projections, and make strategic decisions.
In addition to revenue, net (loss) income, and other results under accounting
principles generally accepted in the United States ("U.S. GAAP"), the following
tables set forth key operating metrics we use to evaluate our business.
                                          Three Months Ended                 Six Months Ended
                                             December 31,                      December 31,
                                        2021             2020             2021             2020
                                                             (in thousands)

Gross Merchandise Volume (GMV) $4,457,574 $2,075,112 $7,170,513 $3,551,041

GMV

We measure gross merchandise volume to assess the volume of transactions that
take place on our platform. We define GMV as the total dollar amount of all
transactions on the Affirm platform during the applicable period, net of
refunds. GMV does not represent revenue earned by us. However, the GMV processed
through our platform is an indicator of the success of our merchants and the
strength of our platform. For the three months ended December 31, 2021, GMV was
$4.5 billion, which represented an increase of approximately 115% as compared to
$2.1 billion for the three months ended December 31, 2020. For the six months
ended December 31, 2021, GMV was $7.2 billion, which represents an increase of
approximately 102% as compared to $3.6 billion for the six months ended
December 31, 2020.

                                                       December 31, 2021               June 30, 2021               December 31, 2020
                                                                          (in thousands, except per consumer data)
Active Consumers                                              11,231                         7,121                         4,493
Transactions per Active Consumer (x)                             2.5                                  2.3                            2.2


Active Consumers
We assess consumer adoption and engagement by the number of active consumers
across our platform. Active consumers are the primary measure of the size of our
network. We define an active consumer as a consumer who engages in at least one
transaction on our platform during the 12 months prior to the measurement date.
As of December 31, 2021, we had 11.2 million active consumers, representing an
increase of approximately 58% compared to 7.1 million at June 30, 2021, and
approximately 150% compared to 4.5 million at December 31, 2020.

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Transactions per Active Consumer
We believe the value of our network is amplified with greater consumer
engagement and repeat usage, highlighted by increased transactions per active
consumer. Transactions per active consumer is defined as the average number of
transactions that an active consumer has conducted on our platform during the
12 months prior to the measurement date. As of December 31, 2021, we had
approximately 2.5 transactions per active consumer, an increase of 11% compared
to June 30, 2021, and approximately 15% compared to December 31, 2020.
Transactions per active consumer includes incremental transactions completed by
active consumers on the PayBright and Returnly platforms during the twelve
months prior to the measurement date and prior to the acquisitions of PayBright
and Returnly by Affirm.
Factors Affecting Our Performance
Expanding our Network, Diversity, and Mix of Funding Relationships
Our capital efficient funding model is integral to the success of our platform.
As we scale the number of transactions on our network and grow GMV, we maintain
a variety of funding relationships in order to support our network. Our
diversified funding relationships include warehouse facilities, securitization
trusts, forward flow arrangements, and partnerships with banks. Given the short
duration and strong performance of our assets, funding can be recycled quickly,
resulting in a high-velocity, capital efficient funding model. The percentage of
equity capital required to fund our total platform portfolio has remained
relatively flat at approximately 4% from June 30, 2021 to December 31, 2021. The
mix of on-balance sheet and off-balance sheet funding is a function of both how
we choose to allocate loan volume and the available supply of capital, both of
which may also impact our results in any given period.
Mix of Business on Our Platform
The mix of products that our merchants offer and our consumers purchase in any
period affects our operating results. In addition, shifts in volume among
merchants in any period also affects our operating results. These mix impacts
affect GMV, revenue, our financial results, and our key operating metric
performance for that period. Differences in product mix relate to different loan
durations, APR mix, and varying proportion of 0% APR versus interest-bearing
financings. Differences in merchant mix relate to the variations in the product
and economic terms of the commercial agreements among our merchants. For
example, our low average order value ("AOV") products generally benefit from
shorter duration, but also have lower revenue as a percentage of GMV when
compared to high AOV products. Merchant mix shifts are driven in part by the
products offered by the merchant, the economic terms negotiated with the
merchant, merchant-side activity relating to the marketing of their products,
whether the merchant is fully integrated within our network, and general
economic conditions affecting consumer demand. Our revenue as a percentage of
GMV in any given period varies across products. As such, as we continue to
expand our network to include more merchants, revenue as a percentage of GMV
will vary. In addition, our commercial agreement with Shopify to offer Shop Pay
Installments powered by Affirm and our recent Split Pay offering, a short-term
payment plan with 0% APR, will continue to increase the mix of our shorter
duration, low AOV products. Differences in the mix of high versus low AOV will
also impact our results. For example, we expect that transactions per active
consumer may increase while revenue as a percentage of GMV may decline in the
medium term to the extent that a greater portion of our GMV comes from Split Pay
and other low-AOV offerings.
Sales and Marketing Investment
We rely on the strength of our merchant relationships and positive user
experience to develop our consumer brand and grow the ubiquity of our platform.
During the three and six months ended December 31, 2021, we increased our
investment in sales and marketing channels that we believe will drive further
brand awareness and preference among both consumers and merchants. Given the
nature of our revenue, our investment in sales and marketing in a given period
may not impact results until subsequent periods. Additionally, given the
increasingly competitive nature of merchant acquisition, we expect that we may
make significant investments in retaining and
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acquiring new merchants. We are focused on the effectiveness of sales and
marketing spending and will continue to be strategic in maintaining efficient
consumer and merchant acquisition.
Seasonality
We experience seasonal fluctuations in our revenue as a result of consumer
spending patterns. Historically, our revenue has been the strongest during the
second quarter of our fiscal year due to increases in retail commerce occurring
through the holiday season. Adverse events that occur during these months could
have a disproportionate effect on our financial results for the fiscal year.
Impact of COVID-19

The COVID-19 pandemic has had, and continues to have, a significant impact on
the U.S. economy and the markets in which we operate. Our positive performance
during this period demonstrates the value and effectiveness of our platform, the
resiliency of our business model, and the capabilities of our risk management
and underwriting approach. As we enter a new phase of the pandemic, our focus
will turn to both changing macro-economic conditions and individual consumer
spending habits. As we observe new behavior, we will rely on our flexible and
robust risk infrastructure to make appropriate decisions for our business.
Diversified Mix of Merchant Partners
We have a diversified set of merchant partners across industries, which allows
us to capitalize on industry tailwinds and changing consumer spending behavior,
economic conditions, and other factors that may affect a particular type of
merchant or industry. For example, following the onset of the COVID-19 pandemic,
our revenue from merchant partners in the travel, hospitality, and entertainment
industries declined significantly, but we saw a significant increase in revenue
from merchant partners offering home fitness equipment, home office products,
and home furnishings. As we move past the period of extended lock-downs due to
COVID-19, we have observed strong changes in consumer preferences. Industries
impacted by the lock-down such as travel and hospitality have seen a strong
resurgence and have either replaced or offset the spending decreases we
experienced in the aforementioned categories.
Dynamic Changes to Risk Model
As part of our risk mitigation platform, we closely track data and trends to
measure risk and manage exposure, leveraging our flexibility to quickly adjust
and adapt. In response to the macroeconomic impact of the COVID-19 pandemic, we
initiated a series of refinements to our risk model based on our real-time data
observations and analysis. We were able to respond, implement, and test the
updates to our model quickly due to the adaptability of our infrastructure,
underwriting, and risk management models. This resulted in continued decreases
across both charge-offs and delinquencies. As macroeconomic conditions improved,
the embedded flexibility of the model allowed our risk tolerances to return
closer to pre-pandemic levels while still maintaining low losses. Our
proprietary risk model was not designed to take into account the longer-term
impacts of social, economic, and financial disruptions caused by the COVID-19
pandemic, and while we continue to make refinements to our risk model as new
information becomes available to us, any changes to our risk model may be
ineffective and the performance of our risk model may decline.
Resilient Allowance Model
At the onset of the COVID-19 pandemic in March 2020, we factored in updated loss
multiples using macroeconomic data to reflect stressed expected loss scenarios
emerging from forecasted delinquencies and defaults. This stressing of the model
resulted in an increase of the allowance for credit losses as a percentage of
loans held for investment to a high of 14.8% as of March 31, 2020. In the months
subsequent to this and during fiscal year 2021, we saw stronger than expected
repayment history in the portfolio and increased credit quality of loans held on
our balance sheet from credit tightening, resulting in a release of the
allowance over time. As the economic reopening and recovery continues, we
believe our allowance model is well equipped to forecast expected loss scenarios
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resulting from both the shifting product mix of loans on our balance sheet as
well as a return to pre-pandemic credit levels over time. The allowance for
credit losses as a percentage of loans held for investment increased from 5.8%
as of June 30, 2021 to 6.5% as of December 31, 2021 due to a shift in the
composition of loans retained on balance sheet. Should macroeconomic factors or
expected losses change, we may increase or decrease the allowance for credit
losses.
Components of Results of Operations

revenue

Merchant Network Revenue
Merchant partners are charged a fee on each transaction processed through the
Affirm platform. The fees vary depending on the individual arrangement between
us and each merchant and on the terms of the product offering. The fee is
recognized at the point in time the terms of the executed merchant agreement
have been fulfilled and the merchant successfully confirms the transaction. We
may originate certain loans via our wholly-owned subsidiaries, with zero or
below market interest rates. In these instances, the par value of the loans
originated is in excess of the fair market value of such loans, resulting in a
loss, which we record as a reduction to merchant network revenue. In order to
continue to expand our consumer base, we may originate loans under certain
merchant arrangements that we do not expect to achieve positive revenue. In
these instances, the loss is recorded as sales and marketing expense. During the
three and six months ended December 31, 2020, we generated 49% and 51% of our
revenue from merchant network fees, respectively. During both the three and six
months ended December 31, 2021, we generated 35% of our revenue from merchant
network fees.
Virtual Card Network Revenue
A smaller portion of our revenue comes from our Virtual Card product. We have an
agreement with an issuer processor to facilitate transactions through the
issuance of virtual debit cards to be used by consumers at checkout. Consumers
can apply for a virtual debit card through the Affirm app and, upon approval,
receive a single-use virtual debit card to be used for their purchase online or
offline at a non-integrated merchant. The virtual debit card is funded at the
time a transaction is authorized using cash held by the issuer processor in a
reserve fund, which is ultimately funded and maintained by us. Our originating
bank partner then originates a loan to the consumer once the transaction is
confirmed by the merchant. The non-integrated merchants are charged interchange
fees by the issuer processor for virtual debit card transactions, as with all
debit card purchases, and the issuer processor shares a portion of this revenue
with us. We also leverage this issuer processor as a means of integrating
certain merchants. Similarly, for these arrangements with integrated merchants,
the merchant is charged interchange fees by the issuer processor and the issuer
processor shares a portion of this revenue with us. This revenue is recognized
as a percentage of both our loan volume transacted on the payment processor
network and net interchange income, and this revenue is presented net of
associated processing fees. We generated 7% of our revenue from virtual card
network fees for both the three and six months ended December 31, 2021, and 5%
and 4% of our revenue from virtual card network fees for the three and six
months ended December 31, 2020, respectively.
Interest Income
We also earn revenue through interest earned on loans facilitated by our
platform. Interest income includes interest charged to consumers over the term
of the consumers' loans based on the principal outstanding and is calculated
using the effective interest method. In addition, interest income includes the
amortization of any discounts or premiums on loan receivables created upon
either the purchase of a loan from our originating bank partners or the
origination of a loan. These discounts and premiums are accreted or amortized
over the life of the loan using the effective interest method and represented
40% and 37% of total interest income for the three and six months ended
December 31, 2021, respectively, compared to 30% and 29% for the three and six
months ended December 31, 2020. During the three and six months ended
December 31, 2021, we generated 38% and 41% of our revenue from interest income,
respectively. During the three and six months ended December 31, 2020, we
generated 36% and 34% of our revenue from interest income, respectively.
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Gain on Sales of Loans
We sell a portion of the loans we originate or purchase from our originating
bank partners to third-party investors. We recognize a gain or loss on sale of
such loans as the difference between the proceeds received, adjusted for initial
recognition of servicing assets and liabilities obtained at the date of sale,
and the carrying value of the loan. During the three and six months ended
December 31, 2021, we recognized a decrease of $3.5 million and $2.2 million in
gain on sales of loans due to the net impact of the servicing assets and
liabilities of the loans sold, respectively. During the three and six months
ended December 31, 2020, we generated 7% and 8% of our revenue from gain on
sales of loans, respectively. During the three and six months ended December 31,
2021, we generated 16% and 14% of our revenue from gain on sales of loans,
respectively.
Servicing Income
We earn a specified fee from providing professional services to manage loan
portfolios on behalf of our third-party loan owners. Under the servicing
agreements with our third-party loan owners, we are entitled to collect
servicing fees on the loans that we service, which are paid monthly based upon
an annual fixed percentage of the outstanding loan portfolio balance. During the
three and six months ended December 31, 2020, we generated 3% and 2% of our
revenue from servicing fees, respectively. During both the three and six months
ended December 31, 2021, we generated 3% of our revenue from servicing fees.
We expect our revenue may vary from period to period based on, among other
things, the timing of onboarding and size of new merchants, the mix of 0% APR
loans versus interest-bearing loans with simple interest, loan funding strategy
and mix, type and mix of products that our merchants offer to their customers,
the rate of repeat transactions, transaction volume, and seasonality of or
fluctuations in usage of our platform.
Operating Expenses
Our operating expenses consist of the loss on loan purchase commitment made to
our originating bank partners, the provision for credit losses, funding costs,
processing and servicing, technology and data analytics, sales and marketing,
and general and administrative expenses. Salaries and personnel-related costs,
including benefits, bonuses, stock-based compensation expense and occupancy,
comprise a significant component of several of these expense categories. An
allocation of overhead, such as rent and other overhead, is based on employee
headcount and included in processing and servicing, technology and data
analytics, sales and marketing, and general and administrative expenses.
As of December 31, 2021, we had 2,071 employees, compared to 1,641 employees as
of June 30, 2021. We increased our headcount and personnel related costs across
our business in order to support our growth expansion strategy. We expect
headcount to continue to increase during fiscal year 2022 given our focus on
growth and expansion.
Loss on Loan Purchase Commitment
We purchase certain loans from our originating bank partners that are processed
through our platform and our originating bank partner puts back to us. Under the
terms of the agreements with our originating bank partners, we are generally
required to pay the principal amount plus accrued interest for such loans. In
certain instances, our originating bank partners may originate loans with zero
or below market interest rates that we are required to purchase. In these
instances, we may be required to purchase the loan for a price in excess of the
fair market value of such loans, which results in a loss. These losses are
recognized as loss on loan purchase commitment in our interim condensed
consolidated statements of operations and comprehensive loss. These costs are
incurred on a per loan basis.
Provision for Credit Losses
Provision for credit losses consists of amounts charged against income during
the period to maintain an allowance for credit losses. Our allowance for credit
losses represents our estimate of the credit losses inherent in
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our loans held for investment and is based on a variety of factors, including
the composition and quality of the portfolio, loan specific information gathered
through our collection efforts, current economic conditions, future reasonable
and supportable forecasts, and our historical net charge-off and loss
experience. These costs are incurred on a per loan basis.
Funding Costs
Funding costs consist of the interest expense we incur on our borrowings and
amortization of fees and other costs incurred in connection with funding the
purchases and originations of loans. Excluding the amortization of debt issuance
costs, which totaled $1.3 million and $2.4 million for the three and six months
ended December 31, 2020, respectively, and $4.3 million and $9.6 million for the
three and six months ended December 31, 2021, respectively, we incur an expense
based on the dollar amount of loans pledged to our debt funding sources.
Processing and Servicing
Processing and servicing expense consists primarily of payment processing fees,
third-party customer support and collection expense salaries and
personnel-related costs of our customer care team, platform fees, and allocated
overhead. Payment processing costs are primarily driven by the number and dollar
value of consumer repayments which grow as the number of transactions and GMV
processed on our platform increases. Customer care loan servicing costs are
primarily staffing costs related to third-party and in-house loan servicing
agents, the demand for which generally increases with the number of transactions
on our platform. Collection fees are fees paid to agencies as percentages of the
dollars of repayment they recuperate from borrowers whose loans had previously
been charged off. Platform fees are revenue sharing fees paid to our e-commerce
platform partners. Processing and servicing expenses are predominantly per
transaction processing fees and third-party staffing fees that generally
increase with consumer contact.
Technology and Data Analytics
Technology and data analytics expense consists primarily of the salaries,
stock-based compensation, and personnel-related costs of our engineering and
product employees as well as our credit and analytics employees who develop our
proprietary risk model, which totaled $24.9 million and $46.0 million for the
three and six months ended December 31, 2020, respectively, and $53.4 million
and $103.9 million for the three and six months ended December 31, 2021,
respectively.
Additionally, for the three and six months ended December 31, 2020, $2.4 million
and $7.5 million, respectively, of salaries and personnel costs that relate to
the creation of internally-developed software were capitalized into property,
equipment and software, net on the interim condensed consolidated balance
sheets, and amortized into technology and data analytics expense over the useful
life of the developed software. This amortization expense totaled $2.2 million
and $4.8 million for the three and six months ended December 31, 2020,
respectively. For the three and six months ended December 31, 2021, $34.0
million and $60.8 million, respectively, of salaries and personnel costs that
relate to the creation of internally-developed software were capitalized into
property, equipment and software, net on our interim condensed consolidated
balance sheets, and we recorded amortization expense of $5.3 million and $8.9
million for the three and six months ended December 31, 2021, respectively.
Additional technology and data analytics expenses include platform
infrastructure and hosting costs, third-party data acquisition expenses, and
expenses related to the maintenance of existing technology assets and our
technology platform as a whole.
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Sales and Marketing
Sales and marketing costs consist of the expense related to warrants and other
share-based payments granted to our enterprise partners, salaries and
personnel-related costs, as well as costs of general marketing and promotional
activities, promotional event programs, sponsorships, and allocated overhead. In
July 2020, we recognized an asset in connection with a commercial agreement with
Shopify in which we granted warrants in exchange for their promotion of the
Affirm platform with potential new merchant partners. This asset represents the
probable future economic benefit to be realized over the four-year expected
benefit period and is valued based on the fair value of the warrants at the
grant date. This value is amortized on a straight-line basis over the four-year
expected benefit period into sales and marketing expense, due to the nature of
the expected benefit. In November 2021, we entered into a commercial agreement
with Amazon and granted warrants in exchange for certain exclusivity provisions
and the benefit of acquiring new users. In connection with the agreements, we
recognized an asset associated with the portion of the warrants that were fully
vested upon execution of the agreement. The asset is valued based on the fair
value of the warrants on the grant date and represents the probable future
economic benefit to be realized over the approximately 3.2 year remaining
initial term of the commercial agreement. For both the three and six months
ended December 31, 2021, we recognized $70.6 million of expenses related to the
warrants within sales and marketing expense, which included the amortization
expense of the commercial agreement asset and the expense based upon the
grant-date fair value for the warrant shares that vested during the period. For
the three and six months ended December 31, 2021, warrants and stock
appreciation rights comprised 61% and 44% of sales and marketing expenses,
respectively, compared to 50% and 51% for the three and six months ended
December 31, 2020, respectively.
Additionally, in order to continue to expand our consumer base, we may originate
certain loans via our wholly-owned subsidiaries with zero or below market
interest rates under certain merchant arrangements that we do not expect to
achieve positive revenue. In these instances, the par value of the loans
originated is in excess of the fair market value of such loans, which results in
a loss. These losses are recorded as sales and marketing expense. These losses
totaled $9.6 million and $14.7 million, respectively, during the three and six
months ended December 31, 2021, compared to $1.0 million for both the three and
six months ended December 31, 2020, respectively. We expect that our sales and
marketing expense will continue to increase as we expand our sales and marketing
efforts to drive our growth, expansion, and diversification.
General and Administrative
General and administrative expenses consist primarily of expenses related to our
finance, legal, risk operations, human resources, and administrative personnel.
General and administrative expenses also include costs related to fees paid for
professional services, including legal, tax and accounting services, and
allocated overhead.
We continue to incur additional expenses as a result of operating as a public
company, including costs to comply with the rules and regulations applicable to
companies listed on a national securities exchange, costs related to compliance
and reporting obligations pursuant to the rules and regulations of the SEC, and
increased expenses for insurance, investor relations, and professional services.
We expect that our general and administrative expense will increase in absolute
dollars as our business grows.
Other Income and Expenses
Other (Expense) Income, Net
Other (expense) income, net consists of interest earned on our money market
funds included in cash and cash equivalents and restricted cash, interest earned
on securities available for sale, gains and losses incurred on both our interest
rate caps, amortization of convertible debt issuance costs, and fair value
adjustments resulting from changes in the fair value of our contingent
consideration liability, primarily driven by changes in the market price of our
common stock.
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Income Tax Expense
Our income tax expense consists of U.S. federal and state income taxes, Canadian
federal and provincial income taxes, and income taxes attributable to other
foreign jurisdictions.
Results of Operations

The following tables present selected condensed consolidated interim results and comprehensive loss data for each of the periods presented in dollars:

                                            Three Months Ended December 31,                 Six Months Ended December 31,
                                                2021                   2020                   2021                   2020
                                                                            (in thousands)
Revenue
Merchant network revenue                $         127,087          $   

99,630 $219,331 $192,895
Virtual card network revenue

                       26,558              10,820                    45,953              16,778
Total network revenue                             153,645             110,450                   265,284             209,673
Interest income (1)                               138,355              73,857                   255,657             128,094
Gain on sales of loans (1)                         57,690              14,560                    88,669              30,994
Servicing income                                   11,321               5,174                    20,786               9,258
Total Revenue, net                      $         361,011          $ 

204.041 $630,396 $378,019
Operating Expenses (2) Loss on credit purchase commitment $65,265 $67,768 $116,943 $133,636
Provision for Loan Losses

                        52,640              12,521                   116,287              41,452
Funding costs                                      17,700              12,060                    34,453              22,412
Processing and servicing                           41,849              16,802                    67,050              30,300
Technology and data analytics                      94,989              41,634                   173,002              75,402
Sales and marketing                               143,476              39,112                   207,436              61,694
General and administrative                        141,292              40,916                   277,496              73,189
Total Operating Expenses                          557,211             230,813                   992,667             438,085
Operating Loss                          $        (196,200)         $  

(26,772) $(362,271) $(60,066)
Other (expense) income, net

                        36,741                 240                  (103,632)             29,685
Loss Before Income Taxes                $        (159,459)         $  (26,532)         $       (465,903)         $  (30,381)
Income Tax Expense                                    276                  78                       447                 175
Net Loss                                $        (159,735)         $  (26,610)         $       (466,350)         $  (30,556)

Other Comprehensive Income (Loss)
Foreign currency translation
adjustments                             $           2,341          $    

$1,814 (1,461) $2,219
Net unrealized gain (loss) on available-for-sale securities

                              (657)                  -                      (936)                  -
Net Other Comprehensive Income (Loss)               1,684               1,814                    (2,397)              2,219
Comprehensive Loss                      $        (158,051)         $  (24,796)         $       (468,747)         $  (28,337)




(1)Upon purchase of a loan from our originating bank partners at a price above
the fair market value of the loan or upon the origination of a loan with a par
value in excess of the fair market value of the loan, a discount is included in
the amortized cost basis of the loan. For loans held for investment, this
discount is amortized over
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the life of the loan into interest income. When a loan is sold to a third-party
loan buyer, the unamortized discount is released in full at the time of sale and
recognized as part of the gain or loss on sales of loans. However, the
cumulative value of the loss on loan purchase commitment or loss on origination,
the interest income recognized over time from the amortization of discount while
retained, and the release of discount into gain on sales of loans, together net
to zero over the life of the loan. The following table details activity for the
discount, included in loans held for investment, for the periods indicated:
                                          Three Months Ended December 31,               Six Months Ended December 31,
                                             2021                   2020                   2021                  2020
                                                                         (in thousands)
Balance at the beginning of the
period                                $         53,657          $   56,035          $        53,177          $   28,659
Additions from loans purchased or
originated, net of refunds                     121,603              72,094                  198,873             130,237
Amortization of discount                       (54,965)            (22,448)                 (93,410)            (37,218)
Unamortized discount released on
loans sold                                     (72,335)            (34,110)                (110,680)            (50,107)

Balance at the end of the period $47,960 $71,571

        $        47,960          $   71,571



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

                                         Three Months Ended December 31,              Six Months Ended December 31,
                                            2021                 2020                   2021                    2020
                                                 (in thousands)
General and administrative             $     61,947          $    3,097          $        129,689          $     6,301
Technology and data analytics                21,427               2,556                    41,494                4,769
Sales and marketing                           4,633                 581                     9,657                1,341
Processing and servicing                        530                 287                       886                  313
Total stock-based compensation in
operating expenses                           88,537               6,521                   181,726               12,724
Capitalized into property, equipment
and software, net                            13,383                 253                    25,073                1,225

Total stock-based compensation expense $101,920 $6,774

$206,799 $13,949

Comparison of the completed three and six months December 31, 2021 and 2020

Total Revenue, net
                        Three Months Ended December 31,                  Change                      Six Months Ended December 31,                      Change
                            2021               2020                $                %                   2021                  2020                $                %
                                                                                (in thousands, except percentage)
Merchant network
revenue                 $  127,087          $ 99,630          $ 27,457               28  %       $       219,331          $ 192,895          $ 26,436               14  %
Virtual card network
revenue                     26,558            10,820            15,738              145  %                45,953             16,778            29,175              174  %
Total network revenue      153,645           110,450            43,195               39  %               265,284            209,673            55,611               27  %
Interest income            138,355            73,857            64,498               87  %               255,657            128,094           127,563              100  %
Gain on sales of loans      57,690            14,560            43,130              296  %                88,669             30,994            57,675              186  %
Servicing income            11,321             5,174             6,147              119  %                20,786              9,258            11,528              125  %
Total Revenue, net         361,011           204,041           156,970               77  %               630,396            378,019           252,377               67  %


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Total Revenue, net for the three and six months ended December 31, 2021
increased by $157.0 million or 77% and $252.4 million or 67%, respectively,
compared to the three and six months ended December 31, 2020. The increase is
primarily due to an increase of $2,382.5 million or 115% and $3,619.5 million or
102% in GMV on our platform during the quarter, from $2,075.1 million and
$3,551.0 million for the three and six months ended December 31, 2020,
respectively, to $4,457.6 million and $7,171 million for the three and six
months ended December 31, 2021, respectively. This increase in GMV was driven by
the strong network effects of the expansion of our active merchant base from
7,890 as of December 31, 2020 to 168,030 as of December 31, 2021, an increase in
active consumers from 4.5 million as of December 31, 2020 to 11.2 million as of
December 31, 2021, and an increase in average transactions per consumer from 2.2
as of December 31, 2020 to 2.5 as of December 31, 2021.
Merchant network revenue for the three and six months ended December 31, 2021
increased by $27.5 million or 28% and $26.4 million or 14%, compared to the
three and six months ended December 31, 2020, respectively. Merchant network
revenue as a percentage of GMV for the three months ended December 31, 2021
decreased to 2.9% compared to 4.8% for the three months ended December 31, 2020,
and decreased to 3.1% for the six months ended December 31, 2020 to 5.4%
compared to the six months ended December 31, 2021.
Merchant network revenue growth is generally correlated with both GMV growth and
the mix of loans on our platform as different loan characteristics are
positively or negatively correlated with merchant fee revenue as a percentage of
GMV. In particular, merchant network revenue as a percentage of GMV typically
increases with the term length and AOV of our loans, and typically decreases
with shorter duration and higher APR loans. Specifically, long-term 0% APR loans
typically carry higher merchant fees as a percentage of GMV and have higher
AOVs.
The increase in merchant network revenue during the three and six month period
was primarily driven by an increase in GMV, partially offset by reductions in
the concentration of long-term 0% APR loans, our highest merchant fee category.
For the three and six months ended December 31, 2021, approximately 11% and 10%,
respectively, of total revenue was driven by our largest merchant partner by
merchant network revenue, Peloton, for which we facilitate long-term 0% APR
loans with a higher merchant fee, compared with 24% and 27% of total revenue in
the comparative periods. More broadly, for both the three and six months ended
December 31, 2021, loans with term lengths greater than 12 months accounted for
21% of GMV, compared to 31% and 34% for the three and six months ended
December 31, 2020, respectively, primarily due to the increased adoption of our
Split Pay product. AOV was lower at $365 and $379 for the three and six months
ended December 31, 2021, respectively, compared to $541 and $585 for the three
and six months ended December 31, 2020, respectively, primarily due to the
increased adoption of our Split Pay product.
Additionally, we recorded reductions to merchant network revenue of $28.7
million and $42.2 million for the three and six months ended December 31, 2021,
respectively, associated with the creation of discounts upon origination of
loans with par values in excess of the fair value of such loans, which was not
material during the three and six months ended December 31, 2020. These
reductions to merchant network revenue are primarily due to our Split Pay
product and our 0% APR lending programs outside of the United States.
Virtual card network revenue for the three and six months ended December 31,
2021 increased by $15.7 million or 145% and $29.2 million or 174%, compared to
the three and six months ended December 31, 2020, respectively. This increase
was driven by an increase in GMV processed through our issuer processor of 133%
and 160% for the three and six months December 31, 2021, respectively, due to
increased activity on our virtual card-enabled mobile application as well as
growth in existing and new merchants integrated using our virtual card platform.
Interest income for the three and six months ended December 31, 2021 increased
by $64.5 million or 87% and $127.6 million or 100%, respectively, compared to
the three and six months ended December 31, 2020. Generally, interest income is
correlated with the changes in the average balance of loans held for investment,
as we recognize interest on loans held for investment using the effective
interest method over the life of the loan. The average balance of loans held for
investment increased by 41% to $2,335.2 million, and by 54% to $2,223.9 million
for the three and six months ended December 31, 2021, respectively, compared to
the same period in the prior fiscal year.
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As an annualized percentage of average loans held for investment, total interest
income increased from approximately 18% during the three months ended
December 31, 2020 to 24% during the three months ended December 31, 2021. This
change was driven by a decrease in the average proportion of 0% APR loans being
held on our interim condensed consolidated balance sheet as a percentage of the
total loans held for investment, which decreased from 49% and 45% during the
three and six months ended December 31, 2020 to 41% and 41% during the three and
six months ended December 31, 2021. The shift was largely due to increased
concentration of loans with large enterprise merchant partners; those loans tend
to be interest-bearing.
While we do recognize interest income on 0% APR loans via the amortization of
the loan discount, short term 0% APR loans (Split Pay) carry higher annualized
discounts as percentages of annualized loan balances than longer term loans, and
thus amortize more discount into interest income as percentages of unpaid
principal balance than longer term loans. Therefore, the change in the mix of 0%
APR loans held for investment is also contributing to the increase in interest
income as an annualized percentage of average loans held for investment. The
total amortization of discounts on loans held for investment increased by $32.5
million or 145% and $56.2 million or 151% for the three and six months ended
December 31, 2021, respectively, compared with the three and six months ended
December 31, 2020, and represented 40% and 37% of total interest income for the
three and six months ended December 31, 2021, compared to 30% and 29% for the
three and six months ended December 31, 2020, respectively. This increase
included the amortization of discounts arising from self-originated loans held
for investment of $38.0 million and $46.6 million during the three and six
months ended December 31, 2021, respectively, which was $1.9 million for both
the three and six months ended December 31, 2020.
Gain on sales of loans for the three and six months ended December 31, 2021
increased by $43.1 million or 296%, and $57.7 million or 186%, compared to the
three and six months ended December 31, 2020. We sold loans with an unpaid
balance of $834.9 million and $1,256.5 million for the three and six months
ended December 31, 2020, respectively, and $2,511.9 million and $3,605.0 million
for the three and six months ended and December 31, 2021, for which we retained
servicing rights. This increase was primarily due to higher loan sale volume,
favorable loan sale pricing terms, and optimizing the allocation of loans to
loan buyers with higher pricing terms.
Servicing income for the three and six months ended December 31, 2021 increased
by $6.1 million or 119% and $11.5 million or 125%, compared to the three and six
months ended December 31, 2020, respectively. This increase was primarily due to
an increase in the average unpaid principal balance of loans owned by
third-party loan owners and increases in negotiated servicing rates with new and
existing third-party loan owners. Offsetting the increase in service income,
during the three months ended December 31, 2020 we recognized a reduction of
servicing income of $0.2 million related to the changes in fair value of
servicing assets and liabilities compared with a reduction to servicing income
of $1.6 million during the three months ended December 31, 2021. Similarly,
during the six months ended December 31, 2020, we recognized a reduction of $1.0
million compared with a reduction of $2.7 million during the six months ended
December 31, 2021.
Operating Expenses
                                                   Three Months Ended December 31,            Six Months Ended December 31,
                                                       2021                2020                  2021                  2020
                                                                                  (in thousands)
Loss on loan purchase commitment                   $   65,265          $  

67,768 $116,943 $133,636
Provision for Loan Losses

                            52,640             12,521                  116,287             41,452
Funding costs                                          17,700             12,060                   34,453             22,412
Processing and servicing                               41,849             16,802                   67,050             30,300
Total transaction costs                               177,454            109,151                  334,733            227,800
Technology and data analytics                          94,989             41,634                  173,002             75,402
Sales and marketing                                   143,476             39,112                  207,436             61,694
General and administrative                            141,292             40,916                  277,496             73,189
Total operating expenses                           $  557,211          $ 

230,813 $992,667 $438,085

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Loss on Loan Purchase Commitment
                             Three Months Ended
                                December 31,                          Change                      Six Months Ended December 31,                      Change
                           2021              2020                $                %                  2021                  2020                $                 %
                                                                              (in thousands, except percentage)
Loss on loan purchase
commitment              $ 65,265          $ 67,768          $ (2,503)             (4) %       $      116,943           $ 133,636          $ (16,693)            (12) %
Percentage of total
revenue, net                  18  %             33  %                                                     19   %              35  %


Loss on loan purchase commitment for the three and six months ended December 31,
2021 decreased by $2.5 million or 4% and $16.7 million or 12%, compared to the
three and six months ended December 31, 2020, respectively. This decrease was
due to a decrease in the volume and concentration of long-term 0% APR loans
purchased from our originating bank partners compared to the prior period, which
are purchased above fair market value. During the three and six months ended
December 31, 2021, we purchased $917.8 million and $1,642.2 million,
respectively, of 0% APR loan receivables from our originating bank partners,
representing a decrease of $9.4 million or 1% and $22.6 million or 1% compared
to the three and six months ended December 31, 2020, respectively.
Provision for Credit Losses
                                      Three Months Ended
                                         December 31,                              Change                      Six Months Ended December 31,                     Change
                                  2021                    2020                $                %                  2021                  2020                $                %
                                               (in thousands, except percentage)
Provision for credit losses $         52,640           $ 12,521          $ 40,119             320  %       $       116,287           $ 41,452          $ 74,835             181  %
Percentage of total
revenue, net                          15   %                  6  %                                                      18   %             11  %
Allowance as a percentage
of loans held for
investment                           6.5   %                6.6  %                                                     6.5   %            6.6  %


Provision for credit losses generally represents the amount of expense required
to maintain the allowance for credit losses on our interim condensed
consolidated balance sheet, which represents management's estimate of future
losses. In the event that our loans outperform expectation and/or we reduce our
expectation of credit losses in future periods, we may release reserves and
thereby reduce the allowance for credit losses, yielding income in the provision
for credit losses. The provision is determined by the change in estimates for
future losses and the net charge-offs incurred in the period. We record
provision expense for each loan we retain as loans held for investment, whether
we originate the loan or purchase it from one of our originating bank partners.
At the onset of the COVID-19 pandemic in March 2020, we factored in updated loss
multiples using macroeconomic data to reflect stressed expected loss scenarios
emerging from forecasted delinquencies and defaults. This stressing of the model
resulted in an increase of the allowance for credit losses as a percentage of
loans held for investment up to 14.6% at its peak as of March 31, 2020. In the
months subsequent to this, we saw stronger than expected repayment history and
increased credit quality in the portfolio, and this percentage decreased
slightly from 6.6% as of December 31, 2020 to 6.5% as of December 31, 2021.
Additionally, during the prior fiscal year, following the loss of our emerging
growth company status, we adopted ASU 2016-13, "Financial Instruments - Credit
Losses (Topic 326)" using the modified retrospective approach. The amendments
replaced the incurred loss impairment methodology for computing our allowance
for credit losses with the current expected credit loss model ("CECL"),
effective July 1, 2020. As part of this modified retrospective approach to
adoption, we recorded an adjustment further reducing the provision for credit
losses by $11.3 million and $16.3 million for the three and six months ended
December 31, 2020, respectively.
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During the six months ended December 31, 2021, the allowance for credit losses
as a percentage of loans held for investment increased from 5.8% as of June 30,
2021 to 6.5%. This increase was driven in part by a deconcentration of
long-term, lower-credit-risk 0% APR loans and rapid growth of new platforms and
partnerships with higher expected losses. Prior year provision for credit losses
was unusually low due to release of stressed expected loss scenarios and the
adoption of CECL. Those prior year impacts combined with normalization of credit
levels in the current period resulted in an increase in provision for credit
losses of $40.1 million or 320%, and $74.8 million or 181%, compared to the
three and six months ended December 31, 2020.
Funding Costs
                            Three Months Ended
                               December 31,                          Change                    Six Months Ended December 31,                     Change
                          2021              2020               $                %                  2021                 2020                $                %
                                                                            (in thousands, except percentage)
Funding costs          $ 17,700          $ 12,060          $ 5,640              47  %       $       34,453           $ 22,412          $ 12,041              54  %
Percentage of total
revenue, net                  5  %              6  %                                                     5   %              6  %


Funding costs for the three and six months ended December 31, 2021 increased by
$5.6 million or 47%, and $12.0 million or 54%, compared to the three and
six months ended December 31, 2020, respectively. Funding costs for a given
period are correlated with the sum of the average balance of funding debt and
the average balance of notes issued by securitization trusts. This increase was
primarily due to the increase of notes issued by securitization trusts during
the current fiscal year, which bear interest at fixed rates. The average balance
of notes issued by securitization trusts during the three and six months ended
December 31, 2021 was $1,599.5 million and $1,458.5 million, respectively,
compared with $658.7 million and $439.1 million, respectively, during the three
and six months ended December 31, 2020. The average balance of funding debt for
the three and six months ended December 31, 2021 was $565.4 million and $603.8
million, respectively, compared with $751.9 million and $773.9 million,
respectively, during the three and six months ended December 31, 2020. Combined,
average total debt for the three and six months ended December 31, 2021
increased by $754.3 million or 53% and $849.3 million or 70%, respectively,
compared to the three and six months ended December 31, 2020 while the average
reference interest rate decreased by 38% and 39% during each period,
respectively.

processing and maintenance

                              Three Months Ended                                                 Six Months Ended December
                                 December 31,                           Change                              31,                              Change
                            2021               2020                $                %              2021             2020                $                %
                                                                          (in thousands, except percentage)
Processing and
servicing               $      41,849       $    16,802       $ 25,047             149  %       $   67,050       $    30,300       $ 36,750             121  %
Percentage of total
revenue, net                    12  %             8   %                                              11  %             8   %


Processing and servicing expense for the three and six months ended December 31,
2021 increased by $25.0 million or 149% and $36.8 million or 121%, respectively,
compared to the three and six months ended December 31, 2020. This increase was
primarily due to a $15.3 million or 207% and $23.7 million or 177%, increase in
payment processing fees due to increased servicing activity and payments volume
for the three and six months ended December 31, 2021, respectively.
Additionally, processing fees paid to our customer referral partners increased
by $3.1 million or 344% and $1.7 million or 113%, for the three and six months
ended December 31, 2021, respectively. Personnel costs increased by $2.2 million
or 91% and $4.6 million or 117%, respectively, for the three and six months
ended December 31, 2021 driven by growth in headcount, while third-party loan
servicing and collections spend increased 80% and 66%, respectively, due to
increased loan volume.
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Technology and Data Analytics
                              Three Months Ended
                                 December 31,                           Change                     Six Months Ended December 31,              Change
                            2021               2020                $                %              2021              2020                $                %
                                                                           (in thousands, except percentage)
Technology and data
analytics               $      94,989       $    41,634       $ 53,355             128  %       $   173,002       $    75,402       $ 97,600             129  %
Percentage of total
revenue, net                    26  %            20   %                                               27  %            20   %


Technology and data analytics expense for the three and six months ended
December 31, 2021 increased by $53.4 million or 128% and $97.6 million or 129%,
respectively, compared to the three and six months ended December 31, 2020. This
increase was primarily due to a $28.5 million or 114% and $57.9 million or 126%,
respectively, increase in engineering, product, and data science personnel costs
for the three and six months ended December 31, 2021, compared to the three and
six months ended December 31, 2020, net of capitalized costs for internally
developed software, to continue to support our growth and technology platform as
a whole. The largest component of these personnel costs was stock-based
compensation, which accounted for $18.9 million and $36.7 million of the
increase compared to the three and six months ended December 31, 2020,
respectively, largely due to vesting of RSUs.
Additionally, there was a $14.3 million or 138% and $22.3 million or 130%,
increase in data infrastructure and hosting costs for the three and six months
ended December 31, 2021, respectively, compared to the three and six months
ended December 31, 2020, due to increased capacity requirements of our
technology platform, as well as a $3.4 million or 89% and a $5.5 million or 79%,
increase in underwriting data provider costs for the three and six months ended
December 31, 2021, compared to the three and six months ended December 31, 2020,
respectively, due to the increased capacity requirements, partially offset by
cost improvements achieved as a result of contract renegotiations.
Sales and Marketing
                              Three Months Ended
                                 December 31,                             Change                      Six Months Ended December 31,                      Change
                            2021                2020                $                 %                  2021                  2020                $                 %
                                        (in thousands, except percentage)
Sales and marketing   $    143,476           $ 39,112          $ 104,364             267  %       $       207,436           $ 61,694          $ 145,742             236  %
Percentage of total
revenue, net                    40   %             19  %                                                       33   %             16  %


Sales and marketing expense for the three and six months ended December 31, 2021
increased by $104.4 million or 267% and $145.7 million or 236%, compared to the
three and six months ended December 31, 2020, respectively. This increase was
primarily due to $70.6 million of expense related to warrants granted to Amazon
during the three and six months ended December 31, 2021. Additionally,
stock-based compensation related to employees in the sales and marketing
functions increased $4.1 million or 697% and $8.3 million or 620%, compared to
the three and six months ended December 31, 2020, respectively, largely due to
the vesting of RSUs. Loss on loan originations increased $8.6 million or 865%
and $14.7 million or 1,375%, compared to the three and six months ended
December 31, 2020, respectively, primarily due to an increase in self-originated
loans.
Furthermore, there was a $9.5 million or 78% and $20.3 million or 155%, increase
in brand and consumer marketing spend during the three and six months ended
December 31, 2021, respectively, compared to the three and six months ended
December 31, 2020, associated with our expanded brand-activation, holiday
shopping, lifestyle, and travel marketing campaigns, as well as a $2.2 million
or 120% and $7.9 million or 357% increase in business-to-business marketing
spend compared to the three and six months ended December 31, 2020,
respectively.
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General and Administrative
                                Three Months Ended
                                   December 31,                           Change                      Six Months Ended December 31,                      Change
                              2021              2020                $                 %                  2021                  2020                $                 %
                                                                                  (in thousands, except percentage)
General and
administrative            $ 141,292          $ 40,916          $ 100,376             245  %       $       277,496           $ 73,189          $ 204,307              279  %
Percentage of total
revenue, net                     39  %             20  %                                                       44   %             19  %


General and administrative expense for the three and six months ended
December 31, 2021 increased by $100.4 million or 245% and $204.3 million or
279%, compared to the three and six months ended December 31, 2020,
respectively. This increase was primarily due to an increase of $78.4 million or
342% and $160.2 million or 371%, in personnel costs during the three and
six months ended December 31, 2021, respectively, compared to the three and
six months ended December 31, 2020, as a result of increased headcount as we
continue to grow our finance, legal, operations, and administrative
organizations. The largest component of these personnel costs was stock-based
compensation, which increased by $58.9 million and $123.4 million compared to
the three and six months ended December 31, 2020, respectively. This was
primarily due to $42.3 million and $84.5 million of expense recognized during
the three and six months ended December 31, 2021, respectively, based on a
long-term, multi-year performance-based stock option award granted to our Chief
Executive Officer prior to our IPO, as well as the vesting of RSUs for which the
service-based condition had been met prior to the IPO and the performance-based
condition that was met on the IPO date.
Additionally, professional fees increased by $0.6 million or 7% and $4.0 million
or 31%, during the three and six months ended December 31, 2021, respectively,
compared to the three and six months ended December 31, 2020, to support our
acquisitions, international expansion, and regulatory compliance programs.
Other (Expense) Income, net
                           Three Months Ended
                              December 31,                            Change                       Six Months Ended December 31,                        Change
                          2021              2020               $                 %                     2021                  2020                 $                 %
                                                                               (in thousands, except percentage)
Other (expense)
income, net          $    36,741          $  240          $ 36,501             15,209  %       $       (103,632)          $ 29,685          $ (133,317)            (449) %
Percentage of total
revenue, net                  10  %            -  %                                                         (16)  %              8  %


For the three and six months ended December 31, 2021, other (expense) income,
net, was largely comprised of a gain of $34.0 million and a loss of $107.6
million, respectively, recognized based on the change in fair value of the
contingent consideration liability associated with our acquisition of PayBright,
driven by increases in the value of our common stock. In addition, we recognized
$1.2 million of expense due to the acceleration of issuance costs related to the
termination of our revolving credit facility.
For both the three and six months ended December 31, 2020, other (expense)
income, net was primarily comprised of a gain of $30.1 million recognized upon
the conversion of convertible notes into shares of Series G-1 preferred stock.
The conversion of convertible notes was accounted for as a debt extinguishment
since the number of shares of Series G-1 preferred stock issued upon conversion
was variable and this gain represented the difference between the carrying value
of the debt at the time of extinguishment and the allocated proceeds.
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Liquidity and Capital Resources

Sources and Uses of Funds
We have incurred losses since our inception, accumulating a deficit of
$1.4 billion and $0.9 billion as of December 31, 2021 and June 30, 2021,
respectively. We have historically financed the majority of our operating and
capital needs through the sales of equity securities, borrowings from debt
facilities and convertible debt, third-party loan sale arrangements, and cash
flows from operations. In September and October 2020, we issued an aggregate of
21,836,687 shares of Series G preferred stock for aggregate cash proceeds of
$435.1 million. On January 15, 2021, we closed an initial public offering of our
Class A common stock with cash proceeds, before expenses, of $1.3 billion. On
November 23, 2021, we issued the 2026 Notes, generating cash proceeds of $1.7
billion.
As of December 31, 2021, our principal sources of liquidity were available for
sale securities and cash and cash equivalents, available capacity from revolving
debt facilities, revolving securitizations, forward flow loan sale arrangements,
and certain cash flows from our operations. We believe that our existing cash
balances, available capacity under our revolving debt facilities, revolving
securitizations and off-balance sheet loan sale arrangements, and cash from
operations, are sufficient to meet both our existing operating, working capital,
and capital expenditure requirements and our currently planned growth for at
least the next 12 months. We cannot provide assurance, however, that our
business will generate sufficient cash flows from operations or that future
borrowings will be available to us in an amount sufficient to enable us to fund
our liquidity needs in the long-term. Our ability to do so depends on prevailing
economic conditions and other factors, many of which are beyond our control. Our
on- and off-balance sheet facilities provide funding subject to various
constraining limits on the financed portfolios. These limits are generally tied
to loan-level attributes such as loan term, credit quality, and interest rate,
as well as borrower- and merchant-level attributes.
Cash and Cash Equivalents
As of December 31, 2021, we had approximately $2.6 billion of cash to fund our
future operations compared to approximately $1.5 billion as of June 30, 2021.
This increase is primarily due to the proceeds of the 2026 Notes issuance on
November 23, 2021. Our cash and cash equivalents were held primarily for
continued investment in our business, for working capital purposes, and to
facilitate a portion of our lending activities. Our policy is to invest cash in
excess of our immediate working capital requirements in short-term investments
and deposit accounts to preserve the principal balance and maintain adequate
liquidity.
Restricted Cash
Restricted cash consists primarily of: (i) deposits restricted by standby
letters of credit for office leases; (ii) funds held in accounts as collateral
for our originating bank partners; and (iii) servicing funds held in accounts
contractually restricted by agreements with warehouse credit facilities and
third-party loan owners. We have no ability to draw on such funds as long as
they remain restricted under the applicable arrangements. Our policy is to
invest restricted cash held in debt facility related accounts and cash deposited
as collateral for leases in investments designed to preserve the principal
balance and provide liquidity. Accordingly, such cash is invested primarily in
money market instruments that offer daily purchase and redemption and provide
competitive returns consistent with our policies and market conditions.
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Funding Debt
The following table summarizes our funding debt facilities as of December 31,
2021:
Maturity Fiscal Year        Borrowing Capacity       Principal Outstanding
                                            (in thousands)
2022                       $           412,596      $              172,320
2023                                         -                           -
2024                                 1,325,000                     381,622
2025                                         -                           -
2026                                         -                           -
Thereafter                             650,000                     102,694
Total                      $         2,387,596      $              656,636


Warehouse Credit Facilities
Through trusts, we entered into warehouse credit facilities with certain lenders
to finance the purchase and origination of our loans. These trusts are
consolidated variable interest entities ("VIEs"), and each trust entered into a
credit agreement and security agreement with a commercial bank as administrative
agent and a national banking association as collateral trustee and paying agent.
Borrowings under these agreements are referred to as funding debt. These credit
agreements contain operating covenants, including limitations on the incurrence
of certain indebtedness and liens, restrictions on certain intercompany
transactions, and limitations on the amount of dividends and stock repurchases.
Our funding debt facilities include concentration limits for various loan
characteristics including credit quality, product mix, geography, and merchant
concentration. As of December 31, 2021, we were in compliance with all
applicable covenants in the agreements. Refer to Note 10. Debt in the notes to
the interim consolidated financial statements included elsewhere in this Form
10-Q for additional information.
These revolving facilities mature between 2022 and 2029, and subject to covenant
compliance generally permit borrowings up to 12 months prior to the final
maturity date. Borrowings under these facilities generally occur multiple times
per week, and generally coincide with the purchase of loans from our originating
bank partners. We manage liquidity by accessing diversified pools of capital and
avoid concentration with any single counterparty; we are diversified across
different types of investors including investment banks, asset managers, and
insurance companies.
Borrowings under these facilities bear interest at an annual benchmark rate of
LIBOR or at an alternative commercial paper rate (which is either (i) the per
annum rate equivalent to the weighted-average of the per annum rates at which
all commercial paper notes were issued by certain lenders to fund advances or
maintain loans, or (ii) the daily weighted-average of LIBOR, as set forth in the
applicable credit agreement), plus a spread ranging from 1.65% to 4.00%.
Interest is payable monthly. In addition, these agreements require payment of a
monthly unused commitment fee ranging from 0% to 0.75% per annum on the undrawn
portion available.
Other Funding Facilities
Prior to our acquisition of PayBright on January 1, 2021, PayBright entered into
various credit facilities utilized to finance the origination of loans in
Canada. Similar to our warehouse credit facilities, borrowings under these
agreements are referred to as funding debt, and proceeds from the borrowings may
only be used for the purposes of facilitating loan funding and origination.
These facilities are secured by PayBright loan receivables pledged to the
respective facility as collateral, mature in 2022, and bear interest based on a
benchmark rate plus a spread ranging from 1.25% to 4.45%.
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Revolving Credit Facility
On January 19, 2021, we entered into a revolving credit agreement with a
syndicate of commercial banks for a $185.0 million unsecured revolving credit
facility. This facility bore interest at a rate equal to, at our option, either
(a) a Eurodollar rate determined by reference to adjusted LIBOR for the interest
period, plus an applicable margin of 0.25% per annum or (b) a base rate
determined by reference to the highest of (i) the federal funds rate plus 0.50%
per annum, (ii) the rate last quoted by The Wall Street Journal as the U.S.
prime rate, and (iii) the one-month adjusted LIBOR plus 1.00% per annum, in each
case, plus an applicable margin of 1.50% per annum. The revolving credit
agreement had a final maturity date of January 19, 2024. The facility contained
certain covenants and restrictions, including certain financial maintenance
covenants, and required payment of a monthly unused commitment fee of 0.35% per
annum on the undrawn balance available. The Company executed its right to
terminate the revolving credit agreement effective December 15, 2021. We had not
drawn on the facility and there was no outstanding balance to be repaid. Upon
termination, we accelerated $1.2 million of issuance costs, which were recorded
in other expense. Refer to Note 10. Debt.
On February 4, 2022, we entered into a revolving credit agreement with a
syndicate of commercial banks for a $165.0 million unsecured revolving credit
facility, maturing on February 4, 2025. This facility bears interest at a rate
equal to, at our option, either (a) a SOFR rate determined by reference to the
forward-looking term SOFR rate for the interest period, plus an applicable
margin of 1.85% per annum or (b) a base rate determined by reference to the
highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate last
quoted by the Wall Street Journal as the U.S. prime rate and (iii) the one-month
forward-looking term SOFR rate plus 1.0% per annum, in each case, plus an
applicable margin of 0.85% per annum. The facility contains certain covenants
and restrictions, including certain financial maintenance covenants, and
requires payment of a monthly unused commitment fee of 0.20% per annum on the
undrawn balance available. There are no borrowings outstanding under the
facility. Refer to Note 19. Subsequent Events.
Securitizations
In connection with asset-backed securitizations, we sponsor and establish trusts
to ultimately purchase loans facilitated by our platform. Securities issued from
our asset-backed securitizations are senior or subordinated, based on the
waterfall criteria of loan payments to each security class. The subordinated
residual interests issued from these transactions are first to absorb credit
losses in accordance with the waterfall criteria. The assets are transferred
into a trust such that the assets are legally isolated from the creditors of
Affirm and are not available to satisfy our obligations. These assets can only
be used to settle obligations of the underlying trusts. Each securitization
trust issued senior notes and residual certificates to finance the purchase of
the loans facilitated by our platform. The 2020-Z1, 2020-Z2, 2021-Z1, and
2021-Z2 securitizations are secured by static pools of loans contributed at
closing, whereas the 2020-A, 2021-A and 2021-B securitizations are revolving and
we may contribute additional loans from time to time until the end of the
revolving period. Refer to Note 11. Securitization and Variable Interest
Entities.

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Cash Flows

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

                                                            Six Months Ended
                                                              December 31,
                                                          2021                2020
                                                             (in thousands)
Net Cash Used in Operating Activities              $         (75,104)       

(49,959)

Net Cash Used in Investing Activities                       (819,573)       

(906,710)

Net Cash Provided by Financing Activities(1)               2,010,213       1,265,331



(1) Amounts include net cash provided through the issuance of redeemable convertible preferred stock and convertible debt as follows:

                                                                           Six Months Ended
                                                                             December 31,
                                                                       2021                 2020
                                                                            (in thousands)

Proceeds from issuance of redeemable convertible preferred stock less repurchases and issuance costs

                                -              434,542
Proceeds from issuance of common stock, net of repurchases             59,565               22,634
Proceeds from issuance of convertible debt, net                     1,704,300                    -

Net cash inflow from equity-related financing activities $1,763,865 $457,176
Net cash provided from debt-related financing activities

                359,128              808,155
Payments of tax withholding for stock-based compensation             (112,780)                   -
Net cash provided by financing activities                         $ 

2.010.213 $1,265,331


Operating Activities
Our largest sources of operating cash are fees charged to merchant partners on
transactions processed through our platform and interest income from consumers'
loans. Our primary uses of cash from operating activities are for general and
administrative, technology and data analytics, funding costs, processing and
servicing, and sales and marketing expenses.
Cash used in operating activities for the six months ended December 31, 2021 was
$75.1 million, a decrease of $25.1 million from cash used in operating
activities of $50.0 million for the six months ended December 31, 2020. This
reflects our net loss of $465.9 million, adjusted for non-cash charges of $362.2
million, net cash outflows of $6.2 million from the purchase and sale of loans
held for sale, partially offset by net cash inflows of $35.3 million provided by
changes in our operating assets and liabilities.
Non-cash charges primarily consisted of: provision for credit losses, which
increased by $74.8 million or 181% due to a change in product mix for on-balance
sheet loans and an unusually low provision expense in the prior comparative
period driven by the release of stressed expected loss scenarios and the
adoption of CECL; gain on sales of loans, which increased by $57.7 million from
$31.0 million for the six months ended December 31, 2020 due to improved loan
sale economics and increased loan sales since the second quarter of the prior
fiscal year; and amortization of premiums and discounts, which increased by
$56.2 million or 179% due to increased amortization of discounts related to
loans purchased from our originating bank partners at a price above fair market
value. Furthermore, we incurred $181.7 million of stock-based compensation, up
from $12.7 million due to accelerated vesting of RSUs for which the
service-based condition had been met prior to the IPO and the performance-based
condition was met on the IPO date, and gains of $34.0 million due to the
decrease in the fair value of our contingent consideration liability, driven by
changes in the value of our common stock.
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Our net cash inflows resulting from changes in operating assets and liabilities
increased to $35.3 million for the six months ended December 31, 2021, compared
to net cash inflows of $8.4 million for the six months ended December 31, 2020.
This change was primarily driven by a decrease in other assets due to a
reduction of prepaid payroll taxes during the six months ended December 31,
2021.
Investing Activities
Cash used in investing activities for the six months ended December 31, 2021 was
$819.6 million, a decrease of $87.1 million from $906.7 million for the six
months ended December 31, 2020. The main driver of this was $3,563.1 million of
repayments of loans, representing an increase of $1,862.3 million, or 109%,
compared to the second quarter of the prior year, due to a higher average
balance of loans held for investment and generally increasing credit quality of
the portfolio. Additionally, we sold $780.3 million of loans, representing an
increase of $575.3 million or 281% compared to the second quarter of the prior
year. These cash inflows were partially offset by $4,652.3 million of purchases
of loans, representing an increase of $1,960.6 million or 73% compared to the
second quarter of the prior year, due partly to continued growth in GMV.
Additionally, we recorded cash outflows of approximately $511.7 million related
to purchases of available for sale securities in the current period.
Financing Activities
Cash provided by financing activities for the six months ended December 31, 2021
was $2,010.2 million, an increase of $744.9 million from $1,265.3 million during
the six months ended December 31, 2020. A main driver of this was the issuance
of convertible debt during the six months ended December 31, 2021, which
resulted in net cash inflows of $1,704.3 million, net of debt issuance costs.
Additionally, the issuance of notes by our newly formed securitization trust
during the six months ended December 31, 2021 resulted in net cash inflows of
$397.2 million, net of in-period principal repayments. This cash inflow
represented new financing activities compared to the six months ended December
31, 2020 but was partially offset by $29.9 million of net cash outflows from
funding debt as principal repayments on debt exceeded proceeds from draws on
these revolving credit facilities. This net cash outflow from funding debt was
in contrast to a net cash inflow from the conversion of redeemable convertible
preferred stock of $434.5 million during the six months ended December 31, 2020.
The shift between periods is largely due to the availability of new funding
sources in our securitization trusts. Additionally, we recorded payments of
approximately $112.8 million for tax withholding associated with stock-based
compensation during the six months ended December 31, 2021, which did not occur
in the prior periods as the vesting of RSUs was triggered by the initial public
offering in January 2021.
Liquidity and Capital Risks and Requirements

There are numerous risks to our financial results, liquidity, capital raising,
and debt refinancing plans, some of which may not be quantified in our current
liquidity forecasts. The principal factors that could impact our liquidity and
capital needs are customer delinquencies and defaults, a prolonged inability to
adequately access capital market funding, declines in loan purchases and
therefore revenue, fluctuations in our financial performance, the timing and
extent of spending to support development efforts, the expansion of sales and
marketing activities, the introduction of new and enhanced products, and the
continuing market adoption of our platform. We intend to support our liquidity
and capital position by pursuing diversified debt financings (including new
securitizations and revolving debt facilities) and extending existing secured
revolving facilities to provide committed liquidity in case of prolonged market
fluctuations.
We may, in the future, enter into arrangements to acquire or invest in
complementary businesses, products, and technologies. We may be required to seek
additional equity or debt financing in connection with those efforts. In the
event that we require additional financing, we may not be able to raise such
financing on terms acceptable to us or at all. Additionally, as a result of any
of these actions, we may be subject to restrictions and covenants in the
agreements governing these transactions that may place limitations on us, and we
may be required to pledge additional collateral as security. If we are unable to
raise additional capital or generate cash flows necessary to expand our
operations and invest in continued innovation, we may not be able to compete
successfully, which would harm our business, operations, and financial
condition. It is also possible that the actual outcome of one or more of
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our plans could be materially different than expected or that one or more of our
significant judgments or estimates could prove to be materially incorrect.
Concentrations of Revenue
For the three and six months ended December 31, 2021 approximately 11% and 10%
of total revenue, respectively, was driven by one merchant partner, Peloton. For
the three and six months ended December 31, 2020 approximately 24% and 27% of
total revenue, respectively, was driven by one merchant partner, Peloton. We
believe we have a strong relationship with Peloton and, in September 2020, we
entered into a renewed merchant agreement with Peloton with an initial
three-year term ending in September 2023, which automatically renews for
additional and successive one-year terms until terminated. While we believe our
growth will facilitate both revenue growth and merchant diversification as we
continue to integrate with a wide range of merchants, changes in merchant loan
volume and revenue concentration may cause our financial and operating
performance to fluctuate significantly from period to period. Our revenue as a
percentage of GMV in any given period varies across products. As such, as we
continue to expand our network to include more merchants, revenue as a
percentage of GMV will vary.
Contractual Obligations

On November 23, 2021, the Company issued $1.7 billion in aggregate principal
amount of 0% convertible senior notes due 2026 (the "2026 Notes"). The 2026
Notes represent senior unsecured obligations of the Company. The 2026 Notes do
not bear interest except in special circumstances, and the principal amount of
the 2026 Notes does not accrete. The 2026 Notes mature on November 15, 2026.
Off-Balance Sheet Arrangements

Off-balance sheet loans relate to unconsolidated securitization transactions and
loans sold to third-party investors for which we have some form of continuing
involvement, including as servicer. For off-balance sheet loan sales where
servicing is the only form of continuing involvement, we would only experience a
loss if we were required to repurchase such a loan due to a breach in
representations and warranties associated with our loan sale or servicing
contracts. For unconsolidated securitization transactions where Affirm is the
sponsor and risk retention holder, Affirm could experience a loss of up to 5% of
both the senior notes and residual certificates. As of December 31, 2021, the
aggregate outstanding balance of loans held by third-party investors or
off-balance sheet VIEs was $3.7 billion. As of December 31, 2021, we had two
off-balance sheet VIEs, the 2021-Z1 securitization and 2021-Z2 securitization.
In the unlikely event principal payments on the loans backing any off-balance
sheet securitization are insufficient to pay senior note holders, including any
retained interest, then any amounts the Company contributed to the
securitization reserve accounts may be depleted. See Note 11. Securitization and
Variable Interest Entities of the accompanying notes to our interim condensed
consolidated financial statements for more information.
Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with U.S. GAAP. U.S. GAAP requires us to make certain estimates
and judgments that affect the amounts reported in consolidated financial
statements. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Because
certain of these accounting policies require significant judgment, our actual
results may differ materially from our estimates. To the extent that there are
differences between our estimates and actual results, our future consolidated
financial statement presentation, financial condition, results of operations,
and cash flows will be affected.
We evaluate our significant estimates on an ongoing basis, including, but not
limited to, estimates related to merchant network revenue, loss on loan purchase
commitment, allowance for credit losses, stock-based
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compensation, including warrants granted to nonemployees, and income taxes. We
believe these estimates have the greatest potential effect on our consolidated
financial statements. Therefore, we consider these to be our critical accounting
policies and estimates.
For further information, our significant accounting policies are described in
Note 2. Summary of Significant Accounting Policies within the notes to the
interim condensed consolidated financial statements.
Recent Accounting Pronouncements

See Note 2. Summary of Significant Accounting Policies in the Notes to the Condensed Interim Consolidated Financial Statements.

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