What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-29 compared with 2021-09-17 · 296 added, 449 removed, 433 unchanged (63% of the section changed)

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A discussion regarding our financial condition and results of operations for the fiscal year ended June 30, 2022 compared to the fiscal year ended June 30, 2021 is presented below.

A discussion regarding our financial condition and results of operations for the fiscal year ended June 30, 2020 compared to the fiscal year ended June 30, 2019 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Final Prospectus dated January 12, 2021 and filed with the SEC pursuant to Rule 424(b)(4) on January 14, 2021.

A discussion regarding our financial condition and results of operations for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.

We are building the next generation platform for digital and mobile-first commerce.

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Our solutions, which are built on trust and transparency, make it easier for consumers to spend responsibly and with confidence, easier for merchants to convert sales and grow, and easier for commerce to thrive.

Our point-of-sale solution allows consumers to pay for purchases in fixed amounts without deferred interest, hidden fees, or penalties.

Our point-of-sale solutions allow consumers to pay for purchases in fixed amounts without deferred interest, late fees, or penalties.

We empower consumers to pay over time rather than paying for a purchase entirely upfront.

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We have achieved significant growth in recent periods.

Our total revenue, net was $870.5 million, $509.5 million, and $264.4 million for the years ended June 30, 2021, 2020, and 2019 respectively.

We incurred net losses

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of $430.9 million, $112.6 million, and $120.5 million for the years ended June 30, 2021, 2020, and 2019 respectively.

The combination of our differentiated product offering, efficient go-to-market strategy, and strong monetization engine has resulted in rapid growth.

• Accelerating GMV growth.

We grew our Gross Merchandise Volume ("GMV") by 79% year-over-year to $8.3 billion during the fiscal year ended June 30, 2021.

Our total revenue, net was approximately $1,349.3 million, $870.5 million, and $509.5 million for the years ended June 30, 2022, 2021, and 2020 respectively.

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incurred net losses of $707.4 million, $441.0 million, and $112.6 million for the years ended June 30, 2022, 2021, and 2020 respectively.

The combination of our differentiated product offerings, efficient go-to-market strategy, and strong monetization engine has resulted in fast growth.

• Rapid GMV growth.

We grew our GMV by approximately 87% year-over-year to $15.5 billion during the fiscal year ended June 30, 2022.

During the fiscal year ended June 30, 2021, GMV was $8.3 billion, which represented 79% growth over the fiscal year ended June 30, 2020.

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We have also continued to scale the breadth and reach of our platform.

From June 30, 2020 to June 30, 2021, our merchant base expanded by 412% to 28,995 active merchants.

• Compelling network revenue growth.

Network revenue, which combines merchant network revenue and virtual card network revenue, increased 56% year-over-year compared to the year ended June 30, 2020.

We believe that the continued growth of network revenue demonstrates the value of our platform to our merchants.

Our business was designed to scale efficiently.

From June 30, 2021 to June 30, 2022, our merchant base expanded from 28,995 to 234,847 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.

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Through the diversity of these funding relationships, the equity capital required to build our total platform portfolio has declined from approximately 4% of the total platform portfolio as of June 30, 2021, to approximately 3% as of June 30, 2022.

This metric measures the equity intensity of our business or the amount of capital used in relation to the scale of our enterprise.

We define our total platform portfolio as the unpaid principal balance outstanding of all loans facilitated through our platform as of the balance sheet date, including both those loans held for investment and those loans owned by third-parties.

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Equity capital required as a percent of the last twelve months’ GMV was 1% and 2% as of June 30, 2022 and June 30, 2021, respectively.

We have focused on growing our platform and plan to continue making investments to drive future growth, as evidenced by our strategic acquisitions.

In January 2021, we acquired PayBright, one of Canada's leading providers of installment payment plans for e-commerce and in-store purchases, to expand the scale and reach of our platform, creating a larger, more diverse merchant and consumer network across the United States and Canada.

In May 2021, we acquired Returnly, a leader in online return experiences and post-purchase payments, to expand the capabilities of our platform and address the full shopping journey by enabling seamless return experiences that drive customer loyalty and satisfaction.

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.

We believe that our continued success will depend on many factors, including our ability to attract additional merchant partners, retain our existing merchant partners, and grow and develop our relationships with new and existing merchant partners, help our merchants grow their revenue on our platform, and develop new innovative solutions to establish the ubiquity of our network and breadth of our platform.

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

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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 and financial products with longer term lengths.

For the years ended June 30, 2021, 2020, and 2019, 0% APR financing represented 43%, 43%, and 33%, respectively, of total GMV facilitated through our platform.

From consumers, we earn interest income on the simple interest loans that we purchase from our originating bank partners.

Interest rates charged to our consumers vary depending on the transaction risk, creditworthiness of the consumer, the repayment term selected by the consumer, the amount of the loan, and the individual arrangement with a merchant.

While merchant fees depend on the individual arrangement between us and each merchant and vary based on the terms of the product offering, we generally earn larger merchant fees on 0% APR financing products.

For the years ended June 30, 2022, 2021, and 2020, Split Pay and Core 0% loans represented 22% and 21%, 11% and 32%, and 6% and 37%, respectively, 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

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individual arrangement with a merchant.

Because our consumers are never charged deferred or compounding interest, late fees, or penalties on the loans, we are not incentivized to profit from our consumers’ hardships.

In addition, interest income includes the amortization of any discounts or premiums on loan receivables created upon either the purchase of a loan from one of our originating bank partners or the origination of a loan.

In order to accelerate our ubiquity, we facilitate the issuance of virtual cards directly to consumers through our app, allowing them to shop with merchants that may not yet be fully integrated with Affirm.

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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.

Once approved for the loan, the consumer then selects his/her/their preferred repayment option.

The substantial majority of these loans are funded and issued by our originating bank partners.

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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.

When an originating bank partner originates a loan, it funds the loan out of its own funds and may subsequently offer and sell the loan to us.

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.

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through our consolidated subsidiaries.

We started originating loans directly in Canada in October 2019 and, through June 30, 2021, we had originated approximately $257.7 million of loans in Canada.

As of June 30, 2021, we had directly originated $336.1 million of loans in the U.S.

pursuant to our state licenses.

We originated approximately $817.1 million and $257.7 million of loans in Canada f or the years ended June 30, 2022 and June 30, 2021 , respectively.

We directly originated loans in the U.S.

pursuant to our state licenses of approximately $2.5 billion and $336.1 million , for the years ended June 30, 2022 and June 30, 2021, respectively .

For the year ended June 30, 2022, we self-originated 21% of total loan origination volume through our state and other licenses, compared to 7% for the year ended June 30, 2021.

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.

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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.

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Our Funding Sources

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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.

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Key Operating Metrics

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GAAP”), the following tables set forth key operating metrics we use to evaluate our business.

Year Ended June 30,

2022 2021 2020

(in thousands)

Gross Merchandise Volume ("GMV") $ 8,292,031 $ 4,637,220 $ 2,620,059

We measure gross merchandise volume to assess the volume of transactions that take place on our platform.

Gross Merchandise Volume $ 15,483,237 $ 8,292,031 $ 4,637,220

We measure GMV to assess the volume of transactions that take place on our platform.

We define GMV as the total dollar amount of all transactions on the Affirm platform during the applicable period, net of refunds.

GMV does not represent revenue earned by us.

However, the GMV processed through our platform is an indicator of the success of our merchants, value provided to our consumers, and the strength of our platform.

For the year ended June 30, 2021, GMV was $8.3 billion, which represented an increase of approximately 79% as compared to $4.6 billion for the year ended June 30, 2020.

For the year ended June 30, 2020, GMV was $4.6 billion, which represented an increase of approximately 77% as compared to $2.6 billion for the fiscal year ended June 30, 2019.

Our acquisitions of PayBright and Returnly contributed an incremental $153.8 million of GMV during the year ended June 30, 2021.

However, the GMV processed through our platform is an indicator of the success of our merchants and the strength of our platform.

For the year ended June 30, 2022, GMV was $15.5 billion, which represents an increase of approximately 87% as compared to $8.3 billion for the year ended June 30, 2021.

For the year ended June 30, 2021, GMV was $8.3 billion, which represents an increase of approximately 79% as compared to $4.6 billion for the year ended June 30, 2020.

Active Consumers

June 30, 2022 June 30, 2021 June 30, 2020

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Transactions per Active Consumer (x) 3.0 2.3 2.1

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 twelve months prior to the measurement date.

As of June 30, 2021, we had 7.1 million active consumers, representing an increase of approximately 97% compared to 3.6 million as of June 30, 2020, and approximately 77% compared to 2.0 million at June 30, 2019.

Active consumers include an incremental 1.1 million consumers who engaged in at least one transaction on the PayBright or Returnly platforms during the twelve months prior to the measurement date, including prior to the acquisitions of PayBright and Returnly by Affirm.

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 June 30, 2022, we had 14.0 million active consumers, representing an increase of approximately 96% compared to 7.1 million as of June 30, 2021, and approximately 97% compared to 3.6 million as of June 30, 2020.

Active consumer includes users on the PayBright and Returnly platforms during the twelve months prior to the respective measurement dates.

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 twelve months

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prior to the measurement date.

As of June 30, 2021, we had approximately 2.3 transactions per active consumer, representing an increase of 8% as compared to 2.1 as of June 30, 2020 and an increase of 13% compared to June 30, 2019.

Transactions per active consumer includes incremental transactions completed by active consumers on the PayBright or Returnly platforms during the twelve months prior to the measurement date and prior to the acquisitions of PayBright and Returnly by Affirm.

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 June 30, 2022, we had approximately 3.0 transactions per active consumer, an increase of approximately 31% compared to June 30, 2021 and an increase of 41% compared to June 30, 2020.

Transactions per active consumer includes transactions on the PayBright and Returnly platforms during the twelve months prior to the respective measurement dates.

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Factors Affecting Our Performance

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We have continued to reduce the percentage of our equity capital required to fund our total platform portfolio from approximately 4% as of June 30, 2021, to approximately 3% as of June 30, 2022.

The mix of on-balance sheet and off-balance sheet funding will also impact our results in any given period.

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.

The mix impacts GMV, revenue, and the financial results of that period.

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.

For example, our low AOV products generally benefit from shorter duration, but also have lower revenue as a percentage of GMV when compared to high AOV products.

These mix shifts are driven in part by merchant-side activity relating to the marketing of their products, whether the merchant is fully integrated within our network, and general economic conditions affecting consumer demand.

In addition, we expect that our commercial agreement with Shopify to offer Shop Pay Installments powered by Affirm and our recent Split Pay offering, a short-term payment plan for purchases under $250 with 0% APR, will increase the mix of our shorter duration, low AOV products.

Differences in 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 Split Pay offering, a short-term payment plan with 0% APR, will continue to impact the mix of our shorter duration, low AOV products.

Differences in the mix of high versus low AOV will also impact our results.

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Sales and Marketing Investment

We have historically relied on the strength of our merchant relationships and positive user experience to develop our consumer brand and grow the ubiquity of our platform.

During the year ended June 30, 2021, we increased our investment in sales and marketing channels that we believe will drive further brand awareness and preference among both consumers and merchants.

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 year ended June 30, 2022, we continued to grow our investment in sales and marketing channels that we believe will drive further brand awareness and preference among both consumers and merchants.

Given the nature of our revenue, our investment in sales and marketing in a given period may not impact results until subsequent periods.

Additionally, given the increasingly competitive nature of merchant acquisition, we expect that we may make significant investments in retaining and acquiring new merchants.

Additionally, given the increasingly competitive nature of merchant acquisition, we have previously made, and expect that we may make, significant investments in retaining and acquiring new merchants.

We are focused on the effectiveness of sales and marketing spending and will continue to be strategic in maintaining efficient consumer and merchant acquisition.

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Historically, our revenue has been the strongest during the second quarter of our fiscal year due to increases in retail commerce during the holiday season.

Additionally, revenue associated with the purchase of home fitness equipment historically has been strongest in the third quarter of our fiscal year.

Adverse events that occur during these months could have a disproportionate effect on our financial results for the fiscal year.

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Timing of Merchant Transaction Recognition Change

The timing of our revenue recognition is tied to when a merchant captures payment and confirms a transaction financed through our platform, which we refer to as the merchant capture date.

If a merchant recognizes the payment collection and confirms the transaction later in their transaction process, we expect that this change would delay the merchant capture date, which would delay our recognition of GMV and revenue related to that merchant’s transactions by a corresponding amount.

Such a delay would adversely affect the GMV and revenue that we recognize from such merchant’s transactions in the quarterly period of such change, as the merchant capture date for a portion of such transactions would shift to a future quarterly period.

We typically experience small timing differences between the consumer purchase date and the date when a merchant captures payment;

however, these differences have historically been immaterial.

In December 2020, the implementation of such a change began with respect to our largest merchant, Peloton, who implemented a change in the timing of when the transaction is considered captured.

This resulted in a delay in the recognition of GMV and revenue related to these transactions in the period ended December 31, 2020.

For the year ended June 30, 2021, we facilitated $66.3 million more transaction volume on our platform than was captured and confirmed by our merchants, an increase of $54.1 million from the year ended June 30, 2020, during which we facilitated $12.2 million more transaction volume than was captured and confirmed by our merchants.

As of June 30, 2021 and over the multi-year life of our merchant partnership with Peloton, we had facilitated approximately $73.5 million more transaction volume than had been captured and confirmed by the merchant.

This is an increase of $73.5 million from June 30, 2020 and an increase of $7.8 million from March 31, 2021.

For more information on factors affecting our performance, see “Item 1A.

Risk Factors.”

Impact of COVID-19

The COVID-19 pandemic has had, and continues to have, a significant impact on the U.S.

economy and the markets in which we operate.

Our positive performance during this period demonstrates the value and effectiveness of our platform, the resiliency of our business model, and the capabilities of our risk management and underwriting approach.

However, some of the COVID-19 related trends underlying this positive performance, in particular the significant revenue generated from certain types of merchants, may not continue at current levels.

Diversified Mix of Merchant Partners

We have a diversified set of merchant partners across industries, which allows us to capitalize on industry tailwinds and changing consumer spending behavior, economic conditions, and other factors that may affect a particular type of merchant or industry.

For example, following the onset of the COVID-19 pandemic, our revenue from merchant partners in the travel, hospitality, and entertainment industries declined significantly, but we saw a significant increase in revenue from merchant partners offering home fitness equipment, home office products, and home furnishings.

While we have benefited as a result of such consumer spending trends, there can be no assurance that such trends will continue or that the levels of total revenue and merchant network revenue that we generate from merchants in fitness equipment, home office products, and home furnishings industries will continue;

in fact, we have begun to see these trends begin to reverse as access to COVID-19 vaccinations has increased.

The decline of sales by our merchants for any reason will generally result in lower credit sales and, therefore, lower loan volume and associated fee income for us.

However, the beginnings of economic reopening and recovery present new opportunities for growth in our diverse merchant base, including early indications of strong recovery in the travel and hospitality sectors, in which we believe we are well positioned.

Dynamic Changes to Risk Model

As part of our risk mitigation platform, we closely track data and trends to measure risk and manage exposure, leveraging our flexibility to quickly adjust and adapt.

In response to the macroeconomic impact of the COVID-19 pandemic, we initiated a series of refinements to our risk model based on our real-time data observations

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and analysis.

We were able to respond, implement, and test the updates to our model quickly due to the adaptability of our infrastructure, underwriting, and risk management models.

This resulted in decreases across both charge-offs and delinquencies.

As macroeconomic conditions improved, the embedded flexibility of the model allowed our risk tolerances to return closer to pre-pandemic levels while still maintaining low losses.

Our proprietary risk model was not designed to take into account the longer-term impacts of social, economic, and financial disruptions caused by the COVID-19 pandemic, and while we continue to make refinements to our risk model as new information becomes available to us, any changes to our risk model may be ineffective and the performance of our risk model may decline.

Resilient Allowance Model

At the onset of the COVID-19 pandemic in March 2020, we factored in updated loss multiples using macroeconomic data to reflect stressed expected loss scenarios emerging from forecasted delinquencies and defaults.

This stressing of the model resulted in an increase of the allowance for credit losses as a percentage of loans held for investment from 8.9% as of February 29, 2020 to 14.8% as of March 31, 2020.

In the months subsequent to this, we have seen stronger than expected repayment history in the portfolio, resulting in a release of the allowance.

As of June 30, 2021 and June 30, 2020, the allowance for credit losses as a percentage of loans held for investment was 6% and 9%, respectively.

Our allowance for credit losses has declined as a percentage of loans held for investment as we retained a higher portion of longer-term, 0% APR loans on our balance sheet since completing our consolidated 2020-Z1 and 2020-Z2 securitizations during the year ended June 30, 2021.

These longer-term, 0% APR loans tend to have lower expected losses than our interest bearing loans and generally carry lower loss reserves as a percentage of initial principal balance.

Additionally, improved macroeconomic conditions have resulted in an overall improved credit outlook and reduced expected losses.

Should macroeconomic factors or expected losses change, we may increase or decrease the allowance for credit losses.

For more information on the risks related to the COVID-19 pandemic, see “Item 1A.

Risk Factors — Risks Related to Our Business and Industry.”

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Components of Results of Operations

Merchant Network Revenue

Merchant partners are charged a fee on transactions processed through the Affirm platform.

Merchant partners (or merchants) are generally charged a fee based on GMV processed through the Affirm platform.

The fees vary depending on the individual arrangement between us and each merchant and on the terms of the product offering.

The fee is recognized at the point in time the terms of the executed merchant agreement have been fulfilled and the merchant successfully confirms the transaction.

The fee is recognized at the point in time the merchant successfully confirms the transaction, which is when the terms of the executed merchant agreement are fulfilled.

We may originate certain loans via our wholly-owned subsidiaries, with zero or below market interest rates.

In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting in a loss, which we record as a reduction to merchant network revenue when we estimate that these losses will be recoverable over the term of our contract with the merchant.

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.

In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting in a loss, which we record as a reduction to merchant network revenue.

In certain cases, the losses incurred on loans originated for a merchant may exceed the total network revenue earned on those loans.

We record the excess loss amounts as a sales and marketing expense.

During the years ended June 30, 2022, 2021, and 2020 we generated 34%, 44%, and 50% of our revenue, respectively, from merchant network fees.

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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

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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.

The virtual debit card is funded at the time a transaction is authorized using cash held by the issuer processor in a reserve fund.

We, or 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.

This revenue is recognized as a percentage of both our captured volume transacted on the payment processor network and net interchange income, and this revenue related to net interchange income is presented net of associated processing fees.

We generated 7%, 6%, and 4% of our revenue from virtual card network fees for the years ended June 30, 2022, 2021, and 2020, respectively.

Interest Income

We also earn revenue through interest earned on loans facilitated by our platform.

We also earn revenue through interest earned on loans facilitated through 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.

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These discounts and premiums are accreted or amortized over the life of the loan using the effective interest method and represented 35%, 31%, and 19% of total interest income for the years ended June 30, 2022, 2021, and 2020, respectively.

During the years ended June 30, 2021, 2020, and 2019, we generated 37%, 37%, and 45% of our revenue from interest income, respectively.

During the years ended June 30, 2022, 2021, and 2020, respectively, we generated 39%, 37%, and 37% of our revenue from interest income, respectively.

Gain on Sales of Loans

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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 years ended June 30, 2021, 2020, and 2019, we generated 10%, 6% and 0% of our revenue from gain (loss) on sales of loans, respectively.

During the years ended June 30, 2022, 2021, and 2020, we generated 15%, 10%, and 6% of our revenue from gain on sales of loans.

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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 capital markets partners, 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 years ended June 30, 2021, 2020, and 2019, we generated 3%, 3%, and 2% of our revenue from servicing fees, respectively.

We expect our revenue may vary from period to period based on, among other things, the timing and size of onboarding of new merchants, the mix of 0% APR loans versus interest-bearing loans with simple interest, type and mix of products that our merchants offer to their customers, the rate of repeat transactions, transaction volume, and seasonality of or fluctuations in usage of our platform.

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.

Servicing income also includes fair value adjustments for servicing assets and servicing liabilities.

During the years ended June 30, 2022, 2021, and 2020, we generated 5%, 3%, and 3% of our revenue from servicing income, respectively.

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, and stock-based compensation expense, comprise a significant component of several of these expense categories.

An allocation of overhead, such as rent and other occupancy expenses, is based on employee headcount and included in 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 June 30, 2022, we had 2,552 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 strategy.

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 2023 given our focus on growth and expansion.

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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.

We purchase certain loans from our originating bank partners that are processed through our platform and our originating bank partners put back to us.

Under the terms of the agreements with our originating bank partners, we are generally required to pay the principal amount plus accrued interest for such loans.

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Provision for credit losses consists of amounts charged against income during the period to maintain an allowance for credit losses.

Our allowance for credit losses represents our estimate of the credit losses inherent in our loans held for investment and is based on a variety of factors, including the composition and quality of the portfolio, loan specific information gathered through our collection efforts, current economic conditions, and our historical net charge-off and loss experience.

Our allowance for credit losses represents our estimate of the credit losses inherent in our loans held for investment and is based on a variety of factors, including the composition and quality of the portfolio, loan specific information gathered through our collection efforts, current economic conditions, 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 purchase and origination of loans.

Excluding the amortization of debt issuance costs, which totaled $6.4 million, $2.3 million, and $1.7 million for the years ended June 30, 2021, 2020, and 2019, respectively, we incur an expense per loan pledged to our debt funding sources.

Funding costs consist of interest expense and the amortization of fees for certain borrowings including on balance sheet VIEs and sale and repurchase agreements, and other costs incurred in connection with funding the purchases and originations of loans.

Amortization of debt issuance costs totaled $16.2 million, $6.4 million, and $2.3 million for the years ended June 30, 2022, 2021, and 2020, respectively.

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Processing and Servicing

Processing and servicing expense consists primarily of payment processing fees, third-party customer support and collection expense salaries and personnel-related costs of our customer care team, and allocated overhead.

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.

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Collection fees are fees paid to agencies as percentages of the dollars of repayment they recuperate from borrowers whose loans had previously been charged off.

Processing and servicing expenses are predominantly per transaction processing fees and third-party staffing fees that generally increase with consumer contact.

Platform fees are revenue sharing fees paid to our e-commerce platform partners.

Technology and Data Analytics

Technology and data analytics expense consists primarily of the salaries, stock-based compensation, and personnel-related costs of our engineering and product employees as well as our credit and analytics employees who develop our proprietary risk model, and totaled $182.2 million, $75.8 million, and $53.2 million for the years ended June 30, 2021, 2020, and 2019, respectively.

Additionally, for the years ended June 30, 2021, 2020, and 2019, $29.0 million, $17.1 million, and $12.6 million, respectively, of salaries and personnel costs that relate to the development of internal-use software were capitalized into property, equipment and software, net on the consolidated balance sheets, and amortized into technology and data analytics expense over the useful life of the internal-use software.

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 $254.6 million, $171.5 million, and $75.8 million for the years ended June 30, 2022, 2021, and 2020, respectively.

Additionally, for the years ended June 30, 2022, 2021, and 2020, $133.7 million, $29.0 million, and $17.1 million, respectively, of salaries and personnel costs that relate to the creation of internally-developed software were capitalized into property, equipment and software, net on the consolidated balance sheets, and amortized into technology and data analytics expense over the useful life of the developed software.

This amortization expense totaled $23.9 million, $10.3 million, and $5.5 million for the years ended June 30, 2022, 2021, and 2020, respectively.

Additional technology and data analytics expenses include platform infrastructure and hosting costs, third-party data acquisition expenses, and expenses related to the maintenance of existing technology assets and our technology platform as a whole.

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Additional technology and data analytics expenses include platform infrastructure and hosting costs, third-party data acquisition expenses, amortization of intangible assets, and expenses related to the maintenance of existing technology assets and our technology platform as a whole.

Sales and Marketing

Sales and marketing expense consists primarily of salaries and personnel-related costs, as well as costs of general marketing and promotional activities, promotional event programs, sponsorships, and allocated overhead.

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.

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, losses measured as the difference between the par value and fair market value of such loans are recorded as a sales and marketing expense when the loans are originated.

These losses are recorded as sales and marketing expense.

These losses totaled $1.7 million during the year ended June 30, 2021.

We expect that our sales and marketing expense will increase as a percentage of revenue as we expand our sales and marketing efforts to drive our growth, expansion, and diversification.

This asset represents the probable future economic benefit to be realized over the expected benefit period and is valued based on the fair value of the warrants on the grant date.

The expected benefit period of the asset was initially estimated to be four years, and the remaining useful life of the asset is reevaluated each reporting period.

During the year ended June 30, 2022 the remaining expected benefit period was extended by two years upon the execution of an amendment to the commercial agreement with Shopify which extended the term of the agreement.

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 the year ended June 30, 2022, we recognized $281.0 million of expenses related to the warrants within sales and marketing expense, respectively, 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 year ended June 30, 2022, the expense related to warrants and other share-based payments comprised 64% of sales and marketing expenses, compared to 36% for the year ended June 30, 2021.

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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.

In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting in a loss, which we record as a reduction to merchant network revenue.

In certain cases, the losses incurred on loans originated for a merchant may exceed the total network revenue earned on those loans.

We record the excess loss amounts as a sales and marketing expense.

These losses totaled $19.8 million, during the year ended June 30, 2022, compared to $1.7 million for the year ended June 30, 2021.

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 expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services.

General and administrative expenses also include costs related to fees paid for professional services, including legal, tax and accounting services, allocated overhead, and certain discretionary expenses incurred from operating our technology platform.

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 Income (Expense), Net

Other income (expense), net consists of interest earned on our money market funds included in cash and cash equivalents and restricted cash, gains and losses incurred on both our constant maturity swaps and as related to bifurcated derivatives associated with our convertible debt, and fair value adjustments resulting from changes in the fair value of our contingent consideration liability.

Income Tax (Benefit) Expense

Our income tax (benefit) expense consists of U.S.

federal and state income taxes and Canadian federal and provincial income taxes.

Through June 30, 2021, we had not been required to pay any material U.S.

federal, state, or foreign income taxes due to accumulated net operating losses.

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Other (Expense) Income, Net

Other (expense) income, net consists primarily of interest earned on our money market funds included in cash and cash equivalents and restricted cash, interest earned on securities available for sale, gains and losses incurred on derivative agreements, amortization of convertible debt issuance cost and revolving debt facility issuance costs, and fair value adjustments resulting from changes in the fair value of our contingent consideration liability, primarily driven by changes in the market price of our Class A common stock.

Income Tax Expense

Our Income tax expense (benefit) consists of U.S.

federal and state income taxes, Canadian federal and provincial income taxes, and income taxes attributable to other foreign jurisdictions.

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Results of Operations

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Operating Loss $ (866,048) $ (383,667) $ (107,790)

Other income (expense), net (54,073) (4,432) 7,022

Other (expense) income, net 141,217 (59,703) (4,432)

Loss Before Income Taxes $ (724,831) $ (443,370) $ (112,222)

Income tax (benefit) expense (2,343) 376 36

Income tax expense (benefit) (17,414) (2,343) 376

Net Loss $ (707,417) $ (441,027) $ (112,598)

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Foreign currency translation adjustments $ (5,900) $ 7,046 $ (302)

Unrealized gains on investments 29 — —

Unrealized gain (loss) on securities available for sale, net (8,022) 29 —

Net Other Comprehensive Income (Loss) (13,922) 7,075 (302)

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For loans held for investment, this discount is amortized over the life of the loan into interest income.

When a loan is sold to a third-party loan buyer, the unamortized discount is released in full at the time of sale and recognized as part of the gain or loss on sales of loans.

However, the cumulative value of the loss on loan purchase commitment or loss on origination, the interest income recognized over time from the amortization of discount while retained, and the release of discount into gain (loss) on sales of

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loans, together net to zero over the life of the loan.

When a loan is sold to a third-party loan buyer or off-balance sheet securitization trust, the unamortized discount is released in full at the time of sale and recognized as part of the gain or loss on sales of loans.

However, the cumulative value of the loss on loan purchase commitment or loss

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on origination, the interest income recognized over time from the amortization of discount while retained, and the release of discount into gain on sales of loans, together net to zero over the life of the loan.

The following table details activity for the discount, included in loans held for investment, for the periods indicated:

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Balance at the beginning of the period $ 53,177 $ 28,659 $ 13,068

Additions from loans purchased, net of refunds 264,725 157,426 $ 70,700

Additions from loans purchased or originated, net of refunds 366,279 264,725 157,426

Amortization of discount (185,050) (101,078) (35,251)

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Interest income 527,880 326,417 201,463 62 %

Gain (loss) on sales of loans 89,926 31,907 58,019 182 %

Gain on sales of loans 196,435 89,926 106,509 118 %

Servicing income 65,770 24,719 41,051 166 %

Total Revenue, net $ 1,349,292 $ 870,464 478,828 55 %

Total Revenue, net for the year ended June 30, 2021 increased by $360.9 million or 71%, compared to the year ended June 30, 2020, primarily due to an increase of $3,654.8 million or 79% in GMV on our platform, from $4,637.2 million for the year ended June 30, 2020 to $8,292.0 million for the year ended June 30, 2021.

This increase in GMV was driven by the strong network effects of the expansion of our active merchant base from 5,664 as of June 30, 2020 to 28,995 as of June 30, 2021, growth in active consumers from 3.6 million as of June 30, 2020 to 7.1 million as of June 30, 2021, and an increase in average transactions per consumer from 2.1 as of June 30, 2020 to 2.3 as of June 30, 2021.

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Total Revenue, net for the year ended June 30, 2022 increased by $478.8 million or 55%, compared to the year ended June 30, 2021.

The increase is primarily due to an increase of $7.2 billion or 87% in GMV on our platform during the year, from $8.3 billion for the year ended June 30, 2021 to $15.5 billion for the year ended June 30, 2022.

This increase in GMV was driven by the strong network effects of the expansion of our active merchant base from 28,995 as of June 30, 2021 to 234,847 as of June 30, 2022, an increase in active consumers from 7.1 million as of June 30, 2021 to 14.0 million as of June 30, 2022, and an increase in average transactions per consumer from 2.3 as of June 30, 2021 to 3.0 as of June 30, 2022.

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Merchant network revenue for the year ended June 30, 2022 increased by $79.0 million or 21%, compared to the year ended June 30, 2021.

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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 average order value of our loans ("AOV"), and typically decreases in higher APR loans.

Specifically, 0% APR loans typically carry higher merchant fees as a percentage of GMV.

The increases in merchant network revenue during the year ended June 30, 2021 were primarily driven by growth in GMV, partially offset by reductions in average term length and AOV.

For both the years ended June 30, 2021 and June 30, 2020, 0% APR loans accounted for 43% of our total GMV.

For the year ended June 30, 2021, loans with a term length greater than 12 months accounted for 29% of GMV, compared with 34% for the year ended June 30, 2020.

AOV was lower at $550 for the year ended June 30, 2021, compared to $609 for the year ended June 30, 2020.

These increases were partially offset by a reduction of merchant network revenue of $11.4 million for the year ended June 30, 2021 associated with the creation of discounts on self-originated loans with a par value in excess of the fair value of such loans.

These discounts on certain self-originated loans are amortized into interest income over the life of the loan and were not incurred during the year ended June 30, 2020.

Additionally, during the third fiscal quarter of 2021, we recorded a reduction of merchant network revenue of $3.1 million associated with estimated merchant fees previously earned on the facilitation of transactions related to products involved in a recall announced by our largest merchant partner, Peloton.

This estimate was derived in part based on estimates of return rates provided by Peloton for the quarter ended March 31, 2021, in its Form 10-Q.

Based on actual return activity observed, we recorded a further reduction of merchant network revenue of $2.3 million during the fourth fiscal quarter, bringing the total reduction of merchant network revenue associated with the recall to $5.4 million for the year ended June 30, 2021.

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 year ended June 30, 2022 was primarily driven by an increase in GMV, partially offset by reductions in the concentration of long-term 0% APR loans, our highest merchant fee category, which decreased from 21% of total GMV during the year ended June 30, 2021 to 11% during the year ended June 30, 2022.

For the year ended June 30, 2022, approximately 8%, 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 20% of total revenue in the comparative period.

More broadly, for the year ended June 30, 2022, loans with term lengths greater than 12 months accounted for 20% of GMV, compared to 29% for the year ended June 30, 2021, primarily due to the increased adoption of our Split Pay product.

AOV was lower at $403 for the year ended June 30, 2022, compared to $550 for the year ended June 30, 2021, primarily due to the increased adoption of our Split Pay product.

The increases were partially offset by a reduction of merchant network revenue of $80.4 million for the year ended June 30, 2022, associated with the creation of discounts upon the self-origination of loans with par values in excess of the fair value of such loans, compared to $11.4 million during the year ended June 30, 2021.

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, which we self-originate.

For the year ended June 30, 2022, we self-originated $3.3 billion of loans, an increase of 453.9% compared to $0.6 billion during year ended June 30, 2021.

While the discounts created upon the origination of a loan reduce merchant network revenue at the time of origination, the discounts are amortized into interest income over the life of the respective loans when retained on the balance sheet and any unamortized discount is reflected in the cost basis when determining gain on sale of loans.

Virtual card network revenue for the year ended June 30, 2022 increased by $50.8 million or 102%, compared to the year ended June 30, 2021.

This increase was driven by an increase in GMV processed through our issuer processor of 148% for the year ended June 30, 2021 due to increased activity on our virtual card-enabled mobile application and growth in existing and new merchants integrated using our virtual card platform, as well as improved economics with our virtual card issuer processor partner.

This increase was driven by an increase in GMV processed through our issuer processor of 100% for the year ended June 30, 2022, 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, growing from 756 merchants as of June 30, 2021 to 1,099 merchants as of June 30, 2022.

Virtual card network revenue is also impacted by the mix of merchants as different merchants can have different interchange rates depending on their industry or size, among other factors.

Interest income for the year ended June 30, 2022 increased by $201.5 million or 62%, compared to the year ended June 30, 2021.

Generally, interest income is correlated with the changes in the average balance of loans held for investment, as we recognize interest on loans held for investment using the effective interest method over the life of the loan.

The average balance of loans held for investment increased by 87% to $1,710.9 million for the year ended June 30, 2021, compared to the same periods in the prior fiscal year.

As a percentage of average loans held for investment, total interest income decreased slightly from approximately 20% during the year ended June 30, 2020 to 19% during the year ended June 30, 2021.

This change was driven by an increase in the average proportion of 0% APR loans being held on our consolidated balance sheet as a percentage of the total loans held for investment, which increased from 29% during the year ended June 30, 2020, compared to 46% during the year ended June 30, 2021.

The shift was largely due to strong volume of longer-term 0% APR loans as well as short-term Split Pay loans being held for investment and the addition of our 0% APR 2020-Z1 and 2020-Z2 consolidated securitizations.

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While we do recognize interest income on 0% APR loans via the amortization of the loan discount, this is generally earned at a lower rate than consumer interest on interest-bearing loans.

The total amortization of discounts on loans held for investment increased by $65.8 million or 187%, for the year ended June 30, 2021, compared with the year ended June 30, 2020, and represented 31% of total interest income for the year ended June 30, 2021, compared to 19% for the year ended June 30, 2020.

This increase included the amortization of discounts arising from self-originated loans held for investment of $18.2 million during the year ended June 30, 2021, which was nil for the year ended June 30, 2020.

Gain (loss) on sales of loans for the year ended June 30, 2021 increased by $58.0 million or 182%, compared to the year ended June 30, 2020.

We sold loans with an unpaid balance of $3,232.9 million for the year ended June 30, 2021 and $2,664.4 million for the year ended June 30, 2020, for which we retained servicing rights.

This increase was primarily due to higher loan sale volume, favorable loan sale pricing terms, and optimizing the allocation of loans to loan buyers with higher pricing terms.

The average balance of loans held for investment increased by 27% to $2.3 billion for the year ended June 30, 2022, compared to the same period in the prior fiscal year.

As an annualized percentage of average loans held for investment, total interest income increased from approximately 18% during the year ended June 30, 2021 to 23% during the year ended June 30, 2022.

This change was driven by a decrease in the average proportion of 0% APR loans being held on our consolidated balance sheet as a percentage of the average loans held for investment, which decreased from 46% during the year ended June 30, 2021 to 39% during the year ended June 30, 2022.

The shift was largely due to increased concentration of loans with large enterprise merchant partners;

those loans tend to be interest-bearing.

We recognize interest income on 0% APR loans via the amortization of the loan discount.

Short term 0% APR loans, including Split Pay loans, 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

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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 $84.0 million or 83% for the year ended June 30, 2022, compared with the year ended June 30, 2021.

The amortization of discounts represented 35% of total interest income for the year ended June 30, 2022, compared to 31% for the year ended June 30, 2021, respectively.

This increase included the amortization of discounts arising from self-originated loans held for investment of $106.1 million during the year ended June 30, 2022, which was $18.2 million for the year ended June 30, 2021.

Gain on sales of loans for the year ended June 30, 2022 increased by $106.5 million or 118%, compared to the year ended June 30, 2021.

We sold loans with an unpaid balance of $3.2 billion for the year ended June 30, 2021, and $7.1 billion for the year ended June 30, 2022, for which we retained servicing rights.

This increase was primarily due to higher loan sale volume to third-party loan buyers and off-balance sheet securitizations, favorable loan sale pricing terms, and optimizing the allocation of loans to loan buyers with higher pricing terms.

The increase was partially offset by a reduction of $6.2 million due to the net impact of the servicing assets and liabilities of the loans sold during the year ended June 30, 2022, compared to a reduction of $1.5 million for the year ended June 30, 2021

Servicing income for the year ended June 30, 2022 increased by $41.1 million or 166%, compared to the year ended June 30, 2021.

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.

Additionally, during the year ended June 30, 2020, we recognized a reduction of servicing income of $1.0 million related to the changes in fair value of servicing assets and liabilities compared with an addition to servicing income of $1.5 million during the year ended June 30, 2021.

This increase was primarily due to an increase in the average unpaid principal balance of loans owned by third-party loan owners, which increased from $1.8 billion during the year ended June 30, 2021 to $3.6 billion during the year ended June 30, 2022.

Additionally, we recognized an increase of servicing income of $6.3 million related to the changes in fair value of servicing assets and liabilities during the year ended June 30, 2022, compared with a reduction to servicing income of $1.5 million during the year ended June 30, 2021.

Operating Expenses

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Percentage of total revenue, net 15 % 28 %

Loss on loan purchase commitment for the year ended June 30, 2021 increased by $85.2 million or 53%, compared to the year ended June 30, 2020.

This increase was due to a significant increase in the volume of loans purchased above fair market value, primarily as a result of an increase in purchases of 0% APR loans from our originating bank partners during the period.

During the year ended June 30, 2021, we purchased $7.9 billion of loan receivables from our originating bank partners, representing an increase of $3.2 billion or 68%, compared to the year ended June 30, 2020.

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Loss on loan purchase commitment for the year ended June 30, 2022 decreased by $42.6 million or 17%, compared to the year ended June 30, 2021.

This decrease was due to a decrease in the volume of long-term 0% APR loans purchased from our originating bank partners compared to the prior period, which are purchased above fair market value.

The decrease in loss on loan purchase commitment is also impacted by changes in the estimate of fair value of the loans driven primarily by the mix of loan terms.

The differences in fair values and purchase values for our loans are generally correlated with the term length, so the reduction in long term loans reduced the differences between the estimates of fair value and purchase value.

During the year ended June 30, 2022, we purchased $3,251.5

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million, of 0% APR loan receivables from our originating bank partners, representing a decrease of $33.1 million or 1% compared to the year ended June 30, 2021.

Provision for Credit Losses

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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.

This stressing of the model resulted in an increase of the allowance for credit losses up to 14.6% at its peak as of March 31, 2020.

In the months subsequent to this, we have seen stronger than expected repayment history in the portfolio, resulting in a release of the allowance over time.

While the allowance for credit losses increased by 24% compared to June 30, 2020, the balance of loans held for investment increased 96% compared to the prior period.

As of June 30, 2021, the allowance for credit losses as a percentage of loans held for investment decreased to 5.8%, compared to 9.2% as of June 30, 2020.

This decrease in the allowance for credit losses as a percentage of loans held for investment over time was due to a combination of factors.

Firstly, continued stronger than expected repayment performance of the portfolio accounted for a decrease of 62% in our net charge-offs as a percentage of our average loans held for investment to 3.0%, compared with 7.9% for the year ended June 30, 2020.

Secondly, we began transitioning to a new underlying data model which incorporates internal improvements to our underwriting and collections processes while allowing for a more granular segmentation of the loan portfolio.

This change in model resulted in a decrease in the allowance of approximately $48.2 million.

These decreases were offset by allowances recognized on new purchases and originations of loans held for investment in the period, though with generally higher credit quality and pledged to securitization trusts.

This combination of factors, coupled with the in-period charge-offs and recoveries, resulted in a decrease in the provision for credit losses of $39.2 million compared to the year ended June 30, 2020.

Additionally, during the prior fiscal year, following the loss of our emerging growth company status, we adopted Accounting Standard Update (“ 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 increasing the provision for credit losses by $10.1 million for the year ended June 30, 2021.

During the year ended June 30, 2022 , t he allowance as a percentage of loans held for investment increased from 5.8% as of June 30, 2021 to 6.2% as of June 30, 2022, primarily due to a deconcentration of long-term, lower-credit-risk 0% APR loans on our balance sheet and growth of new platforms and merchant partnerships with generally 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 an overall larger loan population, shifting product mix, and normalized credit environment, resulted in an increase in provision for credit losses expense of $189.4 million or 287% compared to the year ended June 30, 2021.

Funding Costs

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Funding costs for a given period are correlated with the sum of the average balance of funding debt and the average balance of notes issued by securitization trusts.

This increase was primarily due to the introduction of notes issued by securitization trusts during the current fiscal year, which bear interest at fixed rates.

The average balance of notes issued by securitization trusts during the year ended June 30, 2021 was $747.0 million, which did not exist during the prior year period.

The average balance of funding debt for the year ended June 30, 2021 increased by $38.0 million or 5%, compared to the year ended June 30, 2020, while the average reference interest rate decreased by 91% during the period.

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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 year ended June 30, 2022 was $1,490.1 million, compared with $747.0 million, during the year ended June 30, 2021.

The average balance of funding debt for the year ended June 30, 2022 was $677.0 million, compared with $752.6 million, during the year ended June 30, 2021.

Combined, average total debt for the year ended June 30, 2022 increased by $667.6 million or 45%, respectively, compared to the year ended June 30, 2021 while the average reference interest rate increased by 163% during the period.

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Processing and Servicing

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Processing and servicing expense for the year ended June 30, 2022 increased by $84.2 million or 114%, compared to the year ended June 30, 2021.

This increase was primarily due to a $12.5 million or 57% increased in payment processing fees due to increased servicing activity and payments volume for the year ended June 30, 2021.

Additionally, processing fees paid to our customer referral partners increased by $3.4 million or 189% for the year ended June 30, 2021.

Personnel costs increased by $6.4 million or 119% for the year ended June 30, 2021 driven by growth in headcount, while third-party loan servicing and collections spend remained flat, increasing only 4% due to vendor cost improvements.

This increase was primarily due to a $56.1 million or 163% increase in payment processing fees related to increased servicing activity and payments volume for the year ended June 30, 2022.

Additionally, processing fees paid to our platform partners increased by $5.4 million or 104%, for the year ended June 30, 2022.

Personnel costs increased by $5.6 million or 47% for the year June 30, 2022 driven by growth in headcount.

For the year ended June 30, 2022, third-party loan servicing and collections spend increased $17.0 million or 82%, due to increased loan volume.

Technology and Data Analytics

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Technology and data analytics expense for the year ended June 30, 2022 increased by $169.3 million or 68%, compared to the year ended June 30, 2021.

This increase was primarily due to a $106.4 million or 140%, increase in engineering, product, and data science personnel costs for the year ended June 30, 2021, compared to the year ended June 30, 2020, net of capitalized costs for internal-use 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 $71.1 million of the increase compared to the year ended June 30, 2020, largely due to the 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.

Additionally, there was a $15.1 million or 63%, increase in data infrastructure and hosting costs for the year ended June 30, 2021, compared to the year ended June 30, 2020, as well as a $0.9 million or 6%, increase in underwriting data provider costs for the year ended June 30, 2021 compared to the year ended June 30, 2020.

Our data infrastructure and hosting and underwriting and data provider costs all benefited from unit level cost improvements achieved as a result of vendor contract renegotiations.

For the year ended June 30, 2022, we saw a $83.1 million or 48% increase in personnel costs compared to the year ended June 30, 2021 primarily due to an increased headcount as we continue to support our growth and technology platform as a whole.

A portion of these personnel costs was stock-based compensation, which accounted for a $39.9 million increase compared to the year ended June 30, 2021, respectively, largely due to vesting of RSUs.

Additionally, there was a $51.9 million or 132%, increase in data infrastructure and hosting costs for the year ended June 30, 2022, compared to the year ended June 30, 2021, due to increased capacity requirements of our technology platform driven by increase in active users and transactions per active consumer.

There was a $12.8 million or 75%, increase in underwriting data provider costs for the year ended June 30, 2022, compared to the year ended June 30, 2021, due to an increase in applications, partially offset by cost improvements achieved as a result of contract renegotiations.

Furthermore, amortization of internally-developed software increased by $13.6 million or 132%, compared to the year ended June 30, 2021, primarily as a result of an increase in the number of capitalized projects during the period due to our ongoing investment in software development.

Capitalized projects grew 370% from 30 projects for the year ended June 30, 2021 to 141 projects for the year ended June 30, 2022.

Sales and Marketing

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Sales and marketing expense for the year ended June 30, 2022 increased by $350.2 million or 192%, compared to the year ended June 30, 2021.

This increase was primarily due to $64.8 million of expense incurred during the year ended June 30, 2021 associated with the amortization of our commercial agreement asset with Shopify, which was recognized in July 2020.

This asset represents the probable future economic benefit to be realized over the four-year expected benefit period and is valued based on the fair value of the warrants granted to Shopify under such commercial agreement at the grant date.

This value is amortized on a straight-line basis over the four-year expected benefit period.

Additionally, stock-based compensation related to employees in the sales and

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marketing functions increased $15.1 million or 375%, compared to the year ended June 30, 2020, largely due to the 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.

This increase was primarily due to $281.0 million of expense related to warrants granted to Amazon during the year ended June 30, 2022.

Additionally, personnel costs related to employees in the sales and marketing functions increased $19.5 million or 45%, compared to the year ended June 30, 2021 largely due to an increased headcount.

Loss on loan originations increased $18.1 million or 1,067%, compared to the year ended June 30, 2021, primarily due to an increase in self-originated loans.

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Furthermore, there was a $20.9 million or 59%, increase in brand and consumer marketing spend during the year ended June 30, 2022, compared to the year ended June 30, 2021, associated with our expanded brand-activation, holiday shopping, lifestyle, and travel marketing campaigns, as well as a $5.1 million or 40% increase in business-to-business marketing spend compared to the year ended June 30, 2021.

Prior to this fiscal year, we had only engaged in very limited marketing efforts, primarily in the form of co-marketing with merchants.

General and Administrative

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Percentage of total revenue, net 43 % 44 %

General and administrative expense for the year ended June 30, 2021 increased by $249.0 million or 205%, compared to the year ended June 30, 2020.

This increase was primarily due to an increase of $198.9 million or 263% in personnel costs during the year ended June 30, 2021, compared to the year ended June 30, 2020, as a result of increased headcount as we continue to grow our finance, legal, operations, and administrative organizations.

The largest component of these personnel costs was stock-based compensation, which increased by $169.4 million compared to the year ended June 30, 2020.

This was primarily due to $83.9 million of expense recognized during the year ended June 30, 2021 based on a long-term, multi-year performance-based stock option award granted to our Chief Executive Officer prior to our IPO, as well as the vesting of RSUs for which the service-based condition had been met prior to the IPO and the performance-based condition was met on the IPO date.

Additionally, professional fees increased by $16.3 million or 133% during the year ended June 30, 2021, compared to the year ended June 30, 2020, to support our initial public offering, acquisitions, international expansion, and regulatory compliance programs.

Other Income, net

General and administrative expense for the year ended June 30, 2022 increased by $193.7 million or 50%, compared to the year ended June 30, 2021 primarily due to an increased headcount as we continue to grow our finance, legal, operations, and administrative organizations.

Additionally, professional fees increased by $16.0 million or 56%, during the year ended June 30, 2022 compared to the year ended June 30, 2021, to support our acquisitions, international expansion, and regulatory compliance programs.

Other (Expense) Income, net

Year ended June 30, Change

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(in thousands, except percentage)

Other income, net $ (54,073) $ (4,432) $ (49,641) 1,120 %

Other (expense) income, net $ 141,217 $ (59,703) $ 200,920 (337) %

Percentage of total revenue, net 10 % (7) %

For the year ended June 30, 2021, other income (expense), net, was primarily comprised of a loss of $87.2 million recognized based on the change in fair value of the contingent consideration liability associated with our acquisition of PayBright driven by changes in the value of our common stock, and a gain of $30.1 million recognized upon the conversion of convertible notes into shares of Series G-1 preferred stock.

For the year ended June 30, 2022, other (expense) income, net, was largely comprised of a gain of $89.3 million, recognized based on the change in fair value of the contingent consideration liability associated with our acquisition of PayBright, driven by decreases in the value of our common stock.

Additionally other (expense) income, net included a gain of $48.6 million on hedging instruments due to increases in fair value of interest rate caps as a direct correlation with LIBOR and increased volatility in the market.

For the year ended June 30, 2021, other (expense) income, net was primarily comprised of a loss of $92.9 million recognized based on the change in fair value of the contingent consideration liability associated with our acquisition of PayBright, driven by changes in the value of our common stock.

Additionally, for the year ended June 30, 2021, other (expense) income, net included 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.

Additionally, we recognized a loss of $(1.6) million related to increases in the fair value of investments.

For the year ended June 30, 2020, other income (expense), net was primarily comprised of interest earned on money market funds of $3.9 million, offset by losses on our constant maturity swaps of $4.0 million and a loss of $3.8 million on the extinguishment of our convertible debt derivative liability.

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Quarterly Results of Operations and Other Data

The following tables set forth our selected unaudited quarterly consolidated statements of operations data for each of the quarters indicated, as well as the percentage that each line item represents of our total revenue for each quarter presented.

The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements and reflect, in the opinion of management, all adjustments which consist only of a normal, recurring nature that are necessary for a fair statement of the financial information contained in those financial statements.

Our historical results are not necessarily indicative of the results that may be expected in the future.

The following quarterly financial data should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K.

Totals may not foot due to rounding.

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Three Months Ended

June 30, 2021 March 31, 2021 1 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

(in thousands) (unaudited)

Merchant network revenue $ 88,657 $ 97,999 $ 99,630 $ 93,265 $ 85,249 $ 67,350 $ 67,764 $ 36,389

Virtual card network revenue 19,264 13,809 10,820 5,958 2,699 5,930 7,110 3,601

Total network revenue $ 107,921 $ 111,808 $ 110,450 $ 99,223 $ 87,948 $ 73,280 $ 74,874 $ 39,990

Interest income 103,793 94,530 73,857 54,237 49,117 52,372 45,073 40,168

Gain (loss) on sales of loans 42,582 16,350 14,560 16,434 11,578 9,866 4,738 5,725

Servicing income 7,484 7,977 5,174 4,084 4,689 2,755 5,291 2,064

Total Revenue, net $ 261,780 $ 230,665 $ 204,041 $ 173,978 $ 153,332 $ 138,273 $ 129,976 $ 87,947

Operating Expenses

Loss on loan purchase commitment $ 51,010 $ 62,054 $ 67,768 $ 65,868 $ 55,311 $ 43,519 $ 42,661 $ 19,961

Provision for credit losses 25,489 (1,063) 12,521 28,931 (32,171) 82,216 30,178 24,844

Funding costs 15,623 14,665 12,060 10,352 7,817 8,204 8,167 8,128

Processing and servicing 21,924 21,543 16,802 13,498 14,806 13,678 11,652 9,695

Technology and data analytics 71,233 109,447 41,634 33,768 31,744 33,654 31,612 25,368

Sales and marketing 63,544 59,041 39,112 22,582 5,066 7,108 7,651 5,219

General and administrative 137,647 159,415 40,916 32,273 31,439 31,399 30,688 27,704

Total Operating Expenses $ 386,470 $ 425,102 $ 230,813 $ 207,272 $ 114,012 $ 219,778 $ 162,609 $ 120,919

Operating (Loss) Income $ (124,690) $ (194,437) $ (26,772) $ (33,294) $ 39,320 $ (81,505) $ (32,633) $ (32,972)

Other income (expense), net (5,985) (77,773) 240 29,445 (4,413) (4,022) 1,730 2,273

(Loss) Income Before Income Taxes $ (130,675) $ (272,210) $ (26,532) $ (3,849) $ 34,907 $ (85,527) $ (30,903) $ (30,699)

Income tax (benefit) expense (2,448) (70) 78 97 94 93 93 96

Net (Loss) Income $ (128,227) $ (272,140) $ (26,610) $ (3,946) $ 34,813 $ (85,620) $ (30,996) $ (30,795)

1 We determined that stock based compensation recorded during the three months ended March 31, 2021 was understated, as the estimated fair value of RSUs granted during the three months ended December 31, 2020 did not reflect an increase in share value due to the anticipated IPO.

As a result, the accompanying unaudited interim financial information for the three months ended March 31, 2021 has been adjusted to reflect additional stock based compensation expense of $25.0 million from amounts previously reported.

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Operating expenses include stock-based compensation as follows:

Three Months Ended

June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

(in thousands) (unaudited)

Processing and servicing $ 473 $ 1,621 $ 287 $ 26 $ 28 $ 27 $ 32 $ (5)

Technology and data analytics 21,922 56,699 2,556 2,213 1,988 3,360 3,610 3,327

Sales and marketing 6,415 11,425 581 760 868 918 963 1,291

General and administrative 81,771 94,983 3,097 3,204 2,496 3,665 3,689 3,812

Total stock-based compensation expense $ 110,581 $ 164,728 $ 6,521 $ 6,203 $ 5,380 $ 7,970 $ 8,294 $ 8,425

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The following table presents each line item as a percentage of our total revenue for each quarter presented:

Three Months Ended

June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

Merchant network revenue 34 % 42 % 49 % 54 % 56 % 49 % 52 % 41 %

Virtual card network revenue 7 % 6 % 5 % 3 % 2 % 4 % 5 % 4 %

Total network revenue 41 % 48 % 54 % 57 % 57 % 53 % 58 % 45 %

Interest income 40 % 41 % 36 % 31 % 32 % 38 % 35 % 46 %

Gain (loss) on sales of loans 16 % 7 % 7 % 9 % 8 % 7 % 4 % 7 %

Servicing income 3 % 3 % 3 % 2 % 3 % 2 % 4 % 2 %

Total Revenue, net 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Operating Expenses

Loss on loan purchase commitment 19 % 27 % 33 % 38 % 36 % 31 % 33 % 23 %

Provision for credit losses 10 % — % 6 % 17 % (21) % 59 % 23 % 28 %

Funding costs 6 % 6 % 6 % 6 % 5 % 6 % 6 % 9 %

Processing and servicing 8 % 9 % 8 % 8 % 10 % 10 % 9 % 11 %

Technology and data analytics 27 % 47 % 20 % 19 % 21 % 24 % 24 % 29 %

Sales and marketing 24 % 26 % 19 % 13 % 3 % 5 % 6 % 6 %

General and administrative 53 % 69 % 20 % 19 % 21 % 23 % 24 % 32 %

Total Operating Expenses 148 % 184 % 113 % 119 % 74 % 159 % 125 % 137 %

Operating (Loss) Income (48) % (84) % (13) % (19) % 26 % (59) % (25) % (37) %

Other income (expense), net (2) % (34) % — % 17 % (3) % (3) % 1 % 3 %

(Loss) Income Before Income Taxes (50) % (118) % (13) % (2) % 23 % (62) % (24) % (35) %

Income tax (benefit) expense (1) % — % — % — % — % — % — % — %

Net (Loss) Income (49) % (118) % (13) % (2) % 23 % (62) % (24) % (35) %

The following table sets forth some of the key operating metrics we use to evaluate our business for each of the periods indicated:

Three Months Ended

June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

(in thousands) (unaudited)

Gross Merchandise Volume (GMV)

Income tax expense (benefit)

Year ended June 30, Change

2022 2021 $ %

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Quarterly Revenue Trends

Total Revenue, net has generally increased sequentially in each of the periods presented due to the continued growth in GMV, increase in active consumers, and expansion of our merchant network.

We generally experience seasonality in our business in terms of changes in GMV in accordance with retail and e-commerce trends.

We typically see increased revenue in the second fiscal quarter of each year as a result of the increased GMV occurring as a part of the holiday shopping season, which is most evident in merchant network revenue as this revenue is recognized when the terms of the executed merchant agreement have been fulfilled and the merchant successfully confirms the transaction.

We believe that this seasonality has affected and will continue to affect our quarterly results;

however, to date its effect may have been masked by our rapid growth.

Since we recognize interest income on loans held for investment over the term of the loan, a substantial portion of the revenue we report in each period is attributable to loans created via transactions occurring in prior periods.

Consequently, increases or decreases in GMV in one period may not be immediately reflected in our revenue for that period and may positively or negatively affect our revenue in future periods.

This effect is lessened by the relatively short duration of loans held for investment but may be increased by shifts in the relative proportion of loans held for investment compared to loans sold to third-party loan buyers.

Quarterly Operating Expense Trends

Operating expenses generally have increased sequentially in each of the periods presented, other than the fourth fiscal quarter of 2020 and fourth fiscal quarter of 2021.

Quarterly increases in operating expenses are primarily due to increased costs of operations as our GMV and total platform portfolio have grown and due to increased investments in headcount and other related expenses to support our growth.

We expect headcount to continue to increase given our focus on growth and expansion.

The provision for credit losses represents the amount of expense required to maintain the allowance of credit losses on our balance sheet which represents management’s estimate of future losses.

The provision is determined by the change in estimates for future losses and the net charge offs incurred in the period.

Our provision for losses has generally grown in line with the increase in loans held for investment, with the exception of the third and fourth fiscal quarters of 2020 as well as the second and third fiscal quarters of 2021.

In March 2020, at the onset of the COVID-19 pandemic, we increased our allowance for loan losses significantly after factoring in updated loss multiples using macroeconomic data to reflect stressed expected loss scenarios emerging from forecasted delinquencies and defaults.

This resulted in a significant increase in provision for credit losses during the period.

However, during the following quarter ended June 30, 2020, we saw stronger than expected repayment history in the portfolio, resulting in a decrease in these stressed loss multiples and release of the allowance and therefore, a significant decrease in operating expenses.

During the second and third fiscal quarters of 2021, we saw similarly stronger than expected repayment history as well as improving macroeconomic factors resulting in reduced provision expense.

Additionally, we began transitioning to a new underlying data model which incorporates internal improvements to our underwriting and collections processes while allowing for a more granular segmentation of the loan portfolio.

This change in model resulted in a decrease to the allowance.

These decreases were largely offset by allowances recognized on new purchases and originations of loans held for investment in the period with generally higher credit quality and pledged to securitization trusts, however, this combination of factors, coupled with the in-period charge-offs and repayments, resulted in income recognized from the provision for credit losses of during the three months ended March 31, 2021.

Should similar macroeconomic or other factors arise that change our loss expectations, we may increase or decrease the allowance.

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(in thousands, except percentage)

Income tax expense (benefit) $ (17,414) $ (2,343) $ (15,071) 643 %

Percentage of total revenue, net (1) % — %

The income tax benefit for the year ended June 30, 2022 was primarily attributable to a change in our assessment of the future realization of certain foreign deferred tax assets, while the income tax benefit for the year ended June 30, 2021 was primarily attributable to an adjustment to the Company's valuation allowance resulting from a deferred tax liability assumed with the acquisition of Returnly.

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In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including our historical financial performance, projections of future taxable income - incorporating any changes in circumstance for the business, future reversals of existing taxable temporary differences, and any carryback available.

The assumptions about future taxable income require the use of Management’s judgment and are consistent with the plans and estimates we are using to manage the underlying businesses, yet they are subject to change from period to period.

As a result of (i) the integration and consolidation of our PayBright business into and with Affirm’s Canadian business, which makes PayBright’s tax attributes utilizable against future income in the combined Canadian operations, (ii) the expansion of our overall business in Canada, and (iii) other objectively verifiable positive evidence that became available during the year ended June 30, 2022 - all of which we have concluded is sufficient to outweigh the existing negative evidence, including the presence of a three-year cumulative loss attributable to the related foreign jurisdiction, we have determined that it is more likely than not that our foreign deferred tax assets will be realized and a valuation allowance is not required.

Even though our determination that our foreign deferred tax assets will more likely than not be realized is primarily based on sufficient, objectively verifiable positive evidence, consideration was still required for the underlying projections of future income.

If our assumptions change in the future and we determine that we will not be able to realize our foreign deferred tax assets, the tax benefits related to any release of the valuation allowance on foreign deferred tax assets as of June 30, 2022 will be reversed and recorded as an increase of income tax expense for the period.

We continue to recognize a full valuation allowance against our U.S.

federal and state net deferred tax assets.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Company for the years ended June 30, 2022, 2021, and 2020.

The presence of a three-year cumulative loss limits the ability to consider other subjective evidence, such as our expectations of future taxable income and projections for growth, and the other positive evidence available is not sufficient to outweigh the existing negative evidence at this time.

Liquidity and Capital Resources

Sources and Uses of Funds

We have incurred losses since our inception, accumulating a deficit of $888.4 million and $447.2 million as of June 30, 2021 and June 30, 2020, respectively.

We have historically financed the majority of our operating and capital needs through the private sales of equity securities, borrowings from debt facilities and convertible debt, third-party loan sale arrangements, and cash flows from operations.

We have incurred losses since our inception, accumulating a deficit of $1.6 billion and $0.9 billion as of June 30, 2022 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.

As of June 30, 2021, our principal sources of liquidity were cash and cash equivalents, available capacity from revolving debt facilities, revolving securitizations, forward flow loan sale arrangements, and certain cash flows from our operations.

On November 23, 2021, we issued the 2026 Notes, generating cash proceeds of $1.7 billion.

As of June 30, 2022, 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.

Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control.

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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.

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Cash and Cash Equivalents

As of June 30, 2021, we had approximately $1.5 billion of cash to fund our future operations compared to approximately $267.1 million as of June 30, 2020.

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.

As of June 30, 2022, we had approximately $1.3 billion of cash and cash equivalents to fund our future operations compared to approximately $1.5 billion as of June 30, 2021.

Our cash and cash equivalents were comprised of operating bank accounts, money market funds, certificates of deposits, corporate bonds, and other commercial paper with maturities less than three months.

Cash and cash equivalents are 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 liquid 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;

(i) deposits restricted by standby letters of credit for office leases and merchant partnership agreements;

(ii) funds held in accounts as collateral for our originating bank partners;

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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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Securities, Available for Sale

As of June 30, 2022, we had $1.6 billion of investments in marketable debt securities classified as available-for-sale, compared to $16.2 million as of June 30, 2021.

Our securities available for sale at fair value primarily consist of certificates of deposits, corporate bonds, commercial paper, and government bonds with maturities greater than three months.

Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

The following table summarizes our funding debt facilities as of June 30, 2022.

The funding debt consists of warehouse credit facilities, other funding facilities, revolving credit facilities, and repurchase liabilities:

Maturity Fiscal Year Borrowing Capacity Principal Outstanding

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2027 250,000 34,428

2026 250,000 102,203

2028 and thereafter 600,000 68,936

Total $ 2,934,027 $ 683,395

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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 (“VIE”), 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.

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.

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Our funding debt facilities include concentration limits for various loan characteristics including credit quality, product mix, geography, and merchant concentration.

As of June 30, 2021, we were in compliance with all applicable covenants in the agreements.

As of June 30, 2022, we were in

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compliance with all applicable covenants in the agreements.

Refer to Note 11.

Debt of the accompanying notes to the consolidated financial statements included elsewhere in this Form 10-K for additional information.

Debt in the notes to the consolidated financial statements included elsewhere in this Form 10-K for additional information.

These revolving facilities mature between 2023 and 2029, and subject to covenant compliance generally permit borrowings up to 12 months prior to the final maturity date.

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Similar to our warehouse credit facilities, borrowings under these agreements are referred to as funding debt, and proceeds from the borrowings may only be used for the purposes of facilitating loan funding and origination.

These facilities are secured by PayBright loan receivables pledged to the respective facility as collateral, mature in 2022, and bear interest based on a commercial paper rate plus a spread ranging from 1.25% to 4.25%.

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Convertible Debt

On April 29, 2020, we entered into a note purchase agreement with various investors and issued convertible notes in an aggregate amount of $75.0 million with a maturity date of April 29, 2021 and bearing interest at a rate of 1.00% per annum.

On September 11, 2020, as part of our Series G equity financing round, the convertible notes issued in April 2020 were fully converted into 4,444,321 shares of Series G-1 preferred stock.

These facilities are secured by PayBright loan receivables pledged to the respective facility as collateral, mature between 2023 and 2024, and bear interest based on a benchmark rate plus a spread ranging from 1.25% to 4.25%.

Revolving Credit Facility

On January 19, 2021, we entered into a revolving credit agreement with a syndicate of commercial banks for a $185.0 million unsecured revolving credit facility.

This facility bears interest at a rate equal to, at our option, either (a) a Eurodollar rate determined by reference to adjusted LIBOR for the interest period, plus an applicable margin of 2.50% per annum or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate last quoted by The Wall Street Journal as the U.S.

prime rate, and (iii) the one-month adjusted LIBOR plus 1.00% per annum, in each case, plus an applicable margin of 1.50% per annum.

The revolving credit agreement has a final maturity date of January 19, 2024.

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.

On May 16, 2022, we increased unsecured revolving commitments under the facility to $205.0 million.

This facility bears interest at a rate equal to, at our option, either (a) a 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 at June 30, 2021.

There are no borrowings outstanding under the facility.

Refer to Note 11.

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Each securitization trust issued senior notes and residual certificates to finance the purchase of the loans facilitated by our platform.

At the closing of each securitization, we contributed loans, facilitated through our technology platform, with an aggregate outstanding principal balance of $1,856.8 million.

The 2020-Z1, 2020-Z2, and 2021-Z1 securitizations are secured by static pools of loans contributed at closing, whereas the 2020-A and 2021-A securitizations are revolving and we may contribute additional loans from time to time until the end of the revolving period.

The 2020-Z1, 2020-Z2, 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 securitizations are secured by static pools of loans contributed at closing, whereas the 2021-A, 2021-B, and 2022-A securitizations are revolving and we may contribute additional loans from time to time until the end of the respective revolving period.

The 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 securitizations are off balance sheet since we determined we are not the primary beneficiary as of June 30, 2022.

Refer to Note 12.

Securitizations and Variable Interest Entities.

Securitization and Variable Interest Entities.

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

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2,037,119 2,577,830

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

(in thousands)

Proceeds from initial public offering, net $ 1,305,176 $ —

Proceeds from issuance of redeemable convertible preferred stock, net of repurchases and issuance costs 434,529 (7,110)

Proceeds from issuance of convertible debt, net $ 1,704,300 $ —

Proceeds from issuance of common stock, net of repurchases 73,828 46,242

Proceeds from issuance of convertible debt — 75,000

Net cash (used in) provided by equity-related financing activities $ 1,785,947 $ 51,769

Proceeds from initial public offering, net — 1,305,176

Proceeds from issuance and conversion of redeemable convertible preferred stock, net of repurchases and issuance costs — 434,529

Net cash provided by equity-related financing activities $ 1,778,128 $ 1,785,947

Net cash provided by debt-related financing activities 444,169 950,163

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Operating Activities

Our largest sources of operating cash flows are fees charged to merchant partners on transactions processed through our platform and interest income from consumers’ loans.

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 year ended June 30, 2021 was $193.1 million, an increase of $121.8 million from $71.3 million for the year ended June 30, 2020.

This reflects our net loss of $430.9 million, adjusted for non-cash charges of $332.3 million, net cash outflows of $45.9 million from the purchase and sale of loans held for sale, and net cash inflows of $53.7 million provided by changes in our operating assets and liabilities.

Cash used in operating activities for the year ended June 30, 2022 was $162.2 million, a decrease of $30.9 million from cash used in operating activities of $193.1 million for the year ended June 30, 2021.

This reflects our net loss of $707.4 million, adjusted for non-cash charges of $525.8 million, net cash inflows of $29.4 million from the purchase and sale of loans held for sale, and net cash outflows of $9.9 million provided by changes in our operating assets and liabilities.

For the year ended June 30, 2022, net cash inflows from the purchase and sale of loans held for sale increased $75.3 million compared to the $45.9 million net cash outflows for the year ended June 30, 2021.

Non-cash charges primarily consisted of:

provision for credit losses, which decreased by $39.2 million or 37% due to lower than expected credit losses and improved credit quality of the portfolio;

gain (loss) on sales of loans, which increased by $58.0 million from $31.9 million for the year ended June 30, 2020 due to improved loan sale economics and increased loan sales since the fourth quarter of the prior year;

provision for credit losses, which increased by $189.4 million or 287% due to a change in product mix for on-balance sheet loans and an unusually low provision expense in the prior comparative period;

gain on sales of loans, which increased by $106.5 million from $89.9 million for the year ended June 30, 2021 due to improved loan sale economics, loan credit quality mix and increased loan sales since the year ended June 30, 2021;

and amortization of premiums and discounts, which increased by $81.6 million or 90% due to increased amortization of discounts related to loans purchased from our originating bank partners at a price above fair market value.

Additionally, during the year ended June 30, 2021, we recognized a gain of $30.1 million resulting from the conversion of the convertible notes into shares of Series G-1 redeemable convertible preferred stock in September 2020.

This gain represented the difference between the carrying value of the debt at the time of extinguishment and the allocated proceeds.

We also incurred $69.1 million of amortization expense associated with our commercial agreement assets.

None of these non-cash charges were earned or incurred during the year ended June 30, 2020.

Furthermore, we incurred $288.0 million of stock-based compensation, up from $29.6 million during the year ended June 30, 2020 due to accelerated vesting of RSUs for which the service-based condition had been met prior to the IPO and the performance-based condition was met on the IPO date, and losses of $87.2 million due to the increase in the fair value of our contingent consideration liability, driven by changes in the value of our common stock.

Our net cash outflows resulting from changes in operating assets and liabilities increased to $53.7 million for the year ended June 30, 2021, compared to cash inflows of $31.0 million for the year ended June 30, 2020.

This shift was primarily due to increases to other assets as a result of the recognition of our Shopify commercial agreement asset, which had a balance of $205.8 million at June 30, 2021, partially offset by increases to accrued expenses and other liabilities associated with our contingent consideration liability, which had a balance of $147.8 million at June 30, 2021.

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Furthermore, we incurred $391.0 million of stock-based compensation, up from $292.5 million due to accelerated vesting of RSUs for which the service-based condition had been met prior to the IPO, the

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performance-based condition was met on the IPO date and the addition of the Employee Share Purchase Plan during the period, and gains of $89.3 million due to the decrease in the fair value of our contingent consideration liability, driven by changes in the value of our common stock.

Additionally, during the year ended June 30, 2022, we incurred $96.7 million of amortization expense associated with our commercial agreement assets.

Our net cash outflows resulting from changes in operating assets and liabilities decreased to $9.9 million for the year ended June 30, 2022, compared to net cash outflows of $53.7 million for the year ended June 30, 2021.

This change was primarily driven by a decrease in other assets due to a reduction of prepaid payroll taxes during the year ended June 30, 2022.

Investing Activities

Cash used in investing activities for the year ended June 30, 2022 was $2,011.3 million, an increase of $989.3 million from $1,022.0 million for the year ended June 30, 2021.

The main driver of this was $5.9 billion of purchases and origination of loans, representing an increase of $3.1 billion or 108% compared to the prior year, due partly to continued growth in GMV but also due to the establishment of five new securitization trusts during the period in which we purchased loans and contributed approximately $1,856.8 million of loan receivables to the trusts, rather than selling to third-party loan buyers and classifying this activity as an operating activity on the statement of cash flows.

Additionally, we recorded cash outflows of approximately $222.4 million related to cash consideration for acquisitions, net of cash and restricted cash acquired.

These cash outflows were partially offset by $4,324.6 million of repayments of loans and other servicing activity, representing an increase of $2,029.8 million, or 88%, compared to the prior year, due to a higher average balance of loans held for investment and generally increasing credit quality of the portfolio.

The main driver of this was $10.4 billion of purchases of loans, representing an increase of $4.5 billion or 76% compared to the year ended June 30, 2021, due partly to continued growth in GMV.

We recorded cash outflows of approximately $1,841.4 million related to purchases of available for sale securities in the current period.

Additionally, we recorded cash outflow of approximately $25.4 million related to purchases of intangibles in connection with an asset acquisition during the period.

These cash outflows were partially offset by $8.1 billion of repayments of loans, representing an increase of $3.8 billion, or 88%, compared to the year ended June 30, 2021, due to a higher average balance of loans held for investment and generally increasing credit quality of the portfolio.

Financing Activities

Cash provided by financing activities for the year ended June 30, 2021 was $2,577.8 million, an increase of $2,283.1 million from $294.7 million during the year ended June 30, 2020.

A main driver of this was the issuance of common stock upon our initial public offering in January 2021 for $1,305.2 million, net of issuance costs, and issuances of Series G redeemable convertible preferred stock in September 2020 and October 2020 for $434.5 million, net of issuance costs.

Additionally, the issuance of notes by our newly formed securitization trusts during the year ended June 30, 2021 resulted in net cash inflows of $1,185.5 million, net of in-period principal repayments.

Each of these cash inflows represented new financing activities compared to the year ended June 30, 2020 but were partially offset by $222.8 million of net cash outflows from funding debt as principal repayments on debt exceeded proceeds from draws on these revolving credit facilities.

The net cash outflows from funding debt are in contrast to net cash inflows from funding debt of $250.7 million during the year ended June 30, 2020.

The shift between periods is largely due to the availability of new funding sources in our securitization trusts.

Additionally, we recorded payments of approximately $158.3 million for tax withholding associated with stock-based compensation during the year ended June 30, 2021 which did not occur in prior periods, as the vesting of RSUs was triggered by the initial public offering in January 2021.

Cash provided by financing activities for the year ended June 30, 2022 was $2,037.1 million, a decrease of $540.7 million from $2,577.8 million during the year ended June 30, 2021.

During the year ended June 30, 2022, we saw a $738.2 million decrease in cash inflows from the issuance of notes by our securitization trusts due to a smaller volume of newly formed securitization trusts compared to the year ended June 30, 2021.

Additionally, for the year ended June 30, 2021, cash from financing activities included proceeds of $1,305.2 million from the issuance of common stock upon our initial public offering and $434.5 million from the issuance of Series G redeemable convertible preferred stock.

This decrease was partially offset by the issuance of convertible debt during the year ended June 30, 2022, which resulted in net cash inflows of $1,704.3 million, net of debt issuance costs.

Liquidity and Capital Risks and Requirements

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If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition.

It is also possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect.

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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 years ended June 30, 2021, 2020, and 2019 approximately 20%, 28%, and 20% of total revenue, respectively, was driven by one merchant partner, Peloton.

We believe we have a strong relationship with Peloton and, in September 2020, we entered into a renewed merchant agreement with Peloton with an initial three-year term ending in September 2023, which automatically renews for additional and successive one-year terms until terminated.

While we believe our growth will facilitate both revenue growth and merchant diversification as we continue to integrate with a wide range of merchants, our revenue concentration may cause our financial performance to fluctuate significantly from period to period based on the revenue from such merchant partner.

For the year ended June 30, 2022, there were no merchants that exceeded 10% of total revenue.

For the years ended June 30, 2021 and 2020 approximately 20% and 28% of total revenue, respectively, was driven by one merchant partner.

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

The following table summarizes our contractual obligations as of June 30, 2021:

Payments Due By Period

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23,348 23,348 — — —

Commercial agreement liability (3)

Convertible senior notes (4)

1,725,000 — — 1,725,000 —

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Refer to Note 9.

Balance Sheet Components for a description of the contingent consideration liability and commercial agreement liability, each recorded as a component of accrued expenses and other liabilities on the consolidated balance sheets.

Commitments and Contingencies for further information.

(3) Refer to Note 6.

Balance Sheet Components for a description of the contingent consideration liability, recorded as a component of accrued expenses and other liabilities on the consolidated balance sheets.

(4) 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 mature on November 15, 2026.

Refer to Note 11.

Debt for further information.

The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts.

In February 2012, we entered into an agreement with a third-party cloud computing web services provider for our cloud computing and hosting services.

In May 2020, we entered into an addendum to our agreement with our cloud computing web services provider which included annual spending commitments for the period between May 2020 and April 2023 with an aggregate committed spend of $120.0 million during such period.

Our agreement with our cloud computing web services provider will continue indefinitely until terminated by either party.

Our cloud-computing web services provider may terminate the customer agreement for convenience with 30 days prior written notice and may, in some cases, terminate the agreement immediately for cause upon notice.

If we fail to meet the minimum purchase commitment during any year, we may be required to pay the difference.

We pay our cloud-computing web services provider monthly, and we may pay more than the minimum purchase commitment to our cloud-computing web services provider based on usage.

Off-Balance Sheet Arrangements

Off-balance sheet loans relate to unconsolidated securitization transactions and loans sold to third-party investors for which we have some form of continuing involvement, including as servicer.

For an off-balance sheet

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loan where servicing is the only form of continuing involvement, we would only experience a loss if we were required to repurchase such a loan due to a breach in representations and warranties associated with our loan sale or servicing contracts.

As of June 30, 2021, the aggregate outstanding balance of loans held by third-party investors or off-balance sheet VIEs was $2.5 billion.

As of June 30, 2021, we had one off-balance sheet VIE, the 2021-Z1 securitization.

In the unlikely event principal payments on the loans backing any off-balance sheet securitization are insufficient to pay senior note holders, including any retained interest, then any amounts the Company contributed to the securitization reserve accounts may be depleted.

Securitizations and Variable Interest Entities of the accompanying notes to our consolidated financial statements for more information.

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 June 30,

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2022, the aggregate outstanding balance of loans held by third-party investors or off-balance sheet VIEs was $4.5 billion.

As of June 30, 2022, we had four off-balance sheet VIEs, the 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 securitization trusts.

In the unlikely event payments on the loans backing any off-balance sheet securitization are insufficient to pay note holders, including any retained interest, then any amounts the Company contributed to the securitization reserve accounts may be depleted.

Securitization and Variable Interest Entities of the accompanying notes to our consolidated financial statements for more information.

Critical Accounting Policies and Estimates

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To the extent that there are differences between our estimates and actual results, our future consolidated financial statement presentation, financial condition, results of operations, and cash flows will be affected.

We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to merchant network revenue, loss on loan purchase commitment, allowance for credit losses, stock-based compensation, and income taxes.

We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to merchant network revenue, loss on loan purchase commitment and allowance for credit losses.

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, all of our significant accounting policies, including recent accounting pronouncements, are described in Note 2.

Summary of Significant Accounting Policies of the accompanying notes to our consolidated financial statements included in this Form 10-K.

For further information, our significant accounting policies are described in Note 2.

Summary of Significant Accounting Policies within the notes to the consolidated financial statements.

Merchant Network Revenue

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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 on loan purchase and is recognized as loss on loan purchase commitment in our consolidated statements of operations.

The fair value is determined by taking the difference

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between the estimated fair value of the loan and the anticipated purchase price.

The fair value is determined by taking the difference between the estimated fair value of the loan and the anticipated purchase price.

When the loan is purchased, the liability is included in the amortized cost basis of the purchased loan as a discount, which is then amortized into interest income over the life of the loan.

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Allowance for Credit Losses

The allowance for credit losses on loans held for investment is determined based on management’s current estimate of expected credit losses over the remaining contractual term, historical credit losses, consumer payment trends, estimates of recoveries, and future expectations on individual loans as of each balance sheet date.

We immediately recognize an allowance for expected credit losses upon origination of a loan.

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The analysis focuses on the pertinent factors underlying the quality of the loan portfolio.

These factors include historical performance, the age of the receivable balance, seasonality, customer credit-worthiness, changes in the size and composition of the loan portfolio, delinquency levels, bankruptcy filings, actual credit loss experience, and current economic conditions.

We also take into consideration certain qualitative factors where we adjust our quantitative baseline using our best judgement to consider the inherent uncertainty regarding future economic conditions and consumer loan performance.

For example, the Company considers the impact of current economic and environmental factors at the reporting date that did not exist over the period from which historical experience was used.

As of June 30, 2021, we have considered the impact of government intervention and legislation in the form of stimulus checks, extended unemployment benefits, and small business relief on loan repayment and consumer behavior patterns.

When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses.

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It is possible that we will experience loan losses that are different from our current estimates.

Stock-Based Compensation Expense

Compensation expense related to stock-based transactions, including employee, consultant, and non-employee director stock option awards and restricted stock units ("RSUs"), is measured and recognized in the consolidated financial statements based on fair value.

The fair value of each equity-classified option award is estimated on the grant date using the Black Scholes option-pricing model.

Expense is recognized on a straight-line basis over the vesting period of the award based on the estimated portion of the award that is expected to vest.

Our option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock.

The assumptions used in our option-pricing model represent management’s best estimates.

These estimates involve inherent uncertainties and the application of management’s judgment.

If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

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Additionally, we have granted stock option awards with service-based and performance-based vesting conditions, with market-based conditions that are incorporated into the grant date fair value.

We determined the grant date fair value of these awards by utilizing a Monte Carlo simulation model that incorporates the possibility that the market-based conditions may not be satisfied.

The Monte Carlo simulation also incorporates assumptions including expected stock price volatility, expected term, and risk-free interest rates.

We estimate the volatility of common stock on the date of grant based on the weighted-average historical stock price volatility of comparable publicly-traded companies in our industry group.

We estimate the expected term of the award based on various exercise scenarios.

The risk-free interest rate is determined using a U.S.

Treasury rate for the period that coincides with the expected term set forth.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.

As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.

We report income taxes in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 740, Income Taxes (“ASC 740”), which requires an asset and liability approach in accounting for income taxes.

Under this method, the deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex federal and state tax laws and regulations.

ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available.

Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities.

These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets.

A significant piece of objective negative evidence evaluated was the cumulative loss incurred for the years ended June 30, 2021, 2020, and 2019.

Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of June 30, 2021, 2020, and 2019 , a full valuation allowance has been recorded against our gross deferred tax asset, net of future reversing deferred tax liabilities.

The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of the future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

Recent Accounting Pronouncements

Refer to Note 2.

Summary of Significant Accounting Policies of the accompanying notes to our consolidated financial statements.

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Summary of Significant Accounting Policies within the notes to the consolidated financial statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis