Affirm Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AFFIRM HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firms (PCAOB ID No. 34 ) 85 Consolidated Balance Sheets 87 Consolidated Statements of Operations and Comprehensive Loss 89 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit ) 90 Consolidated Statements of Cash Flows 92 Notes to Consolidated Financial Statements 94 84 Table o f Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Affirm Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Affirm Holdings, Inc. and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended June 30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 29, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses — Refer to Notes 2 and 4 to the financial statements Critical Audit Matter Description The allowance for credit losses (ACL) is a material estimate of the Company and as of June 30, 2022, the total balance was $155.4 million. In estimating the ACL, management utilizes a migration analysis of delinquent and current loan receivables. 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, customer credit-worthiness, changes in the size and composition of the loan portfolio, delinquency levels, bankruptcy filings, and actual credit loss experience. Management also incorporates qualitative adjustments to the quantitative model to consider the inherent uncertainty regarding future economic conditions and consumer loan performance. 85 Table o f Contents Determining the appropriate level of qualitative adjustments is inherently subjective and relies on significant judgment. Given the subjective nature and amount of judgment required in developing these estimates, performing audit procedures to evaluate the reasonableness of the ACL required a high degree of auditor judgment, an increased extent of audit effort, credit specialists, and the need to involve more experienced audit professionals. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the allowance for credit losses included the following procedures, among others: • We tested the design and effectiveness of controls over the ACL, including management’s controls over the qualitative adjustments. • We tested management’s process for estimating the ACL, which included involving our credit specialists to evaluate the appropriateness of the models and methodologies used including the use of qualitative adjustments. • We evaluated the accuracy and completeness of the data used to estimate the allowance for credit losses. • We evaluated the qualitative adjustments, including assessing the basis and overall magnitude of the adjustments, obtaining third party macroeconomic data, and evaluating any contradictory evidence. /s/ Deloitte & Touche LLP San Francisco, California August 29, 2022 We have served as the Company's auditor since 2020. 86 Table o f Contents AFFIRM HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except shares and per share amounts) June 30, 2022 June 30, 2021 Assets Cash and cash equivalents $ 1,255,171 $ 1,466,558 Restricted cash 295,636 226,074 Securities available for sale at fair value 1,595,373 16,170 Loans held for sale 2,670 13,030 Loans held for investment 2,503,561 2,022,320 Allowance for credit losses ( 155,392 ) ( 117,760 ) Loans held for investment, net 2,348,169 1,904,560 Accounts receivable, net 142,052 91,575 Property, equipment and software, net 171,482 62,499 Goodwill 539,534 516,515 Intangible assets 78,942 67,930 Commercial agreement assets 263,196 227,377 Other assets 281,567 274,679 Total Assets $ 6,973,792 $ 4,866,967 Liabilities and Stockholders’ Equity Liabilities: Accounts payable $ 33,072 $ 57,758 Payable to third-party loan owners 71,383 50,079 Accrued interest payable 6,659 2,751 Accrued expenses and other liabilities 237,598 323,577 Convertible senior notes, net 1,706,668 — Notes issued by securitization trusts 1,627,580 1,176,673 Funding debt 672,577 680,602 Total liabilities 4,355,537 2,291,440 Commitments and contingencies (Note 9) Stockholders’ equity: Class A common stock, par value $ 0.00001 per share: 3,030,000,000 shares authorized, 227,255,529 shares issued and outstanding as of June 30, 2022; 3,030,000,000 shares authorized, 181,131,728 shares issued and outstanding as of June 30, 2021 2 2 Class B common stock, par value $ 0.00001 per share: 140,000,000 shares authorized, 60,109,844 shares issued and outstanding as of June 30, 2022; 140,000,000 authorized, 88,226,376 shares issued and outstanding as of June 30, 2021 1 1 Additional paid in capital 4,231,303 3,467,236 Accumulated deficit ( 1,605,902 ) ( 898,485 ) Accumulated other comprehensive gain (loss) ( 7,149 ) 6,773 Total stockholders’ equity 2,618,255 2,575,527 Total Liabilities and Stockholders’ Equity $ 6,973,792 $ 4,866,967 The accompanying notes are an integral part of these consolidated financial statements. 87 Table o f Contents AFFIRM HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS, CONT. (in thousands, except shares and per share amounts) The following table presents the assets and liabilities of consolidated variable interest entities (“VIEs”), which are included in the consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. The liabilities in the table below include liabilities for which creditors do not have recourse to the general credit of the Company. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate upon consolidation. June 30, 2022 June 30, 2021 Assets of consolidated VIEs, included in total assets above Restricted cash $ 164,530 $ 142,385 Loans held for investment 2,179,026 1,743,810 Allowance for credit losses ( 124,052 ) ( 94,463 ) Loans held for investment, net 2,054,974 1,649,347 Accounts receivable, net 8,195 8,209 Other assets 14,570 3,683 Total assets of consolidated VIEs $ 2,242,269 $ 1,803,624 Liabilities of consolidated VIEs, included in total liabilities above Accounts payable $ 2,897 $ 2,927 Accrued interest payable 6,525 2,613 Accrued expenses and other liabilities 15,494 3,820 Notes issued by securitization trusts 1,627,580 1,176,673 Funding debt 514,033 607,394 Total liabilities of consolidated VIEs 2,166,529 1,793,427 Total net assets of consolidated VIEs $ 75,740 $ 10,197 The accompanying notes are an integral part of these consolidated financial statements. 88 Table o f Contents AFFIRM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except share and per share amounts) Year ended June 30, 2022 2021 2020 Revenue Merchant network revenue $ 458,511 $ 379,551 $ 256,752 Virtual card network revenue 100,696 49,851 19,340 Total network revenue 559,207 429,402 276,092 Interest income 527,880 326,417 186,730 Gain on sales of loans 196,435 89,926 31,907 Servicing income 65,770 24,719 14,799 Total Revenue, net $ 1,349,292 $ 870,464 $ 509,528 Operating Expenses Loss on loan purchase commitment $ 204,081 $ 246,700 $ 161,452 Provision for credit losses 255,272 65,878 105,067 Funding costs 69,694 52,700 32,316 Processing and servicing 157,814 73,578 49,831 Technology and data analytics 418,643 249,336 122,378 Sales and marketing 532,343 182,190 25,044 General and administrative 577,493 383,749 121,230 Total Operating Expenses 2,215,340 1,254,131 617,318 Operating Loss $ ( 866,048 ) $ ( 383,667 ) $ ( 107,790 ) Other (expense) income, net 141,217 ( 59,703 ) ( 4,432 ) Loss Before Income Taxes $ ( 724,831 ) $ ( 443,370 ) $ ( 112,222 ) Income tax expense (benefit) ( 17,414 ) ( 2,343 ) 376 Net Loss $ ( 707,417 ) $ ( 441,027 ) $ ( 112,598 ) Excess return to preferred stockholders on repurchase — — ( 13,205 ) Net Loss Attributable to Common Stockholders $ ( 707,417 ) $ ( 441,027 ) $ ( 125,803 ) Other Comprehensive Income (Loss) Foreign currency translation adjustments $ ( 5,900 ) $ 7,046 $ ( 302 ) Unrealized gain (loss) on securities available for sale, net ( 8,022 ) 29 — Net Other Comprehensive Income (Loss) ( 13,922 ) 7,075 ( 302 ) Comprehensive Loss $ ( 721,339 ) $ ( 433,952 ) $ ( 112,900 ) Per share data: Net loss per share attributable to common stockholders for Class A and Class B Basic $ ( 2.51 ) $ ( 2.78 ) $ ( 2.63 ) Diluted $ ( 2.51 ) $ ( 2.94 ) $ ( 2.63 ) Weighted average common shares outstanding Basic 281,704,041 158,367,923 47,856,720 Diluted 281,704,041 159,244,611 47,856,720 The accompanying notes are an integral part of these consolidated financial statements. 89 Table o f Contents AFFIRM HOLDINGS, INC. CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands, except share amounts) Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount Shares 1 Amount Balance as of June 30, 2019 122,653,704 $ 798,074 47,078,208 $ — $ 54,824 $ ( 318,238 ) $ — $ ( 263,414 ) Issuance of common stock — — 2,101,317 — 2,733 — — 2,733 Repurchases of common stock — — ( 1,495,098 ) — ( 2,522 ) ( 16,331 ) — ( 18,853 ) Issuance of redeemable convertible preferred stock, net of issuance costs of $ 0 1,175,872 15,481 — — — — — — Repurchases of redeemable convertible preferred stock ( 1,713,605 ) ( 9,385 ) — — ( 13,205 ) — — ( 13,205 ) Convertible notes beneficial conversion option — — — — 5,998 — — 5,998 Stock-based compensation — — — — 32,545 — — 32,545 Foreign currency translation — — — — — — ( 302 ) ( 302 ) Net loss — — — — — ( 112,598 ) — ( 112,598 ) Balance as of June 30, 2020 122,115,971 $ 804,170 47,684,427 $ — $ 80,373 $ ( 447,167 ) $ ( 302 ) $ ( 367,096 ) Issuance of redeemable convertible preferred stock, net of issuance costs of $ 143 21,836,687 434,542 — — — — — — Conversion of convertible debt 4,444,321 88,559 — — ( 42,124 ) — — ( 42,124 ) Conversion of redeemable convertible preferred stock ( 148,396,979 ) ( 1,327,271 ) 148,396,979 2 1,327,269 ( 11 ) — 1,327,260 Issuance of common stock upon initial public offering, net of issuance costs of $ 6,871 — — 28,290,000 1 1,305,176 — — 1,305,177 Issuance of common stock upon exercise of stock option — — 12,418,931 — 46,462 — — 46,462 Issuance of common stock upon exercise of warrants — — 20,651,583 — 271,156 — — 271,156 Issuance of common stock for acquisitions — — 9,167,515 — 331,498 — — 331,498 Vesting of restricted stock units — — 2,878,060 — — — — — Repurchases of common stock — — ( 129,391 ) — ( 800 ) — — ( 800 ) Stock-based compensation — — — — 306,506 — — 306,506 Tax withholding on stock-based compensation — — — — ( 158,280 ) — — ( 158,280 ) Effects of adoption of new accounting standards — — — — — ( 9,980 ) — ( 9,980 ) Deconsolidation of variable interest entity — — — — — ( 300 ) — ( 300 ) Foreign currency translation adjustments — — — — — — 7,046 7,046 Unrealized gains on investments — — — — — — 29 29 Net Loss — — — — — ( 441,027 ) — ( 441,027 ) Balance as of June 30, 2021 — $ — 269,358,104 $ 3 $ 3,467,236 $ ( 898,485 ) $ 6,773 $ 2,575,527 The accompanying notes are an integral part of these consolidated financial statements. 1 The share amounts listed above combine common stock, Class A common stock and Class B common stock. 90 Table o f Contents AFFIRM HOLDINGS, INC. CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT), CONT. (in thousands, except share amounts) Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount Shares Amount Balance as of June 30, 2021 — $ — 269,358,104 $ 3 $ 3,467,236 $ ( 898,485 ) $ 6,773 $ 2,575,527 Issuance of common stock upon exercise of stock option — — 13,565,397 — 69,876 — — 69,876 Issuance of common stock in acquisitions — — 488,097 — 42,109 — — 42,109 Issuance of common stock, employee share purchase plan — — 149,137 — 3,613 — — 3,613 Vesting of restricted stock units — — 3,815,156 — — — — — Vesting of warrants for common stock — — — — 388,208 — — 388,208 Repurchases of common stock — — ( 10,518 ) — ( 86 ) — — ( 86 ) Stock-based compensation — — — — 445,525 — — 445,525 Tax withholding on stock-based compensation — — — — ( 185,178 ) — — ( 185,178 ) Foreign currency translation adjustments — — — — — — ( 5,900 ) ( 5,900 ) Unrealized loss on securities available for sale — — — — — — ( 8,022 ) ( 8,022 ) Net Loss — — — — — ( 707,417 ) — ( 707,417 ) Balance as of June 30, 2022 — $ — 287,365,373 $ 3 $ 4,231,303 $ ( 1,605,902 ) $ ( 7,149 ) $ 2,618,255 The accompanying notes are an integral part of these consolidated financial statements. 91 Table o f Contents AFFIRM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended June 30, 2022 2021 2020 Cash Flows from Operating Activities Net Loss $ ( 707,417 ) $ ( 441,027 ) $ ( 112,598 ) Adjustments to reconcile net loss to net cash used in operating activities: Provision for credit losses 255,272 65,878 105,067 Amortization of premiums and discounts on loans, net ( 171,965 ) ( 90,371 ) ( 27,605 ) Gain on sales of loans ( 196,435 ) ( 89,926 ) ( 31,907 ) Changes in fair value of assets and liabilities ( 101,789 ) 57,285 2,847 Amortization of commercial agreement assets 96,737 69,103 — Amortization of debt issuance costs 16,152 6,416 2,313 Amortization of discount on securities available for sale 2,192 — — Commercial agreement warrant expense 254,679 — — Stock-based compensation 390,983 292,507 29,625 Depreciation and amortization 52,722 19,979 9,444 Impairment of right of use assets 362 11,544 — Other ( 73,154 ) 5,129 81 Change in operating assets and liabilities: Purchases of loans held for sale ( 5,552,662 ) ( 2,640,734 ) ( 2,101,483 ) Proceeds from the sale of loans held for sale 5,582,035 2,594,835 2,021,938 Accounts receivable, net ( 62,700 ) ( 22,934 ) ( 19,049 ) Other assets ( 15,021 ) ( 209,139 ) 19,936 Accounts payable ( 24,686 ) 32,223 7,514 Payable to third-party loan owners 21,304 25,082 8,279 Accrued interest payable 3,907 1,395 428 Accrued expenses and other liabilities 67,290 119,625 13,868 Net Cash Used in Operating Activities ( 162,194 ) ( 193,130 ) ( 71,302 ) Cash Flows from Investing Activities Purchases and origination of loans held for investment ( 10,362,048 ) ( 5,897,252 ) ( 2,830,320 ) Proceeds from the sale of loans held for investment 1,898,607 824,011 303,433 Principal repayments and other loan servicing activity 8,121,583 4,324,618 2,294,833 Acquisition, net of cash and restricted cash acquired ( 5,999 ) ( 222,433 ) — Purchases of intangible assets ( 25,415 ) — — Additions to property, equipment and software ( 86,290 ) ( 20,252 ) ( 21,019 ) Purchases of securities available for sale ( 1,841,380 ) — — Proceeds from maturities and repayments of securities available for sale 311,035 — — Other investing cash inflows 14,311 1,453 — Other investing cash outflows ( 35,742 ) ( 32,178 ) — Net Cash Used in Investing Activities ( 2,011,338 ) ( 1,022,033 ) ( 253,073 ) Cash Flows from Financing Activities Proceeds from issuance of convertible debt, net 1,704,300 — 75,000 Proceeds from funding debt 4,101,134 2,942,254 2,132,805 Payment of debt issuance costs ( 13,751 ) ( 12,499 ) ( 7,687 ) Principal repayments of funding debt ( 4,090,562 ) ( 3,165,103 ) ( 1,882,155 ) Proceeds from issuance of notes and residual trust certificates by securitization trusts 999,394 1,395,879 — Principal repayments of notes issued by securitization trusts ( 552,046 ) ( 210,368 ) — Proceeds from issuance of redeemable convertible preferred stock, net — 434,542 15,481 Repurchase and conversion of redeemable convertible preferred stock — ( 13 ) ( 22,591 ) Proceeds from initial public offering, net — 1,305,176 — Proceeds from exercise of common stock options and warrants and contributions to ESPP 73,914 47,042 2,733 Repurchases of common stock ( 86 ) ( 800 ) ( 18,854 ) Payments of tax withholding for stock-based compensation ( 185,178 ) ( 158,280 ) — Net Cash Provided by Financing Activities 2,037,119 2,577,830 294,732 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 5,412 ) 1,837 — Net Increase in Cash, Cash Equivalents and Restricted Cash ( 141,825 ) 1,364,504 ( 29,643 ) Cash, Cash equivalents and Restricted cash, Beginning of period 1,692,632 328,128 357,771 Cash, Cash Equivalents and Restricted Cash, End of Period $ 1,550,807 $ 1,692,632 $ 328,128 The accompanying notes are an integral part of these consolidated financial statements. 92 Table o f Contents AFFIRM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT. (in thousands) Year ended June 30, 2022 2021 2020 Reconciliation to amounts on consolidated balance sheets (as of period end) Cash and cash equivalents 1,255,171 1,466,558 267,059 Restricted cash 295,636 226,074 61,069 Total Cash, Cash Equivalents and Restricted Cash $ 1,550,807 $ 1,692,632 $ 328,128 Year ended June 30, 2022 2021 2020 Supplemental Disclosures of Cash Flow Information Cash payments for interest expense $ 51,524 $ 41,690 $ 28,085 Cash paid for operating leases 15,561 13,215 — Cash paid for income taxes 220 219 — Supplemental Disclosures of Non-Cash Investing and Financing Activities Stock-based compensation included in capitalized internal-use software $ 54,542 $ 13,999 $ 2,921 Issuance of common stock in connection with settlement of contingent consideration liability 32,109 — — Securities retained under unconsolidated securitization transactions 54,997 — — Issuance of common stock in connection with acquisition 10,000 331,498 — Right of use assets obtained in exchange for operating lease liabilities 4,604 78,421 — Additions to property and equipment included in accrued expenses 107 6 27 Conversion of redeemable convertible preferred stock — 1,327,271 — Issuance of warrants in exchange for commercial agreement — 270,579 — Conversion of convertible debt — 88,559 — Acquisition of commercial agreement asset — 25,900 — The accompanying notes are an integral part of these consolidated financial statements. 93 Table o f Contents AFFIRM HOLDINGS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Business Description Affirm Holdings, Inc. (“Affirm,” the “Company,” “we,” “us,” or “our”), headquartered in San Francisco, California, provides consumers with a simpler, more transparent, and flexible alternative to traditional payment options. Our mission is to deliver honest financial products that improve lives. Through our next-generation commerce platform, agreements with originating banks, and capital markets partners, we enable consumers to confidently pay for a purchase over time, with terms ranging from one to sixty months . When a consumer applies for a loan through our platform, the loan is underwritten using our proprietary risk model, and once approved, the consumer selects their preferred repayment option. Loans are self-originated or funded and issued by our originating bank partners. Merchants partner with us to transform the consumer shopping experience and to acquire and convert customers more effectively through our frictionless point-of-sale payment solutions. Consumers get the flexibility to buy now and make simple regular payments for their purchases and merchants see increased average order value, repeat purchase rates, and an overall more satisfied customer base. Unlike legacy payment options and our competitors’ product offerings, which charge deferred or compounding interest and unexpected costs, we disclose up-front to consumers exactly what they will owe — no hidden fees, no deferred interest, no penalties. 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Our financial statements have been prepared on a consolidated basis. Under this basis of presentation, our financial statements consolidate all wholly owned subsidiaries and variable interest entities (“VIEs”), in which we have a controlling financial interest. These include various business trust entities and limited partnerships established to enter into warehouse credit agreements with certain lenders for funding debt facilities and certain asset-backed securitization transactions. All intercompany accounts and transactions have been eliminated in consolidation. Our variable interest arises from contractual, ownership, or other monetary interests in the entity, which changes with fluctuations in the fair value of the entity’s net assets. We consolidate a VIE when we are deemed to be the primary beneficiary. We assess whether or not we are the primary beneficiary of a VIE on an ongoing basis. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts in the consolidated financial statements and the accompanying notes. Material estimates that are particularly susceptible to significant change relate to determination of variable consideration for revenue, the allowance for credit losses, capitalized internal-use software development costs, valuation allowance for deferred tax assets, loss on loan purchase commitment, the fair value of servicing assets and liabilities, discount on self-originated loans, the fair value of assets acquired and any contingent consideration transferred in business combinations, the evaluation for impairment of intangible assets and goodwill, the fair value of available for sale debt securities including retained interests in our securitization trusts, the fair value of residual certificates issued by our securitization trusts held by third parties, and stock-based compensation, including the fair value of warrants issued to nonemployees. We base our estimates on historical experience, current events, and other factors we believe to be reasonable under the circumstances. To the extent that there are material 94 Table o f Contents differences between these estimates and actual results, our financial condition or operating results will be materially affected. These estimates are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ materially from those estimates. Immaterial Correction of Prior Period Amounts Subsequent to the issuance of our financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, which was filed with the SEC on September 17, 2021, we identified understatements in certain prior period amounts related to the fair value measurement of contingent consideration and stock-based compensation. We remeasure the fair value of the contingent consideration liability recorded in connection with the PayBright, Inc. (“PayBright”) acquisition at each reporting date. An incorrect input in the Monte Carlo simulation used to estimate the fair value as of June 30, 2021, resulted in an understatement of accrued expenses and other liabilities of $ 5.6 million as of June 30, 2021 as previously reported. We measure stock-based compensation based on the fair value of an award at the grant date and recognize expense over the vesting period of the award based on the estimated portion of the award that is expected to vest. An incorrect determination of the grant date and service inception dates for certain awards granted prior to our initial public offering (“IPO”), as well as incorrect treatment of expense recognition for certain terminated employees, resulted in an understatement of additional paid in capital and misstatement of stock-based compensation expense as of and for the year ended June 30, 2021 as previously reported. Accordingly, we have corrected the accompanying financial statements and related footnotes as of and for the year ended June 30, 2021 from amounts previously reported. We have evaluated the materiality of these misstatements based on an analysis of quantitative and qualitative factors and concluded they were not material to the prior period financial statements, individually or in aggregate. The following tables provide the impact of the correction as of and for the year ended June 30, 2021, as presented below (in thousands): As of June 30, 2021 As Previously Reported Adjustments As Corrected Accrued expenses and other liabilities 317,951 5,626 323,577 Total liabilities 2,285,814 5,626 2,291,440 Additional paid in capital 3,462,762 4,474 3,467,236 Accumulated deficit ( 888,381 ) ( 10,104 ) ( 898,485 ) Accumulated other comprehensive income 6,769 4 6,773 Total stockholders’ equity 2,581,153 ( 5,626 ) 2,575,527 95 Table o f Contents Year Ended June 30, 2021 As Previously Reported Adjustments As Corrected Consolidated Statement of Operations and Comprehensive Loss Processing and servicing 73,767 ( 189 ) 73,578 Technology and data analytics 256,082 ( 6,746 ) 249,336 Sales and marketing 184,279 ( 2,089 ) 182,190 General and administrative 370,251 13,498 383,749 Total Operating Expenses 1,249,657 4,474 1,254,131 Other expense, net ( 54,073 ) ( 5,630 ) ( 59,703 ) Loss Before Income Taxes ( 433,266 ) ( 10,104 ) ( 443,370 ) Net Loss Attributable to Common Stockholders ( 430,923 ) ( 10,104 ) ( 441,027 ) Foreign currency translation adjustments 7,042 4 7,046 Net Comprehensive Income 7,071 4 7,075 Comprehensive Loss ( 423,852 ) ( 10,100 ) ( 433,952 ) Net loss per share attributable to common stockholders for Class A and Class B: Basic $ ( 2.72 ) $ ( 0.06 ) $ ( 2.78 ) Diluted $ ( 2.88 ) $ ( 0.06 ) $ ( 2.94 ) Year Ended June 30, 2021 As Previously Reported Adjustments As Corrected Consolidated Statement of Redeemable Convertible Preferred Stock and Stockholders’ Equity Stock-based compensation - Additional Paid-In Capital 302,032 4,474 306,506 Foreign currency translation adjustments - Accumulated Other Comprehensive Income (Loss) 7,042 4 7,046 Net Loss - Accumulated Deficit ( 430,923 ) ( 10,104 ) ( 441,027 ) Balance as of June 30, 2021 - Total Stockholders' Equity 2,581,153 ( 5,626 ) 2,575,527 Year Ended June 30, 2021 As Previously Reported Adjustments As Corrected Consolidated Statement of Cash Flows Cash Flows from Operating Activities Net Loss ( 430,923 ) ( 10,104 ) ( 441,027 ) Adjustments to reconcile net loss to net cash used in operating activities: Changes in fair value of assets and liabilities 51,655 5,630 57,285 Stock-based compensation 288,033 4,474 292,507 Net Cash Used in Operating Activities ( 193,130 ) — ( 193,130 ) 96 Table o f Contents Segment Reporting We conduct our operations through a single operating segment and, therefore, one reportable segment. Operating segments are components of a company for which separate financial information is internally produced for regular use by the Chief Operating Decision Maker (“CODM”) to allocate resources and assess the performance of the business. Our CODM, the Chief Executive Officer of Affirm Holdings, Inc., uses a variety of measures to assess the performance of the business; however, detailed profitability information that could be used to allocate resources and assess the performance of the business is managed and reviewed for the consolidated company as a whole. Business Combination We use the acquisition method of accounting for business combination transactions, and, accordingly, recognize the fair values of assets acquired and liabilities assumed in our consolidated financial statements. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value. Transaction costs related to the acquisition of the acquired company are expensed as incurred. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information becomes available relative to the fair values as of the acquisition date. The consolidated financial statements include the results of operations of any acquired company since the acquisition date. Cash and Cash Equivalents Cash and cash equivalents consist of checking, money market and savings accounts held at financial institutions and short term highly liquid marketable securities, including money market funds and other corporate securities purchased with an original maturity of three months or less. Restricted Cash Restricted cash consists primarily of: (i) deposits restricted by standby letters of credit for office leases and certain commercial agreements; (ii) funds held in accounts as collateral for our originating bank partners; and (iii) servicing funds held in accounts contractually restricted by agreements with warehouse credit facilities, securitization trusts, and third-party loan owners. We have no ability to draw on such funds as long as they remain restricted under the applicable agreements. Securities Available for Sale We hold certain investments in marketable debt securities and retained interests in our unconsolidated securitization trusts which are accounted for under ASC Topic 320, “Investments - Debt Securities” (“ASC 320”). We have classified these investments as available for sale, as defined within ASC 320. These investments are held at fair value with changes in fair value recorded in unrealized gain (loss) on securities available for sale, net within other comprehensive income (loss) , excluding the portion relating to any credit loss. As of the end of each reporting period, management reviews each security where the fair value is less than the amortized cost to determine whether any portion of the decline in fair value is due to a credit loss and/or whether or not we intend to sell or will be required to sell such security before recovery of its amortized cost basis. The portion of any decline in fair value which management identifies as a credit loss will be recognized as an allowance for credit losses through other (expense) income, net . To the extent management intends to sell or may be required to sell a security in an unrealized loss position, we 1) reverse any previously recorded allowance for credit losses with an offsetting entry to reduce the amortized cost basis of the security and 2) write-off any remaining portion of the amortized cost basis to equal its fair value, with this change recorded through other (expense) income, net . Interest income for available for sale securities is recorded within other (expense) income, net . 97 Table o f Contents Available for sale securities initially purchased with less than 90 days until maturity with quoted transaction prices in an active market are classified as cash and cash equivalents. With respect to retained interests in our securitization trusts, we apply the guidance in ASC Topic 325, “Investments - Other” (“ASC 325”) relating to beneficial interests. Accordingly, we recognize interest income each period based on the effective interest rate calculated using expected cash flows. Changes in the timing of expected cash flows are accounted for prospectively through an adjustment to interest income. When fair value is below amortized cost, we record an allowance for credit losses measured based on the difference between amortized cost and projected cash flows discounted at the effective interest rate. The allowance for credit losses is capped at the difference between amortized cost and fair value. Loans Held for Investment We either originate loans directly or purchase our loans from our originating bank partners pursuant to the terms outlined in the respective executed loan sale program agreements between us and our bank partners. Loan receivables that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as held for investment and are reported at amortized cost, which includes unpaid principal balances, any related premiums including fees paid to our originating bank partners and discounts due to loss on loan purchase commitment for loans with a fair value below the purchase price, where applicable, adjusted for any charge-offs. The amortized cost is adjusted for the allowance for credit losses within loans held for investment, net. Loans Held for Sale We sell certain loans to third-party loan buyers and securitization trusts. A loan is initially classified as held for sale when the loan is identified as for sale to a third party loan buyer or to be sold to a securitization that is anticipated to be off balance sheet. Loans classified as held for sale are recorded at the lower of amortized cost or fair value. A loan that is initially designated as held for sale or held for investment may be reclassified when our intent for that loan changes. When a loan held for investment is reclassified to held for sale and reported at fair value, any allowance for the credit loss related to that loan is released and any fair value adjustment to record the loan at the lower of amortized cost or fair value is recorded. Our loans designated as held for sale are generally sold within one to three days of the balance sheet date. Fair value adjustments were not material for loans designated as held for sale as of June 30, 2022 and June 30, 2021. Transfers of Financial Assets We account for loan sales in accordance with ASC 860, “Transfers and Servicing” (“ASC 860”) which states that a transfer of financial assets, a group of financial assets, or a participating interest in a financial asset is accounted for as a sale if all of the following conditions are met: a. The financial assets are isolated from the transferor and its consolidated affiliates as well as its creditors; b. The transferee or beneficial interest holders have the right to pledge or exchange the transferred financial assets; and c. The transferor does not maintain effective control of the transferred assets. For the years ended June 30, 2022, 2021, and 2020, all loan sales met the requirements for sale treatment in accordance with ASC 860. We record the gain or loss on the sale of a loan at the sale date in an amount equal to the proceeds received, adjusted for initial recognition of servicing assets or liabilities obtained at the date of sale, less the carrying value of the loan. Upon the sale of a loan to a third-party loan buyer or unconsolidated securitization in which we retain servicing rights, we may recognize a servicing asset or liability. Receiving more than adequate compensation, as 98 Table o f Contents defined by ASC 860, for servicing those loans, results in recognition of a servicing asset. Receiving less than adequate compensation results in a servicing liability. Servicing assets and liabilities are recorded at fair value and are presented as a component of other assets or accrued expenses and other liabilities, respectively. The recognition of a servicing asset results in a corresponding increase to the gain on sales of loans. The recognition of a servicing liability results in a corresponding decrease to gain on sales of loans. The servicing rights are marked to fair value each period, with the subsequent adjustment recognized in servicing income . The subsequent measurement includes changes in inputs or assumptions used in the valuation model. In connection with the sale of a loan to a third-party loan buyer or unconsolidated securitization, we may also recognize a recourse liability in accordance with ASC 460, “Guarantees” (“ASC 460”) as in certain circumstances we may become required to re-purchase loans from third-party investors due to breaches in representations and warranties. The recognition of a recourse liability results in a corresponding decrease to gain on sales of loans. The recourse liability is amortized over the loan term and remeasured each period based on the outstanding loan balance and changes in our expectation of future repurchase obligations. 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 the origination of a loan. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses are recognized in earnings through the provision for credit losses presented on our consolidated statements of operations and comprehensive loss. We have made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables. Previously recognized interest receivable from charged-off loans that is accrued but not collected from the consumer is reversed. In estimating the allowance for credit losses, management utilizes a migration analysis of delinquent and current loan receivables. Migration analysis is a technique used to estimate the likelihood that a loan receivable will progress through various stages of delinquency and to charge-off. 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 and actual credit loss experience. We also take into consideration certain qualitative factors where we adjust our quantitative baseline using our best judgment to consider the inherent uncertainty regarding future economic conditions and consumer loan performance. For example, the Company considers the impact of current economic factors at the reporting date that did not exist over the period from which historical experience was used. As of June 30, 2022, we have considered the impact of Federal Reserve monetary policy, labor market trends, inflation and consumer sentiment. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. Loans are charged-off in accordance with our charge-off policy, as the contractual principal becomes 120 days past due. Subsequent recoveries of the unpaid principal balance, if any, are credited to the allowance for credit losses. Refer to Note 4. Loans Held for Investment and Allowance for Credit Losses for more information. Accounts Receivable, net Our accounts receivable consist primarily of amounts due from payment processors, merchant partners, affiliate network partners and servicing fees due from third-party loan owners. We evaluate accounts receivable to determine management’s current estimate of expected credit losses based on historical experience and future expectations and record an allowance for credit losses, as applicable. Our allowance for credit losses with respect to accounts receivable was $ 13.9 million and $ 4.1 million as of June 30, 2022 and June 30, 2021, respectively. 99 Table o f Contents Property, Equipment and Software, net Property, equipment and software consist of computer and office equipment, capitalized internal-use developed software and website development costs and leasehold improvements. Property, equipment and software is stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are recognized using the straight-line method over the estimated useful lives of the assets, which range from three to seven years . Leasehold improvements are depreciated over the shorter of the improvement’s estimated useful life or the remaining lease term. We capitalize costs to develop internally developed software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software or website will function and be used as intended. Capitalized internal-use software costs primarily include salaries and payroll-related costs for employees directly involved in the development efforts, software licenses acquired and fees paid to external consultants. Such costs are amortized on a straight-line basis over the estimated useful life of the related asset, which is three years . Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred. Costs incurred for enhancements that are expected to result in additional functionality are capitalized and expensed over the estimated useful life of the upgrades. Capitalized internally developed software costs are included in property, equipment and software, and amortization expense is included in technology and data analytics expense in the consolidated statements of operations and comprehensive loss. Property, equipment and software is tested for impairment when there is an indication that the carrying value of an asset group may not be recoverable. Carrying values are not recoverable when the undiscounted cash flows estimated to be generated by the assets are less than their carrying values. When an asset is determined not to be recoverable, the impairment is measured based on the excess, if any, of the carrying value of the asset over its respective fair value and recorded in the period the determination is made. Goodwill and Intangible Assets We recognize the excess of the purchase price over the fair value of identifiable net assets acquired at the acquisition date as goodwill. Goodwill is not amortized but is reviewed for impairment annually and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. If the fair value of the reporting unit is greater than the reporting unit’s carrying value, then the carrying value of the reporting unit is deemed to be recoverable. If the carrying value of the reporting unit is greater than the reporting unit’s fair value, goodwill is impaired and written down to the reporting unit’s fair value. Identifiable intangible assets include developed technology, merchant relationships, assembled workforce, and trade names resulting from acquisitions, including asset acquisitions. Acquired intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated economic lives following the pattern in which the economic benefits of the assets will be consumed, which is on a straight-line basis. Acquired intangible assets are presented net of accumulated amortization on the consolidated balance sheets. We review the carrying amounts of intangible assets group for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We measure the recoverability of intangible assets by comparing the carrying amount of each asset to the future undiscounted cash flows we expect the asset to generate. If we consider any of these assets to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. In addition, we periodically evaluate the estimated remaining useful lives of long-lived intangible assets to determine whether events or changes in circumstances warrant a revision to the remaining period of depreciation or amortization. 100 Table o f Contents Leases We determine whether an arrangement is a lease for accounting purposes at contract inception. For operating leases, we record a right-of-use asset within other assets in our consolidated balance sheets, which represents our right to use an underlying asset for the lease term. A corresponding lease liability, which represents our obligation to make lease payments arising from the lease, is recorded in accrued expenses and other liabilities in our consolidated balance sheets. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. To discount the lease payments, we use an incremental borrowing rate derived from a corporate yield curve corresponding with the lease term using information available on the commencement date. We have the option to renew or extend our leases. We include these periods in the lease term when a decision has been made to exercise the option. Lease expense for operating leases is recognized on a straight-line basis over the lease term. We have elected the practical expedient allowing the combination of lease and non-lease components by class of underlying asset. We have also elected the short-term lease exception and will not recognize right-of-use assets or lease liabilities for qualifying leases with a term of less than 12 months from lease commencement. Non-marketable Equity Securities Non-marketable equity securities which do not have a readily determinable fair value are measured at cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “measurement alternative”). Unrealized and realized gains and losses on the investment due to impairment or observable price changes in orderly transaction for an identical or similar investment of the same issuer, if any, are recognized in other (expense) income, net on our consolidated statements of operations and comprehensive loss and a new carrying value is established for the investment upon such recognition. Funding Debt and Debt Issuance Costs We borrow from various lenders through our warehouse facilities and through sale and repurchase agreements by pledging certain retained interests in our off balance sheet securitizations to finance loans we originate directly and purchase loans from our originating bank partners. These borrowings are carried at amortized cost. Costs incurred in connection with borrowings, such as banker fees, commitment fees and legal fees, are classified as deferred debt issuance costs. We defer these costs and amortize them on a straight-line basis over the term of the debt. Interest payments and amortization of debt issuance costs incurred on funding debt is presented as funding costs in the consolidated statements of operations and comprehensive loss. Unamortized debt issuance costs are presented as a reduction of the associated debt. Income Taxes Income taxes are accounted for using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as an income tax expense (benefit) in the period that includes the enactment date. 101 Table o f Contents Valuation allowances are provided when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward periods available under the applicable tax law. We regularly review the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, and tax planning strategies; however, in evaluating the positive evidence available, expectations of future taxable income and projections for growth are usually not sufficient to overcome the negative evidence of the presence of a three-year cumulative loss. Should there be a change in the ability to recover deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex federal, state, and foreign tax laws and regulations, and positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. In accordance with applicable accounting guidance, uncertain tax positions are recognized in the financial statements only when it is more likely than not that the positions will be sustained upon examination by the tax authorities, assuming full knowledge of the position and all relevant facts. Interest and penalties, if any, on income tax uncertainties are classified within income tax expense in the income statement. Fair Value of Assets and Liabilities ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that use, as inputs, observable market-based parameters to the greatest extent possible. Additionally, ASC 820 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels: • Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. • Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means. • Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Revenue Recognition Merchant Network Revenue — Revenue from Contracts with Customers Merchant network revenue consists of merchant fees. Merchant partners (or merchants) are charged a fee on each transaction processed through the Affirm platform. The fees vary depending on the individual arrangement between us and each merchant and on the terms of the product offering. The fee is recognized at the point in time the merchant successfully confirms the transaction, which is when the terms of the executed merchant agreement are fulfilled. 102 Table o f Contents Our contracts with merchants are defined at the transaction level and do not extend beyond the service already provided (i.e., each transaction represents a separate contract). The fees collected from merchants for each transaction are determined as a percentage of the value of the goods purchased by the consumer from merchants and consider a number of factors including the end consumer’s credit risk and financing term. We do not have any capitalized contract costs, and do not carry any material contract balances. Our service comprises a single performance obligation to merchants to facilitate transactions with consumers. From time to time, we offer merchants promotional incentives to offer incentives to promote our platform to their customers, such as fee reductions or rebates. These amounts, as well as refunds, are recorded as a reduction of revenue and netted against merchant network revenue. 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. On May 5, 2021, our largest merchant partner at the time, Peloton, announced a voluntary recall of two of its products following a report by the U.S. Consumer Product Safety Commission released on April 17, 2021. Pursuant to ASC 606, we revised our estimate of the variable consideration associated with revenue earned on the facilitation of transactions related to the recalled products and recorded a reduction in revenue of $ 5.4 million during the year ended June 30, 2021. A portion of merchant network revenue relates to affiliate network revenue, which is generated when a user makes a purchase on a merchant’s website after being directed from an advertisement on Affirm’s website or mobile application. We earn a fixed placement fee and/or commission as a percentage of the associated sale. Revenue is recognized at the point in time when the performance obligation has been fulfilled, which is when the sale occurs. Virtual Card Network Revenue — Revenue from Contracts with Customers We have agreements with issuer processors to facilitate transactions through the issuance of virtual debit cards to be used by consumers at checkout. Consumers can apply for a virtual debit card through the Affirm app and, upon approval, receive a single-use virtual debit card to be used for their purchase online or offline at a non-integrated merchant. The virtual debit card is funded at the time a transaction is authorized using cash held by the issuer processor in a reserve fund. Our originating bank partner then originates a loan to the consumer once the transaction is confirmed by the merchant. The non-integrated merchants are charged interchange fees by the issuer processor for virtual debit card transactions, 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. From time to time, we offer certain integrated merchants promotional incentives to promote our platform to their customers, such as rebates of interchange fees charged by the issuer processor. These amounts are recorded as a reduction of revenue and netted against virtual card network revenue. Our contracts with issuer processors are defined at the transaction level and do not extend beyond the service already provided. The fees collected from issuer processors for each transaction are determined as a percentage of the interchange fees charged on transactions facilitated on the payment processor network, and revenue is recognized at the point in time the transaction is completed successfully. The fees collected are presented in revenue, net of associated processing fees. As the issuer processors do not provide distinct services to us, any fees paid to the issuer processors are offset against collected fees. We have concluded that these fees do not give rise to a future material right because the pricing of each transaction does not depend on the volume of prior successful transactions. We do not have any capitalized contract costs, and do not carry any material contract balances. 103 Table o f Contents Our service comprises a single performance obligation to the issuer processors to facilitate transactions with consumers. A portion of virtual card network revenue relates to incentive payments from card network partners, which we are eligible to receive for reaching certain cumulative volume targets on program cards issued by the issuer processors. We earn incentive revenue as a percentage of each associated transaction and estimate the applicable percentage based on observed cumulative volume on program cards. Revenue is recognized at the point in time when the performance obligation has been fulfilled, which is when the transaction is completed successfully. Interest Income We accrue interest income using the effective interest method. Interest income on a loan is accrued daily, based on the finance charge disclosed to the consumer, over the term of the loan based upon the principal outstanding. The accrual of interest on a loan is suspended if a formal dispute with the borrower involving either Affirm or the merchant of record is opened, or a loan is 120 days past due. Upon the resolution of a dispute with the consumer, the accrual of interest is resumed and any interest that would have been earned during the disputed period is retroactively accrued. As of June 30, 2022 and June 30, 2021, the balance of loans held for investment on non-accrual status was $ 1.7 million and $ 1.1 million, respectively. The account is charged-off in the period if the account becomes 120 days past due or meets other charge-off policy requirements. Past due status is based on the contractual terms of the loans. Previously recognized interest receivable from charged-off loans that is accrued but not collected from the consumer is reversed. Any discounts or premiums on loan receivables created upon the purchase of a loan from our originating bank partners or upon the origination of a loan are amortized into interest income over the life of the loan using the effective interest method. The amortization is presented together as interest income in the consolidated statements of operations and comprehensive loss. Servicing Income Servicing income includes contractual fees specified in our servicing agreements with third-party loan owners and unconsolidated securitizations that are earned from providing professional services to manage loan portfolios on their behalf. The servicing fee is calculated on a daily basis by multiplying a set fee percentage (as outlined in the executed agreements with third-party loan owners) by the outstanding loan principal balance. We recognize this revenue on a monthly basis. Loss on Loan Purchase Commitment We purchase certain loans from our originating bank partners that are processed through our platform that our originating bank partner puts back to us. Under the terms of the agreements with our originating bank partners, we are generally required to pay the principal amount plus accrued interest for such loans. In certain instances, our originating bank partners may originate loans with zero or below market interest rates that we are required to purchase. In these instances, we may be required to purchase the loan for a price in excess of the fair market value of such loans, which results in a loss. These losses are recognized as loss on loan purchase commitment in our consolidated statements of operations and comprehensive loss. Due to the nature of this arrangement with our originating bank partners, we recognize a net liability for this commitment when the merchant confirms the transaction. This liability is recorded at fair value, which is determined by the difference between the estimated fair value of the loan and the anticipated purchase price. Upon purchase, the liability is included in the amortized cost basis of the purchased loan as a discount, which is amortized into interest income over the life of the loan. 104 Table o f Contents Customer Referral Partners From time to time, we make payments to customer referral partners providing lead generation services for each transaction processed through our technology platform. We first evaluate whether the customer referral partner is a customer or a vendor. We consider customer referral partners as customers if we determine they are the principal to eligible merchants in providing the facilitation of credit service. We consider customer referral partners as vendors if we determine that we are the principal to eligible merchants in providing the facilitation of credit service. Payments made to customer referral partners that are considered to be our customer are recorded as a reduction of revenue, and payments made to customer referral partners that are not considered to be our customers are recorded in processing and servicing expense, respectively, over the associated period of benefit within our consolidated statements of operations and comprehensive loss. Sales and Marketing Costs Sales and marketing costs include the expense related to warrants and other share-based payments granted to our enterprise partners. See Note 6. Balance Sheet Components for more information on these arrangements. Sales and marketing costs also include salaries and personnel-related costs, as well as costs of general marketing and promotional activities, promotional event programs, sponsorships, and allocated overhead. A portion of these costs related to general marketing and promotional activities are considered advertising costs within the meaning of ASC Topic 720, “Other Expenses” (“ASC 720”), and are expensed as incurred. Advertising costs totaled $ 74.0 million, $ 48.1 million and $ 3.3 million for the year ended June 30, 2022, 2021, and 2020, respectively. Derivative Instruments We mitigate the impact of changes in interest rates with various derivative instruments, including interest rate caps, constant maturity swaps, and curve efficient swaps that are accounted for as derivatives pursuant to ASC Topic 815, “Derivatives and Hedging” ("ASC Topic 815"). ASC Topic 815 requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet, measure those instruments at fair value and recognize changes in the fair value of derivatives in earnings in the period of change unless the derivative qualifies as a designated hedge that offsets certain exposures. During the periods presented, we have not designated any of our derivatives as hedging instruments. Stock-Based Compensation We account for stock-based compensation expense in accordance with the fair value recognition and measurement provisions of U.S. GAAP, which requires compensation cost for the grant date fair value of stock-based awards to be recognized over the requisite service period. In addition, we made an accounting policy election to estimate the expected forfeiture rate for service-based awards and only recognize expense for those stock-based awards expected to vest. We estimate the forfeiture rate based on our historical experience with stock-based awards that are granted and forfeited prior to vesting. The fair value of stock-based awards, granted or modified, is determined on the grant date (or modification or acquisition dates, if applicable) at fair value, using appropriate valuation techniques. Service-Based Awards We record stock-based compensation expense for service-based stock options and restricted stock units (“RSUs”) on a straight-line basis over the requisite service period, which is generally one to four years . The fair value of each option on the date of grant is determined using the Black Scholes-Merton option pricing model using the single-option award approach. Volatility is based on historical volatility rates obtained from comparable publicly-traded companies that operate in the same or related business as us, as there is a limited time period of historical market data for our common stock. 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 used the simplified method to determine an estimate of the expected term of an employee stock option. 105 Table o f Contents We account for stock-based awards to non-employees, including consultants, in accordance with ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), in which equity-classified awards are measured at the grant date fair value and recognized as expense in the period and manner as though we had paid cash in exchange for goods or services instead of granting a stock-based award. Performance-Based Awards Prior to the IPO, we granted RSUs that were subject to two vesting conditions: a service-based vesting condition (i.e., employment over a period of time) and a performance-based vesting condition (i.e., a liquidity event in the form of either certain change in control transactions or an initial public offering). The performance-based condition was met upon the IPO. We record stock-based compensation expense for these awards on an accelerated attribution method over the requisite service period, which is generally four years . Upon exercise or vesting of a stock-based award, the tax effect of the difference, if any, between the cumulative compensation cost recognized for financial statement purposes and the deduction for income tax purposes, will be recognized as an income tax expense or benefit in the consolidated statement of operations. Market-Based Awards 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 record stock-based compensation expense for market-based equity awards on an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable of being satisfied. Foreign Currency We have wholly-owned foreign subsidiaries that use the local currency of their respective country as their functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Revenue, costs, and expenses of these subsidiaries are translated into U.S. dollars using daily exchange rates when incurred. Gains and losses resulting from these translations are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”). Gains and losses from the remeasurement of foreign currency transactions into the functional currency are recognized as other income (expense), net, in our consolidated statements of operations and comprehensive loss. Basic and Diluted Net Loss per Common Share We calculate net income or loss per share using the two-class method. The two-class method requires income available to common stockholders for the period to be allocated between each class of common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Our participating securities include common stock issued upon the early exercise of stock options and convertible senior notes. We consider any shares issued upon early exercise of stock options, subject to repurchase, to be participating securities because holders of such shares have non-forfeitable dividend rights in the event a cash dividend is declared on our common stock. These participating securities do not contractually require the holders of such shares to participate in our losses. As such, net losses for the years presented were not allocated 106 Table o f Contents to our participating securities. Prior to the conversion of redeemable convertible preferred stock into shares of our common stock on January 12, 2021, these shares also represented participating securities. We calculate basic net loss per share attributable to common stockholders for Class A and Class B common stock by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding in each class for the period. We calculate diluted net loss per share attributable to common stockholders by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding in each class, after giving consideration to the dilutive effect of our redeemable convertible preferred stock, stock options, restricted stock units, employee stock purchase plan shares, convertible debt and common stock warrants that are outstanding during the period. We have generated a net loss in all periods presented, and therefore, the basic and diluted net loss per share attributable to common stockholders are the same as the inclusion of the potentially dilutive securities would be anti-dilutive. During the years ended June 30, 2021 and 2020, the excess of the repurchase price of preferred stock over its carrying value was recorded as an increase to net loss to determine net loss attributable to common stockholders, basic and diluted. Recently Adopted Accounting Standards Convertible Debt Instruments In August 2020, the FASB issued Accounting Standard Update (“ASU”) 2020-06, “Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40),” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. We early adopted the new standard effective July 1, 2021 on a modified retrospective basis. The adoption of the new standard did not have any impact on our financial statements as of the adoption date. As further discussed in Note 11. Debt , the Company issued certain convertible senior notes in November 2021, and the accounting for these instruments was based on the guidance in ASU 2020-06. Staff Accounting Bulletin No. 12 1 In March 2022, the SEC staff released Staff Accounting Bulletin No. 121 ("SAB 121"), which expressed the views of the SEC staff regarding the accounting for obligations to safeguard crypto-assets an entity holds for users of its crypto platform. This guidance requires entities that hold crypto-assets on behalf of platform users to recognize a liability to reflect the entity’s obligation to safeguard the crypto-assets held for its platform users, whether safeguarding is provided by the entity or by an agent acting on behalf of the entity. The liability should be measured at initial recognition and each reporting date at the fair value of the crypto-assets that the entity is responsible for holding for its platform users, taking into account any potential loss event. The entity should also recognize an asset at the same time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of the crypto-assets held for its platform users taking into account any potential loss event. The entity should also describe the asset and the corresponding liability in the footnotes to the financial statements and consider including information regarding who (e.g. the company, its agent, or another third party) holds the cryptographic key information, maintains the internal recordkeeping of those assets, and is obligated to secure the assets and protect them from loss or theft. This guidance is effective from the first interim period after June 15, 2022 and should be applied retrospectively. We adopted the guidance in SAB 121 as of June 30, 2022 on a retrospective basis. The adoption of the guidance did not have a material impact on our financial statements. 107 Table o f Contents Recent Accounting Pronouncements Not Yet Adopted Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Interbank Offered Rate (“LIBOR”). This ASU is effective for all entities upon issuance as of March 12, 2020 through December 31, 2022. In January 2021, the FASB also issued ASU 2021-01, “Reference Rate Reform (Topic 848),” which provides additional optional expedients and exceptions applicable to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This ASU is effective for all entities upon issuance as of January 7, 2021 through December 31, 2022. We have reviewed all our financial agreements that utilize LIBOR as the reference rate and determined there is no material impact to our consolidated financial statements as of June 30, 2022. Throughout the remaining effective period for ASU 2020-04 and ASU 2021-01, we will continue to evaluate the available relief measures within each of these amendments and will determine any impact on our consolidated financial statements and disclosures, as applicable. Business Combinations In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities, such as deferred revenue, acquired in a business combination to be recognized and measured in accordance with Topic 606 (Revenue from Contracts with Customers). ASU 2021-08 is expected to reduce diversity in practice and increase comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The ASU is effective for fiscal years beginning after December 15, 2022 and should be applied prospectively to acquisitions occurring on or after the effective date. Early adoption is permitted, including for interim periods, and is applicable to all business combinations for which the acquisition date occurs within the beginning of the fiscal year of adoption. We are in the process of evaluating the impact of adopting this accounting standard update on our consolidated financial statements and disclosures. Financial Instruments - Credit Losses In March 2022, the FASB issued ASU 2022-02, “Financial Instruments— Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosure” which addresses areas identified by the FASB as part of its post-implementation review of the current expected credit losses model or “CECL” previously issued in ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326)”. The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings by creditors while enhancing the disclosure requirements for loan refinancing and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases in the vintage disclosures. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted if an entity has adopted ASU 2016-13. Amendments in this ASU should be applied prospectively except for the transition method related to the accounting for troubled debt restructurings in which an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. We are in the process of evaluating the impact of adopting this accounting standard update on our consolidated financial statements and disclosures. 108 Table o f Contents 3. Interest Income Interest income consisted of the following components (in thousands): Year ended June 30, 2022 2021 2020 Interest income on unpaid principal balance $ 365,993 237,526 163,374 Amortization of discount on loans 185,050 101,078 35,251 Amortization of premiums on loans ( 13,085 ) ( 9,018 ) ( 6,157 ) Interest receivable charged-off, net of recoveries ( 10,078 ) ( 3,169 ) ( 5,738 ) Total interest income $ 527,880 $ 326,417 $ 186,730 4. Loans Held for Investment and Allowance for Credit Losses Loans held for investment consisted of the following (in thousands): June 30, 2022 June 30, 2021 Unpaid principal balance $ 2,516,733 $ 2,058,863 Accrued interest receivable 20,697 15,466 Premiums on loans held for investment 8,911 7,071 Less: Discount due to loss on loan purchase commitment (1) ( 20,692 ) ( 53,177 ) Less: Discount due to loss on self-originated loans (1) ( 20,443 ) — Less: Fair value adjustment on loans acquired through business combination ( 1,645 ) ( 5,903 ) Total loans held for investment $ 2,503,561 $ 2,022,320 (1) As of June 30, 2021, discount due to loss on self-originated loans, in the amount of $ 6.2 million, was included with discount due to loss on loan purchase commitment. The majority of the loans that are underwritten using our technology platform and originated by our originating bank partners are later purchased by us. We purchased loans from our originating bank partners in the amount of $ 12.1 billion, $ 7.9 billion, and $ 4.7 billion for the years ended June 30, 2022, 2021, and 2020, respectively. These loans have a variety of lending terms as well as maturities ranging from one to sixty months . Given that our loan portfolio focuses on one product segment, point-of-sale unsecured installment loans, we generally evaluate the entire portfolio as a single homogeneous loan portfolio and make merchant or program specific adjustments as necessary. We closely monitor credit quality for our loan receivables to manage and evaluate our related exposure to credit risk. Credit risk management begins with initial underwriting, where loan applications are assessed against the credit underwriting policy and procedures for our self-originated loans and originating bank partner loans, and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal historical experience, including the consumer’s prior repayment history on our platform as well as other measures. We combine these factors to establish a proprietary score as a credit quality indicator. Our proprietary score (“ITACs”) is assigned to most loans facilitated through our technology platform, ranging from zero to 100 , with 100 representing the highest credit quality and therefore the lowest likelihood of loss. The ITACs model analyzes the characteristics of a consumer's attributes that are shown to be predictive of both willingness and ability to repay including, but not limited to: basic features of a consumer's credit profile, a 109 Table o f Contents consumer's prior repayment performance with other creditors, current credit utilization, and legal and policy changes. When a consumer passes both fraud and credit policy checks, the application is assigned an ITACs score. ITACs is also used for portfolio performance monitoring. Our credit risk team closely tracks the distribution of ITACs at the portfolio level, as well as ITACs at the individual loan level to monitor for signs of a changing credit profile within the portfolio. Repayment performance within each ITACs band is also monitored to support both the integrity of the risk scoring models and to measure possible changes in consumer behavior amongst various credit tiers. The following table presents an analysis of the credit quality, by ITACs score, of the amortized cost basis by fiscal year of origination on loans held for investment and loans held for sale (in thousands) as of June 30, 2022: Amortized Costs Basis by Fiscal Year of Origination 2022 2021 2020 2019 2018 Prior Total 96+ $ 1,218,104 $ 122,503 $ 33,458 $ 157 $ 1 $ — $ 1,374,223 94 – 96 620,403 11,240 773 13 2 — 632,431 90 – 94 220,056 3,886 6 4 — — 223,952 <90 44,300 135 2 — — — 44,437 No score (1) 186,044 20,554 3,368 444 79 2 210,491 Total loan receivables $ 2,288,907 $ 158,318 $ 37,607 $ 618 $ 82 $ 2 $ 2,485,534 (1) This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology including loan receivables originated in Canada and Australia. Net Charge-offs by Fiscal Year of Origination 2022 2021 2020 2019 2018 Prior Total Current period charge-offs ( 133,338 ) ( 89,960 ) ( 3,783 ) ( 548 ) ( 120 ) ( 21 ) ( 227,770 ) Current period recoveries 5,288 9,802 4,417 2,952 1,242 897 24,598 Current period net charge-offs $ ( 128,050 ) $ ( 80,158 ) $ 634 $ 2,404 $ 1,122 $ 876 $ ( 203,172 ) Loan receivables are defined as past due if either the principal or interest have not been received within four calendars days of when they are due in accordance with the agreed upon contractual terms. The following table presents an aging analysis of the amortized cost basis of loans held for investment and loans held for sale by delinquency status (in thousands): June 30, 2022 June 30, 2021 Non-delinquent loans $ 2,322,919 $ 1,939,976 4 – 29 calendar days past due 77,963 43,838 30 – 59 calendar days past due 34,669 17,267 60 – 89 calendar days past due 26,919 12,044 90 – 119 calendar days past due (1) 23,064 6,759 Total amortized cost basis $ 2,485,534 $ 2,019,884 (1) Includes $ 22.7 million of loan receivables as of June 30, 2022 that are 90 days or more past due, but are not on nonaccrual status. 110 Table o f Contents We maintain an allowance for credit losses at a level sufficient to absorb expected credit losses based on evaluating known and inherent risks in our loan portfolio. The allowance for credit losses is determined based on our current estimate of expected credit losses over the remaining contractual term, historical credit losses, consumer payment trends, estimates of recoveries, and future expectations as of each balance sheet date. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses are recognized in earnings through the provision for credit losses presented on our consolidated statements of operations and comprehensive loss. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. Loans are charged-off in accordance with our charge-off policy, as the contractual principal becomes 120 days past due. Subsequent recoveries of the unpaid principal balance, if any, are credited to the allowance for credit losses. The following table details activity in the allowance for credit losses (in thousands): Year ended June 30, 2022 2021 2020 Allowance at beginning of period 117,760 95,137 66,260 Adjustment due to adoption of new accounting standard — 10,083 — Provision for credit losses 240,804 63,755 101,540 Charge-offs ( 227,770 ) ( 65,149 ) ( 81,052 ) Recoveries of charged-off receivables 24,598 13,934 8,389 Allowance at end of period 155,392 117,760 95,137 5. Acquisitions Fast On April 19, 2022, Affirm completed the closing of the transaction contemplated by a Release and Waiver Agreement entered into with Fast AF, Inc., (“Fast”) relating to the hiring of certain of its employees or service providers and an option to acquire certain of its assets. The purchase price was comprised of (i) $ 10.0 million in cash and (ii) forgiveness of a $ 15.0 million senior secured note issued to Fast in April 2022 prior to the closing. The acquisition was accounted for as an asset acquisition in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”) since the assets acquired do not meet the definition of a business. The acquired identifiable intangible assets have been recorded at a total cost of $ 25.4 million, which includes approximately $ 0.4 million of transaction costs associated with the acquisition. The excess of the total cost of the assets over their total fair value was allocated between the assets on the basis of their relative fair values. The fair values of the intangible assets were determined by applying the replacement cost method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represent Level 3 measurements. The following table sets forth the identifiable intangible assets acquired and the cost allocated to each asset as of the date of acquisition (in thousands): Assembled workforce $ 12,490 Option to purchase developed technology $ 12,925 Total $ 25,415 The assembled workforce intangible asset has an expected useful life of 1.5 years. The developed technology asset will be amortized over its expected useful life if the associated assets are purchased and entered into service. 111 Table o f Contents ShopBrain On July 1, 2021, Affirm completed the acquisition of technology and intellectual property from Yroo, Inc. and entered into employment arrangements with certain of its employees (“the ShopBrain acquisition”). Yroo, Inc. is a data aggregation and cataloging technology company based in Canada (“ShopBrain”). The purchase price was comprised of (i) $ 30.0 million in cash and (ii) 151,745 shares of our Class A common stock issued to the shareholders of ShopBrain at closing. The acquisition date fair value of the consideration transferred was approximately $ 40.0 million, which consisted of the following (in thousands): Cash $ 30,000 Fair value of Class A common stock transferred 10,000 Total acquisition date fair value of the consideration transferred $ 40,000 The acquisition was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805 . The acquired identifiable intangible assets have been recorded at their estimated fair values with the excess purchase price assigned to goodwill. The goodwill was primarily attributed to future synergies from integration and the value of the assembled workforce. The goodwill is expected to be deductible for income tax purposes. The following table summarizes the allocation of the consideration paid of approximately $ 40.0 million to the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): Intangible assets $ 9,488 Total net assets acquired 9,488 Goodwill 30,512 Total purchase price $ 40,000 The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands): Fair Value Useful Life (in years) Developed technology $ 9,488 3.0 The fair values of the intangible assets were determined by applying the replacement cost method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represents Level 3 measurements. The transaction costs associated with the acquisition were approximately $ 0.2 million for the year ended June 30, 2022, which are included in general and administrative expense within the consolidated statements of operations and comprehensive loss. Pro forma adjustments would only include the additional amortization that would have been charged assuming the intangible assets had been recorded as of July 1, 2020. Such adjustments would not be material to the consolidated statements of operations and comprehensive loss for the year ended June 30, 2021. Kite On June 1, 2021, Affirm completed the acquisition of technology and intellectual property from Manhattan Engineering, Inc. and entered into employment arrangements with certain of its employees (“the Kite acquisition”). 112 Table o f Contents The purchase price was comprised of $ 26.0 million in cash, including $ 9.0 million held in escrow and subject to forfeiture if certain employees terminate within a stipulated time period. The acquisition date fair value of the consideration transferred was approximately $ 24.8 million which consisted of the following (in thousands): Cash $ 26,000 Less: Fair value of contingent consideration asset $ ( 1,241 ) Total acquisition date fair value of consideration transferred $ 24,759 The acquisition was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805. The acquired identifiable intangible assets have been recorded at their estimated fair values with the excess purchase price assigned to goodwill. The goodwill was primarily attributed to the value of assembled workforce. The goodwill is expected to be deductible for income tax purposes. The following table summarizes the allocation of the consideration paid of approximately $ 24.8 million to the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): Intangible assets $ 6,975 Net assets acquired 6,975 Goodwill $ 17,784 Total purchase price $ 24,759 The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands): Fair Value Useful Life (in years) Developed technology $ 6,900 3.0 Trademarks 75 1.0 Total intangible assets $ 6,975 The fair values of the intangible assets were determined by applying the replacement cost method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represent Level 3 measurements. The transaction costs associated with the acquisition were approximately $ 0.2 million for the year ended June 30, 2021, which are included in general and administrative expense in the consolidated statements of operations and comprehensive loss. There were no transaction costs associated with the acquisition for the year ended June 30, 2022. Pro forma adjustments would only include the additional amortization that would have been charged assuming the intangible assets had been recorded as of July 1, 2019. Such adjustments would not be material to the consolidated statements of operations and comprehensive loss for the year ended June 30, 2021 and 2020. Returnly On May 1, 2021, Affirm completed a merger transaction with Returnly Technologies, Inc. (“Returnly”), a leading provider of online return experiences for direct-to-consumer brands. Prior to the merger transaction, Affirm owned approximately 1 % of the outstanding shares of Returnly. By effect of the merger transaction, Affirm acquired 113 Table o f Contents all of the remaining outstanding shares, increasing its equity interest from approximately 1 % to 100 %. We have included the financial results of Returnly in our consolidated financial statements from the date of acquisition. The purchase price for the remaining interest was comprised of (i) approximately $ 71.5 million in cash and (ii) 2,989,697 shares of our common stock issued to the shareholders of Returnly at closing. We also issued 304,364 shares of our common stock, which are held in escrow and subject to forfeiture upon the termination of certain employees or if certain revenue milestones are not met. Because the future payment of the escrowed shares is contingent on continued employment, the arrangement represents stock-based compensation in the post combination period. Refer to Note 16. Equity Incentive Plans for additional information on the escrowed share arrangement. The acquisition date fair value of the consideration transferred for Returnly was approximately $ 286.0 million, which consisted of the following (in thousands): Cash $ 71,484 Fair value of common stock transferred 214,475 Total acquisition date fair value of consideration transferred $ 285,959 The acquisition date fair value of the equity interest in Returnly held by Affirm immediately before the acquisition date was $ 2.1 million, resulting in the recognition of a $ 1.6 million gain included in other (expense) income, net in the consolidated statements of operations and comprehensive loss. The acquisition of Returnly was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805. The acquired Returnly assets, including identifiable intangible assets and liabilities assumed, have been recorded at their estimated fair values with the excess purchase price assigned to goodwill. The goodwill was primarily attributed to future synergies from integration, new customer acquisitions, and the value of assembled workforce. Goodwill is not expected to be deductible for income tax purposes. The following table summarizes the allocation of the fair value of the consideration paid and the previously held equity interest of approximately $ 288.1 million to the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): Cash and cash equivalents $ 3,788 Accounts receivable, net 9,585 Property, equipment and software 127 Intangible assets 45,900 Other assets 1,830 Total assets acquired $ 61,230 Accounts payable 594 Accrued expenses and other liabilities 6,205 Total liabilities assumed $ 6,799 Net assets acquired $ 54,431 Goodwill 233,623 Total fair value of consideration transferred and previously held investment $ 288,054 114 Table o f Contents The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands): Fair Value Useful Life (in years) Developed technology $ 16,200 3.0 Merchant relationships 29,200 5.0 Trade name 500 1.0 Total intangible assets $ 45,900 The fair value of the merchant relationship intangible asset was estimated by applying the income approach, which is based upon the discounted projected future cash flows attributable to the existing merchant relationships. The fair value of the developed technology intangible asset was determined by applying the replacement cost method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represent Level 3 measurements. The transaction costs associated with the acquisition were approximately $ 1.8 million for the year ended June 30, 2021, which are included in general and administrative expense in the consolidated statements of operations and comprehensive loss. There were no transaction costs associated with the acquisition for the year ended June 30, 2022. Unaudited Pro Forma Information The following table reflects the pro forma consolidated total revenue and net loss for the periods presented as if the acquisition of Returnly had occurred on July 1, 2019 and combines the historical results of Affirm and Returnly. This supplemental unaudited pro forma information is based upon accounting estimates and judgments that we believe are reasonable and includes certain adjustments to conform accounting standards to U.S. GAAP. This supplemental unaudited pro forma financial information has been prepared for illustrative purposes only and is not necessarily indicative of what actual results would have occurred, or of results that may occur in the future. Year ended June 30, Year ended June 30, 2021 2020 Revenue $ 880,603 $ 517,438 Net loss $ ( 465,875 ) $ ( 132,721 ) PayBright On January 1, 2021, Affirm Canada Holdings Ltd. (“Affirm Canada”), a subsidiary of Affirm, and Affirm acquired all outstanding stock of PayBright, Inc., one of Canada’s leading buy now, pay later providers, for approximately $ 288.8 million. We have included the financial results of PayBright in our consolidated financial statements from the date of acquisition. The purchase price was comprised of (i) approximately $ 114.5 million in cash, (ii) 3,622,445 shares of our common stock issued to the shareholders of PayBright at closing and (iii) 2,587,362 shares of our common stock held in escrow and subject to forfeiture if certain revenue milestones are not met. On January 12, 2021, these shares were reclassified into an aggregate of 1,811,222 shares of our Class A common stock and 1,811,222 shares of our Class B common stock issued to the shareholders of PayBright at closing and an aggregate of 1,293,681 shares of our Class A common stock and 1,293,681 shares of our Class B common stock held in escrow. 115 Table o f Contents The acquisition date fair value of the consideration transferred for PayBright was approximately $ 288.8 million, which consisted of the following (in thousands): Cash $ 114,490 Fair value of common stock transferred 116,989 Fair value of contingent consideration 57,275 Total purchase price $ 288,754 For further details on our fair value methodology with respect to the contingent consideration, see Note 14. Fair Value of Financial Assets and Liabilities. The acquisition of PayBright was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805. The acquired PayBright assets, including identifiable intangible assets and liabilities assumed, have been recorded at their estimated fair values with the excess purchase price assigned to goodwill. The goodwill was primarily attributed to future synergies from integration, new customer acquisitions, and the value of assembled workforce in Canada. Goodwill is not expected to be deductible for income tax purposes. The following table summarizes the allocation of the consideration paid of approximately $ 288.8 million to the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands): Cash and cash equivalents $ 8,219 Restricted cash 1,469 Loans held for investment 89,570 Accounts receivable, net 1,537 Property, equipment and software, net 586 Intangible assets 16,653 Other assets 5,651 Total assets acquired $ 123,685 Accounts payable 6,579 Accrued interest payable 23 Accrued expenses and other liabilities 193 Funding debt 85,310 Total liabilities assumed $ 92,105 Net assets acquired $ 31,580 Goodwill 257,174 Total purchase price $ 288,754 The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands) Fair Value Useful Life (in years) Developed technology $ 6,127 3.0 Merchant relationships 9,505 4.0 Trade name 1,021 5.0 Total intangible assets $ 16,653 116 Table o f Contents The transaction costs associated with the acquisition were approximately $ 2.4 million for the year ended June 30, 2021, which are included in general and administrative expense in the consolidated statements of operations and comprehensive loss. There were no transaction costs associated with the acquisition for the year ended June 30, 2022. Unaudited Pro Forma Information The following table reflects the pro forma consolidated total revenue and net loss for the periods presented as if the acquisition of PayBright had occurred on July 1, 2019 and combines the historical results of Affirm and PayBright. This supplemental unaudited pro forma information is based upon accounting estimates and judgments that we believe are reasonable and includes certain adjustments to conform accounting standards to U.S. GAAP. This supplemental unaudited pro forma financial information has been prepared for illustrative purposes only and is not necessarily indicative of what actual results would have occurred, or of results that may occur in the future. Year ended June 30, Year ended June 30, 2021 2020 Revenue $ 886,937 $ 524,657 Net loss $ ( 447,116 ) $ ( 128,244 ) 6. Balance Sheet Components Property, Equipment and Software, net Property, equipment and software, net consisted of the following (in thousands): June 30, 2022 June 30, 2021 Internally developed software $ 200,621 $ 68,197 Leasehold improvements 16,169 15,212 Computer equipment 10,751 6,707 Furniture and equipment 4,279 5,284 Total Property, equipment and software, at cost $ 231,820 $ 95,400 Less: Accumulated depreciation and amortization ( 60,338 ) ( 32,901 ) Total Property, equipment and software, net $ 171,482 $ 62,499 Depreciation and amortization expense on property, equipment and software was $ 29.2 million, $ 15.4 million and $ 9.4 million for the years ended June 30, 2022, 2021, and 2020, respectively. Depreciation expense on leasehold improvements, furniture and equipment, and computer equipment is allocated between general and administrative, technology and data analytics, sales and marketing, and processing and servicing based on employee headcount in the consolidated statements of operations and comprehensive loss. Amortization expense on internally developed software is included as a component of technology and data analytics in the consolidated statements of operations and comprehensive loss. For the year ended June 30, 2021, we recorded impairment expense of $ 1.5 million related to leasehold improvements. No impairment losses related to leasehold improvements were noted during both the years ended June 30, 2022 and 2020. No impairment losses related to property, equipment and software were recorded during the years ended June 30, 2022, 2021, and 2020. 117 Table o f Contents Goodwill and Intangible Assets The changes in the carrying amount of goodwill during the years ended June 30, 2022 and 2021 were as follows (in thousands): Balance as of June 30, 2020 $ 1,255 Additions 508,581 Effect of foreign currency translation 6,679 Balance as of June 30, 2021 $ 516,515 Additions 33,318 Effect of foreign currency translation ( 10,299 ) Balance as of June 30, 2022 $ 539,534 Refer to Note 5. Acquisitions for a description of additions to goodwill during the years ended June 30, 2022 and 2021. No impairment losses related to goodwill were recorded during the years ended June 30, 2022, 2021, and 2020. Intangible assets consisted of the following (in thousands): June 30, 2022 Gross Accumulated Amortization Net Weighted Average Remaining Useful Life (in years) Merchant relationships $ 38,371 $ ( 10,281 ) $ 28,090 3.6 Developed technology 39,782 ( 15,882 ) 23,900 1.9 Assembled workforce 12,490 ( 1,664 ) 10,826 1.3 Trademarks and domains, definite 1,507 ( 802 ) 705 2.4 Trademarks and domains, indefinite 2,146 — 2,146 Indefinite Other intangibles 350 — 350 Indefinite Total intangible assets $ 94,646 $ ( 28,629 ) $ 66,017 In connection with the Fast asset acquisition, we also recorded a $ 12.9 million intangible asset representing the option to purchase developed technology as of June 30, 2022. The asset will not be amortized until the purchase is complete and the asset is placed into service. Refer to Note 5. Acquisitions for a description of the acquisition and assets acquired. 118 Table o f Contents June 30, 2021 Gross Accumulated Amortization Net Weighted Average Remaining Useful Life (in years) Merchant relationships $ 38,951 $ ( 2,192 ) $ 36,759 4.5 Developed technology 30,176 ( 2,930 ) 27,246 2.8 Trademarks and domains (1) 3,769 ( 194 ) 3,575 3.3 Other intangibles 350 — 350 Indefinite Total intangible assets $ 73,246 $ ( 5,316 ) $ 67,930 (1) As of June 30, 2021, trademarks and domains included both definite and indefinite intangible assets. Amortization expense for intangible assets was $ 23.5 million, $ 4.6 million and nil for the years ended June 30, 2022, 2021 and 2020, respectively . No impairment losses related to intangible assets were recorded during the years ended June 30, 2022, 2021 , and 2020. The expected future amortization expense of these intangible assets as of June 30, 2022 is as follows (in thousands): 2023 $ 29,595 2024 21,686 2025 7,232 2026 4,993 2027 and thereafter 15 Total amortization expense $ 63,521 Commercial Agreement Assets During the year ended June 30, 2022, we entered into a commercial agreement with Amazon.com Services LLC and Amazon Payments, Inc. ("Amazon") and granted warrants in exchange for certain exclusivity and performance provisions and the benefit of acquiring new users. In connection with the agreements, we recognized an asset of $ 133.5 million associated with the portion of the warrants that were fully vested upon execution of the agreement. The asset was 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 amortization expense of $ 26.3 million in our consolidated statements of operations and comprehensive loss as a component of sales and marketing expense. Refer to Note 15. Redeemable Convertible Preferred Stock and Stockholders’ Equity for further discussion of the warrants. During the year ended June 30, 2021, we recognized an asset in connection with a commercial agreement with Shopify Inc. (“Shopify”), in which we granted warrants in exchange for the opportunity to acquire new merchant partners. This asset represents the probable future economic benefit to be realized over the expected benefit period and is valued based on the fair value of the warrants on the grant date. We recognized an asset of $ 270.6 million associated with the fair value of the warrants, which were fully vested as of June 30, 2021. 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. W e recorded amortization expense related to the commercial agreement asset of 119 Table o f Contents $ 62.2 million and $ 64.9 million for the years ended June 30, 2022, and 2021 , respectively, in our consolidated statements of operations and comprehensive loss as a component of sales and marketing expense. During the year ended June 30, 2021, we recognized an asset in connection with a commercial agreement with an enterprise partner, in which we granted stock appreciation rights in exchange for the benefit of acquiring access to the partner's consumers. This asset represents the probable future economic benefit to be realized over the three-year expected benefit period and is valued based on the fair value of the stock appreciation rights on the grant date. We initially recognized an asset of $ 25.9 million associated with the fair value of the stock appreciation rights. We recorded amortization expense related to the asset of $ 8.1 million, and $ 4.3 million for the years ended June 30, 2022, and 2021 , respectively, in our consolidated statements of operations and comprehensive loss as a component of sales and marketing expense. Other Assets Other assets consisted of the following (in thousands): June 30, 2022 June 30, 2021 Operating lease right-of-use assets $ 50,671 $ 57,828 Derivative instruments 49,983 2,880 Equity securities, at cost 43,172 11,278 Prepaid expenses 37,497 21,069 Prepaid payroll taxes for stock-based compensation 35,172 111,278 Processing reserves 26,483 14,042 Other receivables 17,221 26,423 Other assets 21,368 29,881 Total other assets $ 281,567 $ 274,679 Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consisted of the following (in thousands) June 30, 2022 June 30, 2021 Accrued expenses $ 67,343 $ 47,674 Operating lease liability 65,713 74,952 Collateral held for derivative instruments 55,779 — Contingent consideration liability 23,348 153,447 Commercial agreement liability — 25,357 Other liabilities 25,415 22,147 Total accrued expenses and other liabilities $ 237,598 $ 323,577 Our acquisition of PayBright included consideration transferred and shares held in escrow, contingent upon the achievement of future milestones. We classified the contingent consideration as a liability and we will continue to remeasure the liability to its fair value at each reporting date until the contingency is resolved. As of June 30, 2022, the fair value of the contingent consideration liability was $ 23.3 million. For further details on our fair value methodology with respect to the contingent consideration, see Note 14. Fair Value of Financial Assets and Liabilities. 120 Table o f Contents During the year ended June 30, 2021, we recognized a liability in connection with a commercial agreement with an enterprise partner of $ 25.9 million. As of June 30, 2022, we have fully settled this liability. 7. Leases We lease facilities under operating leases with various expiration dates through 2030. We have the option to renew or extend our leases. Certain lease agreements include the option to terminate the lease with prior written notice ranging from 180 days to one year . As of June 30, 2022, we have not considered such provisions in the determination of the lease term, as it is not reasonably certain these options will be exercised. Leases have remaining terms that range from less than one year to eight years . Several leases require us to obtain standby letters of credit, naming the lessor as a beneficiary. These letters of credit act as security for the faithful performance by us of all terms, covenants and conditions of the lease agreement. The cash collateral and deposits for the letters of credit have been recognized as restricted cash in the consolidated balance sheets and totaled $ 9.7 million and $ 9.9 million as of June 30, 2022 and June 30, 2021, respectively. As of June 30, 2022, right-of-use assets of $ 50.7 million were included in other assets, and the related operating lease liability totaled $ 65.7 million which was included in accrued expenses and other liabilities in the consolidated balance sheet. The impairment expense related to leases during the year ended June 30, 2022 was not material to our consolidated statements of operations. For the year ended June 30, 2021, we recognized impairment expense of $ 11.5 million and for several of our operating lease right-of-use assets, included in general and administrative expense on our consolidated statements of operations and comprehensive loss. There was no impairment expense related to leases during the year ended June 30, 2020. The components of operating lease expenses are as follows (in thousands): Year ended June 30, 2022 2021 2020 Operating lease expense $ 15,200 $ 15,300 $ 13,700 Short-term lease expenses 400 1,100 1,200 We have subleased a portion of our leased facilities. Sublease income totaled $ 3.1 million during the year ended June 30, 2022. There was no sublease income for both the years ended June 30, 2021 and 2020. Lease term and discount rate information are summarized as follows: June 30, 2022 Weighted average remaining lease term (in years) 4.9 Weighted average discount rate 4.7 % 121 Table o f Contents Maturities of operating lease liabilities as of June 30, 2022 are as follows (in thousands) for the years ended: 2023 $ 16,445 2024 16,334 2025 16,119 2026 15,270 2027 2,680 2028 and thereafter 7,688 Total lease payments 74,536 Less imputed interest ( 8,823 ) Present value of total lease liabilities $ 65,713 8. Employee Benefits Retirement Benefits We offer a 401(k) plan to full-time employees. Eligibility for the plan is effective on the first of the month following an employee’s first 90 days of service. Employees may elect to contribute to a traditional 401(k) plan, which qualifies as a deferred compensation arrangement under Section 401 of the Internal Revenue Code (“IRC”). In this case, participating employees defer a portion of their pre-tax earnings. Employees may also contribute to a Roth 401(k) plan using post-tax dollars. We have not made any matching contributions to date. Health and Welfare Benefits We provide health and welfare benefits to our employees, including health, dental, prescription drug and vision for which we are fully-insured. The expense incurred associated with these benefits was $ 20.6 million, $ 10.5 million, and $ 7.1 million for the years ended June 30, 2022, 2021, and 2020, respectively. 9. Commitments and Contingencies Repurchase Obligation Under the normal terms of our whole loans sales to third-party investors, we may become obligated to repurchase loans from investors in certain instances where a breach in representation and warranties is identified. Generally, a breach in representation and warranties would occur where a loan has been identified as subject to verified or suspected fraud, or in cases where a loan was serviced or originated in violation of Affirm’s guidelines. We would only experience a loss if the contractual repurchase price of the loan exceeds the fair value on the repurchase date. The aggregate outstanding balance of loans held by third-party investors or unconsolidated VIEs was $ 4,504.5 million and $ 2,453.9 million as of June 30, 2022 and June 30, 2021, respectively, of which we have recorded a repurchase liability of $ 2.0 million and $ 2.1 million as of June 30, 2022 and June 30, 2021, respectively, within accrued expenses and other liabilities in our consolidated balance sheets. Legal Proceedings From time to time, we are subject to legal proceedings and claims in the ordinary course of business. The results of such matters often cannot be predicted with certainty. In accordance with applicable accounting guidance, we establish an accrued liability for legal proceedings and claims when those matters present loss contingencies which are both probable and reasonably estimable. 122 Table o f Contents Toole v. Affirm Holdings, Inc. On February 28, 2022, plaintiff Jeffrey Toole filed a putative class action against Affirm and Max Levchin in the U.S. District Court for the Northern District of California (the “Toole action”). The Toole complaint alleges that Affirm violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder by issuing and then subsequently deleting a tweet from its official Twitter account on February 10, 2022, which omitted full details of Affirm’s second quarter fiscal 2022 financial results. Toole seeks class certification, unspecified compensatory and punitive damages, and costs and expenses. On June 9, 2022, the Court appointed Eric Nunez as lead plaintiff and Robbins Geller Rudman & Dowd LLP as class counsel. Vallieres v Levchin, et al. On April 25, 2022, plaintiff Michael Vallieres filed a derivative lawsuit in the U.S. District Court for the Northern District of California against Affirm, as a nominal defendant, and certain of Affirm’s current officers and directors as defendants based on allegations substantially similar to those in the Toole action. The Vallieres complaint purports to assert claims on Affirm's behalf for breach of fiduciary duty, gross mismanagement, abuse of control, unjust enrichment, and contribution under the federal securities laws, and seeks corporate reforms, unspecified damages and restitution, and fees and costs. On June 10, 2022, the Court stayed this derivative action pending the resolution of Affirm’s anticipated motion to dismiss the Toole complaint referenced above. We have determined, based on current knowledge, that the aggregate amount or range of losses that are estimable with respect to the our legal proceedings, including the matters described above, would not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Amounts accrued as of June 30, 2022 were not material. The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties, and cannot be predicted with certainty. Concentrations of Credit Risk We have substantial credit risk primarily in our consumer loans held for investment and in our cash and cash equivalents. We maintain our cash and cash equivalents in accounts at regulated domestic financial institutions in amounts that may exceed FDIC insured amounts. We believe we are not exposed to any significant credit risk in these accounts. We are exposed to default risk on both loan receivables purchased from our originating bank partners and loan receivables that are self-originated. The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions. Loans receivables are diversified geographically. As of June 30, 2022 and June 30, 2021, approximately 12 % and 15 %, respectively, of loan receivables related to customers residing in the state of California. No other states or provinces exceeded 10%. Concentrations of Revenue For the year ended June 30, 2022, there were no merchants that exceeded 10% of total revenue, and for the years ended June 30, 2021 and 2020, approximately 20 % and 28 % , respectively, of total revenue was driven by one merchant. Purchase Commitments For the years ended June 30, 2022 and 2021, we recorded purchase commitments of $ 37.1 million and $ 89.3 million, respectively, primarily related to cloud and hosting services. 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 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 30 123 Table o f Contents 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. 10. Transactions with Related Parties In the ordinary course of business, we may enter into transactions with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties). Some of our directors, principal officers, and their immediate families have received loans facilitated by us, in accordance with our regular consumer loan offerings. As of June 30, 2022, the outstanding balance and interest earned on such loans is immaterial. 11. Debt Debt encompasses funding debt, convertible senior notes and our revolving credit facility. Funding Debt Funding debt and its aggregate future maturities consists of the following (in thousands): June 30, 2022 June 30, 2021 2022 $ — $ 104,159 2023 $ 158,547 $ 460,289 2024 421,484 22,705 2025 — — 2026 — 102,203 2027 and thereafter 103,364 — Total $ 683,395 $ 689,356 Deferred debt issuance costs ( 10,818 ) ( 8,754 ) Total funding debt, net of deferred debt issuance costs $ 672,577 $ 680,602 Warehouse Credit Facilities Through trusts, we entered into warehouse credit facilities with certain lenders to finance the purchase and origination of our loans. Each trust entered into a credit agreement and security agreement with a third-party as administrative agent and a national banking association as collateral trustee and paying agent. Borrowings under these agreements are referred to as funding debt and proceeds from the borrowings can only be used for the purposes of facilitating loan funding and origination, with advance rates ranging from 83 % to 88 % of the total collateralized balance. These trusts are bankruptcy-remote special-purpose vehicles in which creditors do not have recourse against the general credit of Affirm. These revolving facilities mature between fiscal years 2024 and 2029, and subject to covenant compliance, generally permit borrowings up to 12 months prior to the final maturity date of each respective facility. As of June 30, 2022, the aggregate commitment amount of these facilities was $ 2,450.0 million on a revolving basis, of which $ 473.3 million was drawn, with $ 1,976.7 million remaining available. Some of the loans originated by us or purchased from the originating bank partners are pledged as collateral for borrowings in our facilities. The unpaid principal balance of these loans totaled $ 549.6 million and $ 664.1 million as of June 30, 2022 and June 30, 2021, respectively. Borrowings under these warehouse credit facilities bear interest at an annual benchmark rate of LIBOR or an alternative commercial paper rate (which is either (i) the per annum rate equivalent to the weighted-average of the per annum rates at which all commercial paper notes were issued by certain lenders to fund advances or maintain 124 Table o f Contents loans, or (ii) the daily weighted-average of LIBOR, as set forth in the applicable credit agreement), plus a spread ranging from 1.65 % to 4.00 %. Interest is payable monthly. In addition, these agreements require payment of a monthly unused commitment fee ranging from 0.00 % to 0.75 % per annum on the undrawn portion available. These agreements contain certain customary negative covenants and financial covenants including maintaining certain levels of minimum liquidity, maximum leverage, and minimum tangible net worth. As of June 30, 2022, we were in compliance with all applicable covenants in the agreements. Other Funding Facilities Prior to our acquisition of PayBright on January 1, 2021, PayBright entered into various credit facilities utilized to finance the origination of loan receivables in Canada. Similar to our warehouse credit facilities, borrowings under these agreements are referred to as funding debt, and proceeds from the borrowings may only be used for the purposes of facilitating loan funding and origination. These facilities are secured by PayBright loan receivables pledged to the respective facility as collateral, mature in 2024, and bear interest based on a benchmark rate plus a spread ranging from 1.25 % to 4.25 %. As of June 30, 2022, the aggregate commitment amount of these facilities was $ 484.0 million on a revolving basis, of which $ 183.1 million was drawn, with $ 300.9 million remaining available. The unpaid principal balance of loans pledged to these facilities totaled $ 210.1 million and $ 74.1 million as of June 30, 2022 and June 30, 2021, respectively. These agreements contain certain customary negative covenants and financial covenants including maintaining certain levels of minimum liquidity, maximum leverage, and minimum tangible net worth at the PayBright subsidiary level or the Affirm Holdings level. As of June 30, 2022, we were in compliance with all applicable covenants in the agreements. Repurchase Agreements We entered into certain sale and repurchase agreements pursuant to our retained interests in our off-balance sheet securitizations where we have sold these securities to a counterparty with an obligation to repurchase at a future date and price. The repurchase agreements each have an initial term of three months and subject to mutual agreement by Affirm and the counterparty, we may enter into a repurchase date extension for an additional three month term at market interest rates on such extension date. As of June 30, 2022, the interest rates were 2.68 % on the senior pledged securities for 2022-X1, 2021-Z1 and 2021-Z2 and 4.33 % on the residual certificate pledged securities for 2022-X1, 2021-Z1 and 2021-Z2 . We had $ 27.0 million and $ 13.9 million in debt outstanding under our repurchase agreements disclosed within funding debt on the consolidated balance sheets as of June 30, 2022 and June 30, 2021, respectively. The debt will be amortized through regular principal and interest payments on the pledged securities. The outstanding debt relates to $ 32.4 million and $ 16.2 million in pledged securities disclosed within securities available for sale at fair value on the consolidated balance sheets as of June 30, 2022 and June 30, 2021, respectively. Convertible Senior Notes On November 23, 2021, we issued $ 1,725 million in aggregate principal amount of 0% convertible senior notes due 2026 (the “2026 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The total net proceeds from this offering, after deducting debt issuance costs, were approximately $ 1,704 million. The 2026 Notes represent senior unsecured obligations of the Company. The 2026 Notes do not bear interest except in special circumstances described below, and the principal amount of the 2026 Notes does not accrete. The 2026 Notes mature on November 15, 2026. Each $1,000 of principal of the 2026 Notes will initially be convertible into 4.6371 shares of our common stock, which is equivalent to an initial conversion price of approximately $ 215.65 per share, subject to adjustment 125 Table o f Contents upon the occurrence of certain specified events set forth in the indenture governing the 2026 Notes (the “Indenture”). Holders of the 2026 Notes may convert their 2026 Notes at their option at any time on or after August 15, 2026 until close of business on the second scheduled trading day immediately preceding the maturity date of November 15, 2026. Further, holders of the 2026 Notes may convert all or any portion of their 2026 Notes at their option prior to the close of business on the business day immediately preceding August 15, 2026, only under the following circumstances: 1) during any calendar quarter commencing after March 31, 2022 (and only during such calendar quarter), if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; 2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the indenture governing the 2026 Notes) per $1,000 principal amount of the 2026 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; 3) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or 4) upon the occurrence of certain specified corporate events. Upon conversion of the 2026 Notes, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election. If we satisfy our conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of our common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value (as set forth in the Indenture) calculated on a proportionate basis for each trading day in a 40 trading day observation period. No sinking fund is provided for the 2026 Notes. We may not redeem the notes prior to November 20, 2024. We may redeem for cash all or part of the notes on or after November 20, 2024 if the last reported sale price of our Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid special interest, if any. If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, holders of the 2026 Notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the 2026 Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date. In addition, if specific corporate events occur prior to the maturity date of the 2026 Notes, we will be required to increase the conversion rate for holders who elect to convert their 2026 Notes in connection with such corporate events. 126 Table o f Contents The net carrying amount of the liability component of the convertible senior notes outstanding as of June 30, 2022 consisted of the following (in thousands): June 30, 2022 Principal $ 1,725,000 Unamortized discount and issuance costs ( 18,332 ) Net carrying amount $ 1,706,668 The 2026 Notes do not bear interest. For the year ended June 30, 2022, we recognized $ 2.4 million, of interest expense related to the amortization of debt discount and issuance costs in the consolidated statement of operations and comprehensive loss within other (expense) income, net . As of June 30, 2022, the remaining life of the 2026 Notes is approximately 53 months. 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 with a final maturity date of January 19, 2024. Effective December 15, 2021, we executed our right to terminate the revolving credit agreement and no early termination penalties were incurred. As of December 15, 2021, we had not drawn on the facility and there was no outstanding balance to be repaid. Upon termination, we accelerated the amortization of $ 1.2 million of issuance costs which were recorded in other (expense) income, net . On February 4, 2022, we entered into a new revolving credit agreement with a syndicate of commercial banks for a $ 165.0 million unsecured revolving credit facility. On May 16, 2022, we increased unsecured revolving commitments under the facility to $ 205.0 million. This facility bears interest at a rate equal to, at our option, either (a) a Secured Overnight Financing Rate (“SOFR”) rate determined by reference to the forward-looking term SOFR rate for the interest period, plus an applicable margin of 1.85 % per annum or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50 % per annum, (ii) the rate last quoted by the Wall Street Journal as the U.S. prime rate and (iii) the one-month forward-looking term SOFR rate plus 1.0 % per annum, in each case, plus an applicable margin of 0.85 % per annum. The revolving credit agreement has a final maturity date of February 4, 2025. The facility contains certain covenants and restrictions, including certain financial maintenance covenants, and requires payment of a monthly unused commitment fee of 0.20 % per annum on the undrawn balance available. There are no borrowings outstanding under the facility as of June 30, 2022. 12. Securitization and Variable Interest Entities Consolidated VIEs We consolidate VIEs when we are deemed to be the primary beneficiary. Warehouse Credit Facilities We established certain entities, deemed to be VIEs, to enter into warehouse credit facilities for the purpose of purchasing loans from our originating bank partners and funding self-originated loans. Refer to Note 11. Debt for additional information. The creditors of the VIEs have no recourse to the general credit of Affirm and the liabilities of the VIEs can only be settled by the respective VIEs’ assets; however, as the servicer of the loans pledged to our warehouse funding facilities, we have the power to direct the activities that most significantly impact the VIEs' economic performance. In addition, we retain significant economic exposure to the pledged loans and therefore, we are the primary beneficiary. 127 Table o f Contents Securitizations In connection with our asset-backed securitization program, we sponsor and establish trusts (deemed to be VIEs) to ultimately purchase loans facilitated by our platform. Securities issued from our asset-backed securitizations are senior or subordinated, based on the waterfall criteria of loan payments to each security class. The subordinated residual interests issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria. For these VIEs, the creditors have no recourse to the general credit of Affirm and the liabilities of the VIEs can only be settled by the respective VIEs’ assets. Additionally, the assets of the VIEs can be used only to settle obligations of the VIEs. We consolidate securitization VIEs when we are deemed to be the primary beneficiary and therefore have the power to direct the activities that most significantly affect the VIEs’ economic performance and a variable interest that could potentially be significant to the VIE. Through our role as the servicer, we have the power to direct the activities that most significantly affect the VIEs’ economic performance. In evaluating whether we have a variable interest that could potentially be significant to the VIE, we consider our retained interests. We also earn a servicing fee which has a senior distribution priority in the payment waterfall. In evaluating whether we are the primary beneficiary, management considers both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIEs. Management assesses whether we are the primary beneficiary of the VIEs on an ongoing basis. Where we consolidate the securitization trusts, the loans held in the securitization trusts are included in loans held for investment, and the notes sold to third-party investors are recorded in notes issued by securitization trusts in the consolidated balance sheets. As of June 30, 2022, we consolidated Affirm Asset Securitization Trust 2020-Z1 (“2020-Z1”), Affirm Asset Securitization Trust 2020-A (“2020-A”), Affirm Asset Securitization Trust 2020-Z2 (“2020-Z2”), Affirm Asset Securitization Trust 2021-A (“2021-A”), Affirm Asset Securitization Trust 2021-B (“2021-B”), and Affirm Asset Securitization Trust 2022-A (“2022-A”). Each securitization trust issued interest-bearing 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 and purchased from our originating bank partners, with an aggregate outstanding principal balance of $ 2,554.3 million. The 2020-Z1 and 2020-Z2 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 revolving period. For the 2020-Z2 securitization, we purchased $ 27.9 million of loan receivables from our third-party loan buyers which were then contributed to the trust. For each securitization, the residual certificates represent the right to receive excess cash on the loans each collection period after all fees and required distributions have been made to the note holders on the related payment date. For 2020-Z1, 2020-A, 2021-A, 2021-B, and 2022-A, all notes were sold to third-party investors and we retained 100 % of the residual certificates issued by the securitization trusts. For 2020-Z2, all notes were sold to third-party investors and we retained 93.3 % of the residual certificates issued by the securitization trust, and a third-party investor holds the remaining 6.7 % of the residual certificates in 2020-Z2. The residual trust certificates held by third-party investors are measured at fair value, using a discounted cash flow model, and presented within accrued expenses and other liabilities on the consolidated balance sheets. In addition to the retained residual certificates, our continued involvement includes loan servicing responsibilities over the life of the underlying loans. We defer and amortize debt issuance costs for consolidated securitization trusts on a straight-line basis over the expected life of the notes. 128 Table o f Contents 2020-Z1 On July 8, 2020, the notes under the 2020-Z1 securitization were issued as a single class: Class A in the amount of $ 150.0 million (the “2020-Z1 notes”). The 2020-Z1 notes bear interest at a fixed rate of 3.46 % and have a maturity date of October 15, 2024. Principal and interest payments began in September 2020 and are payable monthly. These 2021-Z1 notes are recorded at amortized cost on the consolidated balance sheet. The 2020-Z1 notes held by third-party investors and the unamortized debt issuance costs are included in notes issued by securitization trusts with a balance of $ 30.5 million on the consolidated balance sheets at June 30, 2022 and are secured by loan receivables at amortized cost of $ 30.3 million included in loans held for investment on the consolidated balance sheets at June 30, 2022. 2020-A On August 5, 2020, the notes under the 2020-A securitization were issued in three classes: Class A in the amount of $ 330.0 million, Class B in the amount of $ 16.2 million, and Class C in the amount of $ 22.1 million (collectively, the “2020-A notes”). On April 15, 2022, we exercised the optional redemption right under the 2020-A securitization where Affirm as the 100 % residual certificate owner repurchased the outstanding receivables at a repurchase price of $ 234.0 million which was equal to the fair market value of the receivables as of the last day of the related collection period. All of the outstanding 2020-A notes were paid at the aggregate redemption price of $ 280.4 million. The Class A, Class B, and Class C notes previously bore interest at a fixed rate of 2.10 %, 3.54 %, and 6.23 %, respectively, and each class had a final maturity date of February 18, 2025. 2020-Z2 On October 22, 2020, the notes under the 2020-Z2 securitization were issued as a single class: Class A in the amount of $ 375.0 million (the “2020-Z2 notes”). The 2020-Z2 notes bear interest at a fixed rate of 1.90 % and have a maturity date of January 15, 2025. Principal and interest payments began in December 2020 and are payable monthly. These 2020-Z2 notes are recorded at amortized cost on the consolidated balance sheet. The notes held by third-party investors and the unamortized debt issuance costs are included in the 2020-Z2 notes issued by securitization trusts with a balance of $ 102.0 million on the consolidated balance sheets at June 30, 2022 and are secured by loan receivables at amortized cost of $ 101.2 million included in loans held for investment on the consolidated balance sheets at June 30, 2022. The residual trust certificates held by third-party investors are measured at fair value using a discounted cash flow model, and presented within accrued expenses and other liabilities on the consolidated balance sheets. See Note 14. Fair Value of Financial Assets and Liabilities for additional information on the fair value sensitivity of these asset-backed securities. 2021-A On February 18, 2021, the notes under the 2021-A securitization were issued in five classes: Class A in the amount of $ 407.2 million, Class B in the amount of $ 30.3 million, Class C in the amount of $ 21.0 million, Class D in the amount of $ 22.5 million, and Class E in the amount of $ 19.0 million (collectively, the “2021-A notes”). The Class A, Class B, Class C, Class D, and Class E notes bear interest at a fixed rate of 0.88 %, 1.06 %, 1.66 %, 3.49 %, and 5.65 %, respectively, and each class has a maturity date of August 15, 2025. Principal and interest payments began in March 2021 and are payable monthly. These notes are recorded at amortized cost on the consolidated balance sheet. The associated debt issuance costs totaled $ 0.3 million as of June 30, 2022. The 2021-A notes held by third-party investors and the unamortized debt issuance costs are included in notes issued by securitization trusts with a balance of $ 500.0 million on the consolidated balance sheets at June 30, 2022 and are secured by loan receivables at amortized cost of $ 498.5 million included in loans held for investment on the consolidated balance sheets as of June 30, 2022. 129 Table o f Contents 2021-B On August 4, 2021, the notes under the 2021-B securitization were issued in five classes: Class A in the amount of $ 418.8 million, Class B in the amount of $ 28.0 million, Class C in the amount of $ 19.8 million, Class D in the amount of $ 22.5 million, and Class E in the amount of $ 11.0 million (collectively, the “2021-B notes”). The Class A, Class B, Class C, Class D, and Class E notes bear interest at a fixed rate of 1.03 %, 1.24 %, 1.40 %, 2.54 %, and 4.61 %, respectively, and each class has a maturity date of August 17, 2026. Principal and interest payments began in October 2021 and are payable monthly. These notes are recorded at amortized cost on the consolidated balance sheet. The associated debt issuance costs totaled $ 1.8 million as of June 30, 2022. The 2021-B notes held by third-party investors and the unamortized debt issuance costs are included in notes issued by securitization trusts with a balance of $ 500.0 million on the consolidated balance sheets at June 30, 2022 and are secured by loan receivables at amortized cost of $ 511.1 million included in loans held for investment on the consolidated balance sheets as of June 30, 2022. 2022-A On May 4, 2022 the notes under the 2022-A securitization issued in five classes: Class A in the amount of $ 405.6 million, Class B in the amount of $ 27.6 million, Class C in the amount of $ 26.8 million, Class D in the amount of $ 18.2 million, and Class E in the amount of $ 21.8 million (collectively, the “2022-A notes”). The Class A, Class B, Class C, Class D, and Class E notes bear interest at a fixed rate of 4.30 %, 4.64 %, 4.89 %, 5.53 %, and 8.04 %, respectively and each class has a maturity date of May 17, 2027. Principal and interest payments will begin July 2022 and are payable monthly. These notes are recorded at amortized cost on the consolidated balance sheet. The associated debt issuance costs totaled $ 2.7 million as of June 30, 2022. The 2022-A notes held by third-party investors and the unamortized debt issuance costs are included in notes issued by securitization trusts with a balance of $ 499.9 million on the consolidated balance sheets at June 30, 2022 and are secured by loan receivables at amortized cost of $ 519.6 million included in loans held for investment on the consolidated balance sheets as of June 30, 2022. The following tables present the aggregate carrying value of financial assets and liabilities from our involvement with consolidated VIEs. June 30, 2022 Assets Liabilities Net Assets Warehouse credit facilities $ 563,207 $ 534,422 $ 28,785 Securitizations 1,679,062 1,632,107 46,955 Total consolidated VIEs $ 2,242,269 $ 2,166,529 $ 75,740 June 30, 2021 Assets Liabilities Net Assets Warehouse credit facilities $ 688,197 $ 614,882 $ 73,315 Securitizations 1,115,427 1,178,545 ( 63,118 ) Total consolidated VIEs $ 1,803,624 $ 1,793,427 $ 10,197 Unconsolidated VIEs As of June 30, 2022, Affirm Asset Securitization Trust 2021-Z1 (“2021-Z1”), Affirm Asset Securitization Trust 2021-Z2 (“2021-Z2”), Affirm Asset Securitization Trust 2022-X1 (“2022-X1”), and Affirm Asset Securitization Trust 2022-Z1 (“2022-Z1”) were unconsolidated VIEs. We did not retain significant economic exposure through our variable interests and therefore we determined that we are not the primary beneficiary as of June 30, 2022. 130 Table o f Contents For each securitization, the residual certificates represent the right to receive excess cash on the loans each collection period after all fees and required distributions have been made to the note holders on the related payment date. For 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1, we retained a 5 % vertical interest in each trust, respectively, via our ownership of 5 % par amount of each class of notes, and 5 % par amount of residual interests. The remaining 95 % of notes and residual interests were sold to third-party investors . 2021-Z1 On May 5, 2021, the notes under 2021-Z1 securitization were issued as a single class: Class A in the amount of $ 320.0 million (the “2021-Z1 notes”). The 2021-Z1 notes bear interest at a fixed rate of 1.07 % and have a maturity date of August 15, 2025. Principal and interest payments began in June 2021 and are payable monthly. The 2021-Z1 securitization is secured by a static pool of loans which were contributed at the closing date to the 2021-Z1 trust. The loans contributed at closing were facilitated through our technology platform and purchased from our originating bank partners, with an aggregate outstanding principal balance of $ 351.0 million. Of the loans sold to the 2021-Z1 trust, we purchased $ 41.4 million of loan receivables from one of our third-party loan buyers, which were contributed to the trust at closing. At closing, we retained 5 % of the 2021-Z1 notes and 86.9 % of the residual certificates issued by the 2021-Z1 trust. The third-party loan contributor received 13.1 % of the re sidual certificates at closing. On May 17, 2021, we sold a majority of the residual certificates retained at closing, comprising 81.9 % of the par value, to five third-party investors. Subsequent to this sale, we retained only a 5 % vertical interest in the 2021-Z1 trust via our ownership of 5 % par amount of the 2021-Z1 notes and 5 % par amount of the residual interests. We were required to retain these interests for compliance with U.S. risk retention rules. We initially consolidated the 2021-Z1 trust at closing due to retaining a majority of the residual interest. However, upon completing the subsequent third-party sale of 81.9 % of the residual certificates on May 17, 2021, we determined that we no longer had significant economic exposure through our variable interests and as such, we determined that we were no longer the primary beneficiary as of this date. Upon deconsolidating the 2021-Z1 trust, we recognized a gain of $ 16.7 million, which is included within gain on sale of loans in our consolidated statements of operations and comprehensive loss. 2021-Z2 On November 10, 2021, the notes under 2021-Z2 securitization were issued as a single class: Class A in the amount of $ 260.0 million (the “2021-Z2 notes”). The 2021-Z2 notes bear interest at a fixed rate of 1.17 % and have a maturity date of November 16, 2026. Principal and interest payments began in January 2022 and are payable monthly. The 2021-Z2 securitization is secured by a static pool of loans which were contributed at the closing date to the 2021-Z2 trust. The loans contributed at closing were facilitated through our technology platform and purchased from our originating bank partners, with an aggregate outstanding principal balance of $ 287.5 million. Of the loans sold to the 2021-Z2 trust, we purchased $ 192.5 million of loan receivables from one of our third-party loan buyers, which were contributed to the trust at closing. At closing, we retained only a 5 % vertical interest in the 2021-Z2 trust via our ownership of 5 % par amount of the 2021-Z2 notes and 5 % par amount of the residual interests. We were required to retain these interests for compliance with U.S. risk retention rules. The third-party loan contributor received 95 % of the residual certificates at closing. 131 Table o f Contents On the closing date of the 2021-Z2 trust, we recognized a gain on sales of loans sold to the trust of $ 6.1 million, w hich is included within gain on sales of loans in our consolidated statements of operations and comprehensive loss . 2022-X1 On February 9, 2022, the notes under 2022-X1 securitization were issued as a single class: Class A in the amount of $ 366.5 million (the “2022-X1 notes”). The 2022-X1 notes bear interest at a fixed rate of 1.75 % and have a maturity date of February 16, 2027. Principal and interest payments began in April 2022 and are payable monthly. The 2022-X1 securitization is secured by a static pool of loans which were contributed at the closing date to the 2022-X1 trust. The loans contributed at closing were facilitated through our technology platform and originated by us or purchased from our originating bank partners, with an aggregate outstanding principal balance of $ 406.2 million. Of the loans sold to the 2022-X1 trust, we purchased $ 258.3 million of loan receivables from two of our third-party loan buyers, which were contributed to the trust at closing. At closing, we retained only a 5 % vertical interest in the 2022-X1 trust via our ownership of 5 % par amount of the 2022-X1 notes and 5 % par amount of the residual interests. We were required to retain these interests for compliance with U.S. risk retention rules. The remaining 95 % of the residual certificates were sold to third-party investors at closing. On the closing date of the 2022-X1 trust, we recognized gain on sales of loans sold to the trust of $ 13.1 million, which is included within gain on sales of loans in our consolidated statements of operations and comprehensive loss. 2022-Z1 On June 22, 2022, the notes under 2022-Z1 securitization were issued in two classes: Class A in the amount of $ 356.0 million and Class B in the amount of $ 15.5 million (collectively the “2022-Z1 notes”). The 2022-Z1 notes bear interest at a fixed rate of 4.55 % and 6.49 %, respectively and each class has a maturity date of June 15, 2027. Principal and interest payments begin in August 2022 and are payable monthly. The 2022-Z1 securitization is secured by a static pool of loans which were contributed at the closing date to the 2022-Z1 trust. The loans contributed at closing were facilitated through our technology platform and originated by us or purchased from our originating bank partners, with an aggregate outstanding principal balance of $ 420.3 million. Of the loans sold to the 2022-Z1 trust, we purchased $ 251.7 million of loan receivables from one of our third-party loan buyers, which were contributed to the trust at closing. At closing, we retained only a 5 % vertical interest in the 2022-Z1 trust via our ownership of 5 % par amount of the 2022-Z1 notes and 5 % par amount of the residual interests. We were required to retain these interests for compliance with U.S. risk retention rules. The remaining 95 % of the residual certificates were sold to third-party investors at closing. On the closing date of the 2022-Z1 trust, the amount recognized within gain on sale of loans sold to the trust was immaterial, this is included within gain on sales of loans in our consolidated statements of operations and comprehensive loss. The following information pertains to unconsolidated VIEs where we hold a variable interest but are not the primary beneficiary (in thousands): 132 Table o f Contents June 30, 2022 Assets Liabilities Net Assets Maximum Exposure to Losses Securitizations $ 996,242 $ 965,909 $ 30,333 $ 51,248 Total unconsolidated VIEs $ 996,242 $ 965,909 $ 30,333 $ 51,248 June 30, 2021 Assets Liabilities Net Assets Maximum Exposure to Losses Securitizations $ 305,414 $ 304,567 $ 847 $ 16,850 Total unconsolidated VIEs $ 305,414 $ 304,567 $ 847 $ 16,850 Assets of unconsolidated VIEs include the carrying value for loans held in the 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 trust and cash held in the collection and reserve accounts established for the trust. Liabilities include the outstanding principal balance of the 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 n otes. Maximum exposure to losses represents our exposure through our continuing involvement as servicer and through our retained interests. For 2021-Z1, 2021-Z2, 2022-X1 and 2022-Z1, this includes $ 51.7 million in retained notes and residual certificates disclosed within securities available for sale at fair value in our consolidated balance sheets and $ 0.4 million related to our servicing liabilities and receivables disclosed within other assets in our consolidated balance sheets as of June 30, 2022. Additionally, we may experience a loss due to future repurchase obligations resulting from breaches in representations and warranties in our securitization and third-party sale agreements. In connection with 2021-Z1, 2021-Z2, 2022-X1 and 2022-Z1, this amount was not material as of June 30, 2022. Retained Beneficial Interests in Unconsolidated VIEs The investors of the securitizations have no direct recourse to the assets of Affirm, and the timing and amount of beneficial interest payments is dependent on the performance of the underlying loan assets held within each trust. We have classified our retained beneficial interests in 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 as “available for sale” and as such they are disclosed at fair value in our consolidated balance sheets. See Note 13 . Investments and Note 14. Fair Value of Financial Assets and Liabilities for additional information on the fair value sensitivity of the notes receivable and residual certificates. Additionally, as of June 30, 2022 , we have pledged the 2021-Z1, 2021-Z2, a nd 2022-X1 ret ained beneficial interests as collateral in connection with a sale and repurchase agreement as described in Note 11. Debt . 13. Investments Marketable Securities Marketable securities include certain investments classified as cash and cash equivalents and securities available for sale, at fair value, and consist of the following as of each date presented within the consolidated balance sheets (in thousands): 133 Table o f Contents June 30, 2022 June 30, 2021 Cash and cash equivalents: Money market funds $ 162,483 $ 143,241 Certificates of deposit 16,026 — Commercial paper 229,272 — Government bonds US 58,541 — Securities, available for sale: Certificates of deposit 300,390 — Corporate bonds 368,671 — Commercial paper 478,293 — Government bonds Non-US 17,955 — US 378,386 — Securitization notes receivable and certificates (1) 51,678 16,170 Total marketable securities: $ 2,061,695 $ 159,411 (1) These securities, excluding 2022-Z1, have been pledged as collateral in connection with sale and repurchase agreements as discussed within Note 11. Debt. Securities Available for Sale, at Fair Value The amortized cost, gross unrealized gains and losses, allowance for credit losses, and fair value of securities available for sale as of June 30, 2022 were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value Certificates of deposit (1) $ 317,331 $ 6 $ ( 921 ) $ — $ 316,416 Corporate bonds (1) 371,907 7 ( 3,243 ) — 368,671 Commercial paper (1) 708,694 16 ( 1,145 ) — 707,565 Government bonds Non-US 18,196 — ( 241 ) — 17,955 US (1) 438,947 — ( 2,020 ) — 436,927 Securitization notes receivable and certificates (2) 52,180 178 ( 659 ) ( 21 ) 51,678 Total securities available for sale $ 1,907,255 $ 207 $ ( 8,229 ) $ ( 21 ) $ 1,899,212 (1) Certificates of deposit, corporate bonds, commercial paper, and US government bonds include $ 303.8 million classified as cash and cash equivalents within the consolidated balance sheets. (2) These securities, excluding 2022-Z1 , have been pledged as collateral in connection with sale and repurchase agreements as discussed within Note 11. Debt 134 Table o f Contents The amortized cost, gross unrealized gains and losses, allowance for credit losses, and fair value of securities available for sale as of June 30, 2021 were as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value Securitization notes receivable and certificates $ 16,144 $ 29 $ — $ ( 3 ) $ 16,170 Total securities available for sale $ 16,144 $ 29 $ — $ ( 3 ) $ 16,170 As of June 30, 2022 and June 30, 2021, there were no material reversals of prior period allowance for credit losses recognized for available for sale securities. A summary of securities available for sale with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and the length of time that individual securities have been in a continuous loss position as of June 30, 2022 , is as follows (in thousands): Less than or equal to 1 year Greater than 1 year Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Certificates of deposit $ 290,169 $ ( 921 ) $ — $ — $ 290,169 $ ( 921 ) Corporate bonds 351,088 ( 3,243 ) — — 351,088 ( 3,243 ) Commercial paper 679,272 ( 1,145 ) — — 679,272 ( 1,145 ) Government bonds Non-US 17,955 ( 241 ) — — 17,955 ( 241 ) US 431,903 ( 2,020 ) — — 431,903 ( 2,020 ) Securitization notes receivable and certificates 722 ( 45 ) — — 722 ( 45 ) Total securities available for sale (1) $ 1,771,109 $ ( 7,615 ) $ — $ — $ 1,771,109 $ ( 7,615 ) (1) The number of positions with unrealized losses as of June 30, 2022 totaled 270 . There were no securities available for sale with unrealized losses for which an allowance for credit losses had not been recorded as of June 30, 2021. 135 Table o f Contents The length of time to contractual maturities of securities available for sale as of June 30, 2022 , were as follows (in thousands): Within 1 year Greater than 1 year, less than or equal to 5 years Total Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Certificates of deposit $ 317,331 $ 316,416 $ — $ — $ 317,331 $ 316,416 Corporate bonds 206,208 204,614 165,699 164,057 371,907 368,671 Commercial paper 708,694 707,565 — — 708,694 707,565 Government bonds Non-US 11,895 11,813 6,301 6,142 18,196 17,955 US 360,757 359,242 78,190 77,685 438,947 436,927 Securitization notes receivable and certificates (1) — — 52,180 51,678 52,180 51,678 Total securities available for sale $ 1,604,885 $ 1,599,650 $ 302,370 $ 299,562 $ 1,907,255 $ 1,899,212 (1) Based on weighted average life of expected cash flows as of June 30, 2022. Gross proceeds from matured or redeemed securities for the year ended June 30, 2022 were $ 2,187.8 million. For available for sale securities realized gains and losses from portfolio sales were not material for the year ended June 30, 2022 and there were no portfolio sales or associated realized gains or losses for the year ended June 30, 2021 . Non-marketable Equity Securities Equity investments without a readily determinable fair value held at cost were $ 43.2 million and $ 11.3 million as of June 30, 2022 and June 30, 2021, respectively, and are included in other assets within the consolidated balance sheets. There have been no unrealized or realized gains and losses due to observable changes in orderly transactions and we did not record any impairment for the years ended June 30, 2022 or June 30, 2021 . 136 Table o f Contents 14. Fair Value of Financial Assets and Liabilities Financial Assets and Liabilities Recorded at Fair Value The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2022 (in thousands): Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents: Money market funds $ 162,483 $ — $ — $ 162,483 Certificates of deposit — 16,026 — 16,026 Commercial paper — 229,272 — 229,272 Government bonds - U.S. — 58,541 — 58,541 Restricted cash: Securities available for sale: Certificate of deposit — 300,390 — 300,390 Corporate bonds — 368,671 — 368,671 Commercial paper — 478,293 — 478,293 Government bonds: Non-U.S. — 17,955 — 17,955 U.S. — 378,386 — 378,386 Securitization notes receivable and residual trust certificates — — 51,678 51,678 Total securities available for sale — 1,543,695 51,678 1,595,373 Servicing assets — — 1,192 1,192 Derivative instruments — 49,983 — 49,983 Total assets $ 162,483 $ 1,897,517 $ 52,870 $ 2,112,870 Liabilities: Servicing liabilities $ — $ — $ 2,673 $ 2,673 Performance fee liability — — 1,710 1,710 Residual trust certificates, held by third-parties — — 377 377 Contingent consideration — — 23,348 23,348 Profit share liability — — 1,987 1,987 Total liabilities $ — $ — $ 30,095 $ 30,095 137 Table o f Contents The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2021 (in thousands): Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents: Money market funds $ 143,241 $ — $ — $ 143,241 Restricted cash: Securitization notes receivable and residual trust certificates — — 16,170 16,170 Servicing assets — — 2,349 2,349 Derivative instruments — 2,880 — 2,880 Total assets $ 143,241 $ 2,880 $ 18,519 $ 164,640 Liabilities: Servicing liabilities $ — $ — $ 3,961 $ 3,961 Performance fee liability — — 1,290 1,290 Residual trust certificates, held by third-parties — — 914 914 Contingent consideration — — 153,447 153,447 Profit share liability — — 2,464 2,464 Total liabilities $ — $ — $ 162,076 $ 162,076 There were no transfers between levels during the periods ended June 30, 2022 and June 30, 2021. Assets and Liabilities Measured at Fair Value on a Recurring Basis (Level 2) Securities Available for Sale As of June 30, 2022, we held marketable securities classified as available for sale. Management obtains pricing from one or more third-party pricing services for the purpose of determining fair value. Whenever available, the fair value is based on quoted bid prices as of the end of the trading day. When quoted prices are not available, other methods may be utilized including evaluated prices provided by third-party pricing services. Derivative Instruments Our primary objective in holding derivatives is to reduce the volatility in cash flows associated with our funding activities, arising from changes in interest rates. We do not employ derivatives for trading or speculative purposes. As of June 30, 2022 and June 30, 2021, we used a combination of interest rate cap agreements and interest rate swaps to manage interest costs and the risk associated with variable interest rates. Neither the interest rate caps or the interest rate swaps have been designated as hedging instruments. As of June 30, 2022 and June 30, 2021, the interest rate caps and interest rate swaps are in a net asset position, and classified as Level 2 within the fair value hierarchy, based on prices quoted for similar financial instruments in markets that are not active. The fair values are presented gross within other assets and offsetting collateral received by the counterparty is presented as a liability within accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of these financial instruments are reflected in other (expense) income, net , on the consolidated statements of operations and comprehensive loss. 138 Table o f Contents Assets and Liabilities Measured at Fair Value on a Recurring Basis using Significant Unobservable Inputs (Level 3) We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. Since our servicing assets and liabilities, performance fee liability, securitization notes and residual trust certificates, contingent consideration, and profit share liability do not trade in an active market with readily observable prices, we use significant unobservable inputs to measure fair value. This determination requires significant judgments to be made. Servicing Assets and Liabilities We sold loans with an unpaid balance of $ 7,149.0 million, $ 3,232.9 million, and $ 2,664.4 million for the years ended June 30, 2022, 2021, and 2020, respectively, for which we retained servicing rights. As of June 30, 2022 and June 30, 2021, we serviced loans which we sold with a remaining unpaid principal balance of $ 4,504.5 million and $ 2,453.9 million, respectively. We use discounted cash flow models to arrive at an estimate of fair value. Significant assumptions used in the valuation of our servicing rights are as follows: Adequate Compensation We estimate adequate compensation as the rate a willing market participant would require for servicing loans with similar characteristics as those in the serviced portfolio. Discount Rate Estimated future payments to be received under servicing agreements are discounted as a part of determining the fair value of the servicing rights. For servicing rights on loans, the discount rate reflects the time value of money and a risk premium intended to reflect the amount of compensation market participants would require. Net Default Rate We estimate the timing and probability of early loan payoffs, loan defaults and write-offs, thus affecting the projected unpaid principal balance and expected term of the loan, which are used to project future servicing revenue and expenses. We earned $ 65.8 million, $ 24.7 million, and $ 14.8 million of servicing income for the year ended June 30, 2022, 2021, and 2020, respectively. As of June 30, 2022 and June 30, 2021, the aggregate fair value of the servicing assets was measured at $ 1.2 million and $ 2.3 million, respectively, and presented within other assets on the consolidated balance sheets. As of June 30, 2022 and June 30, 2021, the aggregate fair value of the servicing liabilities was measured at $ 2.7 million and $ 4.0 million, respectively, and presented within accrued expenses and other liabilities on the consolidated balance sheets. 139 Table o f Contents The following table summarizes the activity related to the aggregate fair value of our servicing assets during the years ended June 30, 2022 and June 30, 2021 (in thousands): Servicing Assets Year ended June 30, 2022 2021 Fair value at beginning of period $ 2,349 $ 2,132 Initial transfers of financial assets 2,899 2,915 Subsequent changes in fair value ( 4,056 ) ( 2,698 ) Fair value at end of period $ 1,192 $ 2,349 The following table summarizes the activity related to the aggregate fair value of our servicing liabilities during the years ended June 30, 2022 and June 30, 2021 (in thousands): Servicing Liabilities Year ended June 30, 2022 2021 Fair value at beginning of period $ 3,961 $ 1,540 Initial transfers of financial assets 15,617 8,794 Subsequent changes in fair value ( 16,905 ) ( 6,373 ) Fair value at end of period $ 2,673 $ 3,961 The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of servicing assets and liabilities as of June 30, 2022: Unobservable Input Minimum Maximum Weighted Average Servicing assets Discount rate 30.00 % 30.00 % 30.00 % Adequate compensation (1) 0.78 % 1.85 % 1.10 % Net default rate 0.59 % 50.59 % 1.59 % Servicing liabilities Discount rate 30.00 % 30.00 % 30.00 % Adequate compensation (1) 2.13 % 2.34 % 2.21 % Net default rate 9.03 % 24.44 % 13.81 % (1) Estimated cost of servicing a loan as a percentage of unpaid principal balance The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of servicing assets and liabilities as of June 30, 2021: Unobservable Input Minimum Maximum Weighted Average Servicing assets Discount rate 30.00 % 30.00 % 30.00 % Adequate compensation (1) 0.70 % 0.84 % 0.81 % Net default rate 0.53 % 0.95 % 0.64 % Servicing liabilities Discount rate 30.00 % 30.00 % 30.00 % Adequate compensation (1) 1.29 % 3.70 % 2.71 % Net default rate 0.80 % 8.42 % 7.12 % (1) Estimated cost of servicing a loan as a percentage of unpaid principal balance 140 Table o f Contents The following table summarizes the effect that adverse changes in estimates would have on the fair value of the servicing assets and liabilities given hypothetical changes in significant unobservable inputs (in thousands): June 30, 2022 June 30, 2021 Servicing assets Net default rate assumption: Net default rate increase of 25% $ 11 $ ( 7 ) Net default rate increase of 50% $ 22 $ ( 15 ) Adequate compensation assumption: Adequate compensation increase of 25% $ ( 3,513 ) $ ( 2,006 ) Adequate compensation increase of 50% $ ( 7,026 ) $ ( 4,011 ) Discount rate assumption: Discount rate increase of 25% $ ( 57 ) $ ( 4 ) Discount rate increase of 50% $ ( 109 ) $ ( 1 ) Servicing liabilities Net default rate assumption: Net default rate increase of 25% $ ( 10 ) $ ( 40 ) Net default rate increase of 50% $ ( 21 ) $ ( 61 ) Adequate compensation assumption: Adequate compensation increase of 25% $ 6,139 $ 3,060 Adequate compensation increase of 50% $ 12,278 $ 6,119 Discount rate assumption: Discount rate increase of 25% $ ( 50 ) $ ( 137 ) Discount rate increase of 50% $ ( 98 ) $ ( 263 ) Performance Fee Liability In accordance with our agreements with our originating bank partners, we pay a fee for each loan that is fully repaid by the consumer, due at the end of the period in which the loan is fully repaid. We recognize a liability upon the purchase of a loan for the expected future payment of the performance fee. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of the liability are reflected in other (expense) income, net , on the consolidated statements of operations and comprehensive loss. The following table summarizes the activity related to the fair value of the performance fee liability during the years ended June 30, 2022 and June 30, 2021 (in thousands): Performance Fee Liability Year ended June 30, 2022 2021 Fair value at beginning of period $ 1,290 $ 875 Purchases of loans 1,764 1,372 Settlements Paid ( 418 ) — Subsequent changes in fair value ( 926 ) ( 957 ) Fair value at end of period $ 1,710 $ 1,290 141 Table o f Contents Significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability are the discount rate, refund rate, and default rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement. The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability as of June 30, 2022: Unobservable Input Minimum Maximum Weighted Average Discount rate 10.00 % 10.00 % 10.00 % Refund rate 4.50 % 4.50 % 4.50 % Default rate 1.78 % 3.10 % 2.42 % Level 3 fair value measurement of the performance fee liability as of June 30, 2021: Unobservable Input Minimum Maximum Weighted Average Discount rate 10.00 % 10.00 % 10.00 % Refund rate 4.50 % 4.50 % 4.50 % Default rate 1.78 % 2.83 % 1.80 % Residual Trust Certificates Held by Third-Parties in Consolidated VIEs Refer to Note 12. Securitization and Variable Interest Entities for a description of the 2020-Z2 securitization trust. Residual trust certificates held by third-party investor(s) are measured at fair value, using a discounted cash flow model, and presented within accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of the liability are reflected in other (expense) income, net , on the consolidated statements of operations and comprehensive loss. The following table summarizes the activity related to the fair value of the residual trust certificates held by third-parties during the years ended June 30, 2022 and June 30, 2021 (in thousands): Year ended June 30, 2022 2021 Fair value at beginning of period $ 914 $ — Initial transfer of financial assets — 1,622 Repayments ( 908 ) ( 508 ) Subsequent changes in fair value 371 ( 200 ) Fair value at end of period $ 377 $ 914 Significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties are the discount rate, loss rate, and prepayment rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement. 142 Table o f Contents The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties as of June 30, 2022 and June 30, 2021: Unobservable Input Minimum Maximum Weighted Average Discount rate 10.00 % 10.00 % 10.00 % Loss rate 0.75 % 0.75 % 0.75 % Prepayment rate 8.00 % 8.00 % 8.00 % The following table summarizes the effect that adverse changes in estimates would have on the fair value of the securitization residual certificates held by third-party investor(s) given hypothetical changes in significant unobservable inputs (in thousands): June 30, 2022 June 30, 2021 Discount rate assumption: Discount rate increase of 25% $ ( 6 ) $ ( 21 ) Discount rate increase of 50% $ ( 11 ) $ ( 42 ) Loss rate assumption: Loss rate increase of 25% $ ( 8 ) $ ( 28 ) Loss rate increase of 50% $ ( 16 ) $ ( 56 ) Prepayment rate assumption: Prepayment rate decrease of 25% $ ( 2 ) $ ( 10 ) Prepayment rate decrease of 50% $ ( 3 ) $ ( 20 ) Retained Beneficial Interests in Unconsolidated VIEs As of June 30, 2022, the Company held notes receivable and residual trust certificates with an aggregate fair value of $ 51.7 million in connection with th e 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 securitizations, which are unconsolidated securitizations. The balances correspond to the 5 % economic risk retention the Company is required to maintain as the securitization sponsor. Refer to Note 12. Securitization and Variable Interest Entities for a further description of the 2021-Z1, 2021-Z2, 2022-X1and 2022-Z1 securitization trusts. These assets are measured at fair value using a discounted cash flow model, and presented within securities available for sale at fair value on the consolidated balance sheets. Changes in the fair value, other than declines in fair value due to credit recognized as an allowance, are reflected in other comprehensive income (loss) on the consolidated statements of operations and comprehensive loss. Declines in fair value due to credit are reflected in other (expense) income, net on the consolidated statements of operations and comprehensive loss. The following table summarizes the activity related to the fair value of the notes receivable and residual trust certificates during the years ended June 30, 2022 and June 30, 2021 (in thousands): 143 Table o f Contents Year ended June 30, 2022 2021 Fair value at beginning of period $ 16,170 $ — Additions 54,998 16,144 Cash received (due to payments or sales) ( 19,559 ) — Change in unrealized gain (loss) ( 509 ) 29 Accrued interest 595 — Reversal of (impairment on) securities available for sale ( 17 ) ( 3 ) Fair value at end of period $ 51,678 $ 16,170 Significant unobservable inputs used for our Level 3 fair value measurement of the notes and residual trust certificates are the discount rate, loss rate, and prepayment rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement. The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates as of June 30, 2022: Unobservable Input Minimum Maximum Weighted Average Discount rate 3.68 % 22.50 % 5.37 % Loss rate 0.61 % 10.95 % 2.65 % Prepayment rate 5.25 % 35.00 % 18.48 % The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates as of June 30, 2021 : Unobservable Input Minimum Maximum Weighted Average Discount rate 11.46 % 11.46 % 11.46 % Loss rate 0.61 % 0.61 % 0.61 % Prepayment rate 10.50 % 10.50 % 10.50 % The following table summarizes the effect that adverse changes in estimates would have on the fair value of the securitization residual trust certificates given hypothetical changes in significant unobservable inputs (in thousands): Year ended June 30, 2022 2021 Discount rate assumption: Discount rate increase of 25% $ ( 1,410 ) $ ( 22 ) Discount rate increase of 50% $ ( 2,295 ) $ ( 44 ) Loss rate assumption: Loss rate increase of 25% $ ( 729 ) $ ( 24 ) Loss rate increase of 50% $ ( 964 ) $ ( 48 ) Prepayment rate assumption: Prepayment rate decrease of 25% $ ( 545 ) $ ( 13 ) Prepayment rate decrease of 50% $ ( 519 ) $ ( 27 ) 144 Table o f Contents Contingent Consideration Our acquisition of PayBright included consideration transferred and shares held in escrow, contingent upon the achievement of future milestones. We classified the contingent consideration as a liability. The acquisition date fair value of the contingent consideration liability was estimated using a Monte Carlo simulation in which the fair value is equal to the estimated number of shares to be released from escrow, which are determined based on simulated revenue, multiplied by the simulated share price, discounted at the risk-free rate. The liability is remeasured to its fair value at each reporting date, utilizing a Monte Carlo simulation for periods in which actual revenues are unknown, until the contingency is resolved. During the year ended June 30, 2022 one of these milestones was achieved and a portion of the shares were released from escrow, resulting in a reduction to the contingent liability. The change in fair value of the contingent consideration at each reporting date is recognized as a component of other (expense) income, net in the consolidated statements of operations and comprehensive loss for the respective period. The following table summarizes the activity related to the fair value of the PayBright contingent consideration during the years ended June 30, 2022 and June 30, 2021 (in thousands): Year ended June 30, 2022 2021 Fair value at beginning of period $ 153,447 $ — Subsequent changes in fair value ( 89,313 ) 150,135 Fair value of shares released from escrow ( 32,110 ) — Effect of foreign currency translation ( 8,676 ) 3,312 Fair value at end of period $ 23,348 $ 153,447 Significant unobservable inputs used for our Level 3 fair value measurement of the PayBright contingent consideration are the discount rate, equity volatility, and revenue volatility. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement. The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the contingent consideration as of June 30, 2022: Unobservable Input Minimum Maximum Weighted Average Discount rate 15.00 % 15.00 % 15.00 % Equity volatility 36.00 % 139.00 % 116.00 % Revenue volatility 11.00 % 144.00 % 34.00 % Level 3 fair value measurement of the contingent consideration as of June 30, 2021 : Unobservable Input Minimum Maximum Weighted Average Discount rate 12.00 % 12.00 % 12.00 % Equity volatility 37.00 % 97.00 % 62.00 % Revenue volatility 8.00 % 98.00 % 37.00 % The Kite acquisition included $ 9.0 million of cash held in escrow, the release of which is determined based on employee retention. The acquisition date fair value of the contingent consideration of $ 1.2 million was estimated using a probability-weighted approach in which the likelihoods of potential employee retention outcomes were applied to the respective payout amounts and discounted to present value. The contingent consideration asset is remeasured to fair value at each reporting date based on the remaining amount held in escrow, passage of time, and 145 Table o f Contents any changes in expectations regarding employee retention outcomes until the contingency is resolved. The change in fair value of the contingent consideration asset at each reporting date is recognized as a component of other (expense) income, net in the consolidated statements of operations and comprehensive loss for the respective period. During the year ended June 30, 2022, the contingency was resolved and the fair value of the contingent consideration asset was reduced to zero . For the years ended June 30, 2022 and 2021, respectively, the change in fair value of the contingent consideration asset was not material. Profit Share Liability During the fiscal year ended June 30, 2021, we entered into a commercial agreement with an enterprise partner, in which we are obligated to share in the profitability of transactions facilitated by our platform. Upon capture of a loan under this program, we record a liability associated with the estimated future profit to be shared over the life of the loan based on estimated program profitability levels. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the consolidated balance sheets. The following table summarizes the activity related to the fair value of the profit share liability during the years ended June 30, 2022 and June 30, 2021 (in thousands): Year ended June 30, 2022 2021 Fair value at beginning of period $ 2,464 $ — Facilitation of loans 5,955 4,206 Actual performance ( 7,642 ) ( 1,661 ) Subsequent changes in fair value 1,210 ( 81 ) Fair value at end of period $ 1,987 $ 2,464 Significant unobservable inputs used for our Level 3 fair value measurement of the profit share liability are the discount rate and estimated program profitability. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement. The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the profit sharing liability as of June 30, 2022: Unobservable Input Minimum Maximum Weighted Average Discount rate 30.00 % 30.00 % 30.00 % Program profitability 1.25 % 3.54 % 1.28 % The following table presents quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the profit sharing liability as of June 30, 2021: Unobservable Input Minimum Maximum Weighted Average Discount rate 30.00 % 30.00 % 30.00 % Program profitability 1.79 % 3.75 % 3.75 % 146 Table o f Contents Financial Assets and Liabilities Not Recorded at Fair Value The following table presents the fair value hierarchy for financial assets and liabilities not recorded at fair value as of June 30, 2022 (in thousands): Carrying Amount Level 1 Level 2 Level 3 Balance at Fair Value Assets: Loans held for sale $ 2,670 $ — $ 2,670 $ — $ 2,670 Loans held for investment, net 2,348,169 — — 2,412,871 2,412,871 Other assets 12,661 — 12,661 — 12,661 Total assets $ 2,363,500 $ — $ 15,331 $ 2,412,871 $ 2,428,202 Liabilities: Convertible senior notes, net (1) $ 1,706,668 $ — $ 984,285 $ — $ 984,285 Notes issued by securitization trusts 1,627,580 — — 1,529,401 1,529,401 Funding debt (2) 683,395 — — 683,388 683,388 Total liabilities $ 4,017,643 $ — $ 984,285 $ 2,212,789 $ 3,197,074 (1) The estimated fair value of the convertible senior notes is determined based on a market approach, using the estimated or actual bids and offers of the notes in an over-the-counter market on the last business day of the period. (2) As of June 30, 2022 , debt issuance costs in the amount of $ 10.8 million, was included within funding debt. The following table presents the fair value hierarchy for financial assets and liabilities not recorded at fair value as of June 30, 2021 (in thousands): Carrying Amount Level 1 Level 2 Level 3 Balance at Fair Value Assets: Loans held for sale $ 13,030 $ — $ 13,030 $ — $ 13,030 Loans held for investment, net 1,904,560 — — 1,883,364 1,883,364 Accounts receivable, net 91,575 — 91,575 — 91,575 Other assets 171,250 — 171,250 — 171,250 Total assets $ 2,180,415 $ — $ 275,855 $ 1,883,364 $ 2,159,219 Liabilities: Accounts payable $ 57,758 $ — $ 57,758 $ — $ 57,758 Payable to third-party loan owners 50,079 — 50,079 — 50,079 Accrued interest payable 2,751 — 2,751 — 2,751 Accrued expenses and other liabilities 161,502 — 159,387 2,115 161,502 Notes issued by securitization trusts 1,176,673 — — 1,184,663 1,184,663 Funding debt 689,356 — — 689,356 689,356 Total liabilities $ 2,138,119 $ — $ 269,975 $ 1,876,134 $ 2,146,109 147 Table o f Contents 15. Redeemable Convertible Preferred Stock and Stockholders’ Equity Redeemable Convertible Preferred Stock During the year ended June 30, 2021, we issued 21,836,687 shares of Series G redeemable convertible preferred stock at $ 19.93 per share for an aggregate purchase amount of $ 434.9 million. These shares had a liquidation preference of $ 435.1 million. As part of this equity financing round, the convertible notes issued in April 2020 converted into 4,444,321 shares of Series G-1 redeemable convertible preferred stock. These shares had a liquidation preference of $ 75.3 million prior to conversion. On January 12, 2021, prior to our IPO, all outstanding shares of redeemable convertible preferred stock were converted into shares of our common stock on a one-to-one basis and their carrying value of $ 1.3 billion was reclassified into stockholders' deficit. Following this conversion, we amended and restated our certificate of incorporation to effect a reclassification of each share of our outstanding common stock into ½ share of Class A common stock and ½ share of Class B common stock, with cash paid for fractional shares. As of June 30, 2022 and June 30, 2021, there were no shares of redeemable convertible preferred stock issued and outstanding. Common Stock The Company had shares of common stock reserved for issuance as follows: June 30, 2022 June 30, 2021 Available outstanding under stock plan 53,158,233 58,417,514 Available for future grant under stock plan 31,156,746 29,793,755 Total 84,314,979 88,211,269 The common stock is not redeemable. We have two classes of common stock: Class A common stock and Class B common stock. Each holder of Class A common stock has the right to one vote per share of common stock. Each holder of Class B common stock has the right to 15 votes and can be converted at any time into one share of Class A common stock. Holders of Class A and Class B common stock are entitled to notice of any stockholders’ meeting in accordance with the bylaws of the corporation, and are entitled to vote upon such matters and in such manner as may be provided by law. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the common stock are entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefore, such dividends as may be declared from time to time by the Board of Directors. Common Stock Warrants Common stock warrants are included as a component of additional paid in capital within the consolidated balance sheets. During the year ended June 30, 2022, we granted warrants to purchase 22,000,000 shares of common stock in connection with a commercial agreement with Amazon. 7,000,000 of the warrant shares have an exercise price of $ 0.01 per share and a term of 3.5 years, while the remaining 15,000,000 warrant shares have an exercise price of $ 100 per share and a term of 7.5 years. We valued the warrants at the grant date using the Black-Scholes-Merton option pricing model with the following assumptions: a dividend yield of zero ; years to maturity of 3.5 and 7.5 years, respectively; volatility of 45 %; and a risk-free rate of 0.93 % and 1.47 %, respectively. In connection with the portion of these warrants that were fully vested upon execution, we recognized a commercial agreement asset of $ 133.5 million upon execution of the agreement in November 2021. Refer to Note 6. Balance Sheet Components for more information on the asset and related amortization during the period. The remaining grant-date fair value of the warrants will be recognized within our consolidated statements of operations and comprehensive loss as a component of sales and marketing expense as the warrants vest, based upon Amazon’s satisfaction of the vesting conditions. In connection with the warrants, a total of $ 281.0 million was recognized within sales and marketing 148 Table o f Contents expense during the year ended June 30, 2022, which included $ 26.3 million in amortization expense of the commercial agreement asset and $ 254.7 million in expense based upon the grant-date fair value of the warrant shares that vested during the period. During the year ended June 30, 2021, we granted warrants to purchase 20,297,595 shares of common stock in connection with a commercial agreement with Shopify Inc. The exercise price was $ 0.01 per share, and the term of the warrants was 10 years. We valued the warrants at the grant date using the Black-Scholes-Merton option pricing model with the following assumptions: a dividend yield of zero , years to maturity of 10 years, volatility of 52 %, and a risk-free rate of 0.62 %. In connection with these warrants, we recognized an asset of $ 270.6 million at June 30, 2021 associated with the fair value of the warrants, which were fully vested as of June 30, 2021. The following table summarizes the warrants activity during the years ended June 30, 2022 and June 30, 2021: Number of Shares Weighted Average Exercise Price ($) Weighted Average Remaining Life (years) Warrants outstanding, June 30, 2020 706,065 $ 2.50 7.21 Granted 20,297,595 0.01 10.00 Exercised ( 20,651,583 ) 0.04 8.93 Cancelled ( 352,077 ) 3.80 8.27 Warrants outstanding, June 30, 2021 — $ — 0.00 Granted 22,000,000 68.19 5.60 Exercised — — 0.00 Cancelled — — 0.00 Warrants outstanding, June 30, 2022 22,000,000 $ 68.19 5.60 Warrants exercisable, June 30, 2022 3,382,419 $ 32.52 4.20 The weighted-average grant date fair values of warrants granted during the years ended June 30, 2022 and June 30, 2021, were $ 94.20 and $ 13.34 , respectively. On June 30, 2022, the weighted-average grant date fair values for outstanding warrants and exercisable warrants, were $ 94.20 and $ 114.77 , respectively. 16. Equity Incentive Plans 2012 Stock Plan Under our Amended and Restated 2012 Stock Plan (the “Plan”), we may grant incentive and nonqualified stock options, restricted stock, and restricted stock units (“RSUs”) to employees, officers, directors, and consultants. As of June 30, 2022, the maximum number of shares of common stock which may be issued under the Plan is 118,374,202 Class A shares. As of June 30, 2022 and June 30, 2021, there were 31,156,746 and 29,793,755 shares of Class A common stock, respectively, available for future grants under the Plan. Stock Options For stock options granted before our IPO in January 2021, the minimum expiration period is seven years after termination of employment or 10 years from the date of grant. For stock options granted after our IPO, the minimum expiration period is three months after termination of employment or 10 years from the date of grant. Stock options generally vest over a period of four years or with 25 % vesting on the 12 month anniversary of the vesting commencement date, and the remainder vesting on a pro-rata basis each month over the next three years . 149 Table o f Contents The following table summarizes our stock option activity for the year ended June 30, 2022: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balance as of June 30, 2021 31,662,750 $ 10.42 6.30 Granted 2,428,616 25.69 Exercised ( 13,519,561 ) 5.13 Forfeited, expired or cancelled ( 1,261,099 ) 23.68 Balance as of June 30, 2022 19,310,706 15.22 6.94 Vested and exercisable, June 30, 2022 11,792,367 $ 7.61 5.98 $ 139,121 Vested and exercisable, and expected to vest thereafter (1) June 30, 2022 18,922,009 $ 14.53 6.91 $ 164,796 (1) Options expected to vest reflect the application of an estimated forfeiture rate. The weighted-average grant date fair value of employee options granted for the years ended June 30, 2022, 2021, and 2020, was $ 13.29 , $ 59.83 , and $ 3.26 , respectively. The aggregate intrinsic value of options exercised was approximately $ 1.4 billion, $ 706.7 million, and $ 3.1 million for the years ended June 30, 2022, 2021, and 2020, respectively. The total fair value of stock options vested during the years ended June 30, 2022, 2021, and 2020 was $ 30.3 million, $ 97.4 million, and $ 53.9 million, respectively. The fair value of each option on the date of grant is determined using the Black Scholes-Merton option pricing model using the single-option award approach with the weighted-average assumptions set forth in the table below. Volatility is based on historical volatility rates obtained from certain public companies that operate in the same or related business as us since there is a limited period of historical market data for our common stock. 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 used the simplified method to determine an estimate of the expected term of an employee share option. Year ended June 30, 2022 2021 2020 Volatility 54 % 46 % 45 % Risk-free interest rate 1.47 % - 3.01 % 0.70 % - 1.05 % 0.28 % - 1.76 % Expected term (in years) 5.56 6.35 5.87 Expected dividend yield — — — As of June 30, 2022, unrecognized compensation expense related to unvested stock options was approximately $ 67.0 million. The weighted-average period over which such compensation expense will be recognized is approximately 1.9 years. When an employee exercises stock options, we collect and remit taxes on the employee’s behalf to applicable taxing authorities. As of June 30, 2022 and June 30, 2021, the balance of equity exercise taxes payable was $ 10.9 million and $ 23.7 million, respectively, which is included in accounts payable on the consolidated balance sheets. Stock Options with Early Exercise Rights In accordance with the Plan, for certain stock options issued prior to the IPO, we allow for early exercise of the options while retaining the right to repurchase any unvested options upon termination of employment at the 150 Table o f Contents original exercise price. The proceeds received from early exercise of stock options have been recorded within accrued expenses and other liabilities on the consolidated balance sheets. As of June 30, 2022 and June 30, 2021, the early exercise liability totaled $ 0.3 million and $ 0.9 million, respectively. Value Creation Award In November 2020, in connection with an overall review of the compensation of Max Levchin, our Chief Executive Officer, in advance of the IPO, and taking into account Mr. Levchin’s leadership since the inception of the Company, the comparatively modest level of cash compensation he had received from the Company during his many years of service, and that he did not hold any unvested equity awards, the Company's Board of Directors approved a long-term, multi-year performance-based stock option grant providing Mr. Levchin with the opportunity to earn the right to purchase up to 12,500,000 shares of the Company's Class A common stock (the “Value Creation Award”). As discussed below, the Value Creation Award will only be earned, if at all, in the event the price of our Class A common stock attains stock price hurdles that are significantly in excess of the Company's IPO price per share, over a period of five years , subject to Mr. Levchin’s continued service to the Company. The Value Creation Award is divided into ten tranches, each of which Mr. Levchin may earn by satisfying a performance condition within a five-year period following the IPO. The performance condition for each tranche will be satisfied on the date the 90 average trading day volume weighted share price of the Company’s Class A common stock exceeds certain specified stock price hurdles, presented in the table below, which were determined based on a target percentage of share price appreciation from the IPO price. Once earned as a result of satisfying the performance condition, the options will vest and become exercisable over a five-year period that commenced at the time of the IPO, subject to Mr. Levchin’s continued service to the Company, in annual amounts equal to 15 %, 15 %, 20 %, 25 % and 25 %, respectively. The per share exercise price of the Value Creation Award is $ 49.00 , the price to the public in the IPO. Tranche Stock Price Hurdle Number of Options 1 $ 65.66 1,000,000 2 $ 82.32 1,000,000 3 $ 98.98 1,000,000 4 $ 115.64 1,000,000 5 $ 132.30 1,000,000 6 $ 148.47 1,000,000 7 $ 165.13 1,000,000 8 $ 181.79 1,000,000 9 $ 247.94 2,250,000 10 $ 371.91 2,250,000 Total 12,500,000 We estimated the fair value of the Value Creation Award granted with market conditions on the grant date using a Monte Carlo simulation model. We recognize stock-based compensation on these awards based on the grant date fair value using an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable of being satisfied. During the years ended June 30, 2022 and June 30, 2021, we incurred stock-based compensation expense of $ 140.7 million and $ 83.9 million, respectively, associated with the Value Creation Award as a component of general and administrative expense within the consolidated statements of operations and comprehensive loss. During the year ended June 30, 2022, based on achievement of the 151 Table o f Contents stock price hurdles and time-based service conditions, 1,875,000 shares vested. As of June 30, 2022, none of these awards have been exercised. As of June 30, 2022, unrecognized compensation expense related to the Value Creation Award was approximately $ 207.5 million. The period over which such compensation expense will be recognized is approximately 3.5 years. Restricted Stock Units RSUs granted prior to the IPO were subject to two vesting conditions: a service-based vesting condition (i.e., employment over a period of time) and a performance-based vesting condition (i.e., a liquidity event in the form of either a change of control or an initial public offering, each as defined in the Plan), both of which must be met in order to vest. The performance-based condition was met upon the IPO. We record stock-based compensation expense for those RSUs on an accelerated attribution method over the requisite service period, which is generally four years . RSUs granted after IPO are subject to a service-based vesting condition. We record stock-based compensation expense for service-based RSUs on a straight-line basis over the requisite service period, which is generally one to four years . The following table summarizes our RSU activity during the year ended June 30, 2022: Number of Shares Weighted Average Grant Date Fair Value Non-vested as of June 30, 2021 14,242,111 $ 36.69 Granted 15,903,666 42.53 Vested ( 6,251,519 ) 40.00 Forfeited, expired or cancelled ( 2,506,666 ) 36.94 Non-vested as of June 30, 2022 21,387,592 $ 38.41 As of June 30, 2022, unrecognized compensation expense related to unvested RSUs was approximately $ 690.0 million. The weighted-average period over which such compensation expense will be recognized is approximately 2.0 years. 2020 Employee Stock Purchase Plan On November 18, 2020, our Board of Directors adopted and approved the 2020 Employee Stock Purchase Plan (“ESPP”). The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum effort towards the success of the Company and that of its affiliates. A total of 8.9 million shares of Class A common stock were reserved and available for issuance under the ESPP and 149,137 shares have been issued as of June 30, 2022. The ESPP provides for six-month offering periods beginning December 1 and June 1 of each year. The first offering period began on December 1, 2021, and the second offering period began on June 1, 2022. At the end of each offering period, shares of our Class A common stock are purchased on behalf of each ESPP participant at a price per share equal to 85 % of the lesser of (1) the fair market value of the Class A common stock on first day of the offering period (the grant date) or (2) the fair market value of the Class A common stock on the last day of the offering period (the purchase date). We use the Black-Scholes-Merton option pricing model to measure the fair value of the purchase rights issued under the ESPP at the first day of the offering period, which represents the grant date. The Black-Scholes-Merton model incorporates assumptions including the dividend yield, expected stock price volatility, expected term, and risk-free interest rates. We utilized the following assumptions: a dividend yield of zero ; a 0.5 year expected term based on the six-month offering period; the historical stock price volatility of comparable publicly-traded companies in our industry group; and a risk-free rate corresponding to a 152 Table o f Contents U.S. Treasury rate which coincides with the expected term. We record stock-based compensation expense on a straight-line basis over each six-month offering period, the requisite service period of the award. Stock-Based Compensation Expense The following table presents the components and classification of stock-based compensation (in thousands): Year ended June 30, 2022 2021 2020 General and administrative $ 248,797 $ 196,554 $ 13,682 Technology and data analytics 116,531 76,643 12,285 Sales and marketing 23,224 17,092 4,040 Processing and servicing 2,431 2,218 82 Total stock-based compensation in operating expenses 390,983 292,507 30,089 Capitalized into property, equipment and software, net 54,542 13,999 2,921 Total stock-based compensation expense $ 445,525 $ 306,506 $ 33,010 In connection with the acquisition of Returnly on May 1, 2021, we issued 304,364 shares of our Class A common stock, which are held in escrow. Because the future payment of the escrowed shares is contingent on continued employment of certain employees, the arrangement represents stock-based compensation in the post combination period. The grant-date fair value was estimated based on the value of the shares at the date of closing. The escrowed shares have a requisite service period of two years and contain a performance-based vesting condition (i.e., the achievement of certain revenue targets). We record stock-based compensation expense on a straight-line basis for each tranche over the requisite service period, as long as the performance-based conditions are considered probable of being satisfied. As of June 30, 2022, we have not recognized any stock-based compensation expense for these awards. We estimate the grant date fair value based on the probability of achievement of the revenue targets at each reporting period. 17. Income Taxes The U.S. and foreign components of income (loss) before income taxes for the years ended June 30, 2022, 2021, and 2020 are as follows (in thousands): Year Ended June 30, 2022 2021 2020 U.S. $ ( 780,699 ) $ ( 330,313 ) $ ( 112,080 ) Foreign 55,868 ( 113,057 ) ( 142 ) Total loss before income taxes $ ( 724,831 ) $ ( 443,370 ) $ ( 112,222 ) 153 Table o f Contents Income tax expense (benefit) for the years ended June 30, 2022, 2021, and 2020 is summarized as follows (in thousands): Year Ended June 30, 2022 2021 2020 Current State $ 145 $ ( 10 ) $ 351 Foreign 230 ( 410 ) 436 Total current expense $ 375 $ ( 420 ) $ 787 Deferred Federal 113 88 6 State 281 ( 2,570 ) 28 Foreign ( 18,183 ) 559 ( 445 ) Total deferred expense ( 17,789 ) ( 1,923 ) ( 411 ) Income tax (benefit) expense $ ( 17,414 ) $ ( 2,343 ) $ 376 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 and the income tax expense for the year ended June 30, 2020 were primarily attributable to an adjustment to the Company's valuation allowance resulting from a deferred tax liability assumed with the acquisition of Returnly and to various state income taxes and the tax amortization of certain intangibles, respectively. The following is a reconciliation of the U.S. statutory federal income tax rate to our effective tax rate for the years ended June 30, 2022, 2021, and 2020: Year Ended June 30, 2022 2021 2020 U.S. statutory federal income tax rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal tax benefit 8.3 % 9.1 % 10.5 % Foreign rate differential ( 0.4 ) % 1.5 % — % Stock-based compensation 64.0 % 66.4 % ( 0.4 ) % Non-deductible compensation expense ( 12.4 ) % ( 8.4 ) % — % Tax benefit related to tax credits, net 15.4 % 0.5 % — % Impact of change in fair value of contingent consideration 3.3 % ( 5.6 ) % — % Change in unrecognized tax benefits ( 6.2 ) % — % — % Other 0.2 % 1.6 % ( 1.9 ) % Change in valuation allowance ( 90.8 ) % ( 85.6 ) % ( 29.6 ) % Effective income tax rate 2.4 % 0.5 % ( 0.4 ) % 154 Table o f Contents Significant components of deferred tax assets and liabilities are as follows (in thousands): Year Ended June 30, 2022 2021 Net operating loss carryforwards $ 1,056,403 $ 430,464 Allowance for credit losses 55,154 41,155 Stock-based compensation 51,288 51,126 Operating lease liabilities 19,840 23,914 Tax credit carryforwards 69,144 2,054 Other 7,581 4,837 Total deferred tax assets $ 1,259,410 $ 553,550 Internally developed software ( 47,217 ) ( 15,214 ) Purchased intangible assets ( 11,386 ) ( 18,150 ) Right-of-use lease assets ( 15,289 ) ( 18,386 ) Stock warrants ( 7,200 ) — Other ( 2,920 ) ( 2,460 ) Total deferred tax liabilities $ ( 84,012 ) $ ( 54,210 ) Valuation allowance ( 1,158,246 ) ( 499,828 ) Deferred tax assets (liabilities), net of valuation allowance $ 17,152 $ ( 488 ) We continue to recognize a full valuation allowance against our U.S. federal and state net deferred tax assets. This determination was based on the assessment of the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Company for the 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. The domestic valuation allowance increased by $ 668.5 million during the year ended June 30, 2022. As a result of the integration and consolidation of our PayBright business into and with Affirm’s Canadian business and the expansion of our overall business in Canada, as well as other objectively verifiable positive evidence 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. Accordingly, the foreign valuation allowance decreased by $ 10.1 million during the year ended June 30, 2022. As of June 30, 2022, we had pretax U.S. federal net operating loss ("NOL") carryforwards of approximately $ 3,405.9 million, state NOL carryforwards of $ 3,590.4 million, and foreign NOL carryforwards of $ 65.8 million. If not utilized, certain U.S. federal and state NOL carryforwards will begin to expire in 2029, whereas others have an unlimited carryforward period, and foreign NOL carryforwards will begin to expire in 2039. Additionally, as of June 30, 2022, we also had U.S. federal and state research and development tax credit carryforwards of $ 82.0 million and $ 37.7 million, respectively. The U.S. federal research and development tax credit carryforwards will begin to expire in 2041 while the state research and development tax credits may be carried forward indefinitely. As of June 30, 2022, the Company also had other state tax credit carryforwards of $ 2.6 million, which will begin to expire in 2024 if not utilized. Of the above NOL carryforwards, approximately $ 42.0 million pretax U.S. federal NOL carryforwards and $ 36.4 million state NOL carryforwards are from domestic acquisitions, which may be subject to an annual utilization limitation under Internal Revenue Code Section 382. 155 Table o f Contents The future utilization of all domestic NOL and tax credit carryforwards may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383 and similar state provisions, due to ownership changes that may have occurred previously or that could occur in the future. Any limitation may result in the expiration of all or a portion of the NOL carryforwards before utilization. The Company accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes (“ASC 740”) . The following table provides a reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (in thousands): Year ended June 30, 2022 2021 2020 Beginning balance $ — $ — $ — Gross increase for tax positions related to the current year 28,407 — — Gross increase for tax positions related to prior years 19,460 — — Ending balance $ 47,867 $ — $ — As of June 30, 2022, the Company had no unrecognized tax benefits related to uncertain tax positions that, if recognized, would impact the effective tax rate. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months. Interest and penalties on unrecognized tax benefits are recorded as a component of tax expense. During the years ended June 30, 2022, 2021, and 2020, we did not recognize accrued interest and penalties related to unrecognized tax benefits. We file U.S. federal and state income tax returns as well as various foreign income tax returns with varying statutes of limitation. With respect to the Company’s major tax filings, all tax years remain open to examination due to the carryover of unused net operating losses. 156 Table o f Contents 18. Net Loss per Share Attributable to Common Stockholders On January 12, 2021, we amended and restated our certificate of incorporation to effect a reclassification of each share of our outstanding common stock into ½ share of Class A common stock and ½ share of Class B common stock, with cash paid for fractional shares. Therefore, we have two classes of common stock: Class A common stock and Class B common stock. The rights, including the dividends and distributions, of the holders of our Class A and Class B common stock are identical, except with respect to voting. Additionally, the conversion of all outstanding shares of redeemable convertible preferred stock into shares of our common stock occurred immediately prior to the reclassification. The following tables present basic and diluted net loss per share attributable to common stockholders for Class A and Class B common stock (in thousands, except share and per share data): Year ended June 30, 2022 Class A Class B Numerator: Basic and diluted Net Loss $ ( 536,654 ) $ ( 170,763 ) Net loss attributable to common stockholders $ ( 536,654 ) $ ( 170,763 ) Denominator: Basic Weighted average shares outstanding, basic 213,703,749 68,000,292 Total-basic 213,703,749 68,000,292 Diluted Weighted average common shares outstanding, diluted 213,703,749 68,000,292 Total-diluted 213,703,749 68,000,292 Net loss per share attributable to common stockholders: Basic $ ( 2.51 ) $ ( 2.51 ) Diluted $ ( 2.51 ) $ ( 2.51 ) 157 Table o f Contents Year ended June 30, 2021 Class A Class B Numerator: Basic Net Loss $ ( 235,000 ) $ ( 206,027 ) Net loss attributable to common stockholders $ ( 235,000 ) $ ( 206,027 ) Diluted Net Loss $ ( 235,000 ) $ ( 206,027 ) Excess return to preferred stockholders on repurchase ( 16,036 ) ( 14,069 ) Gain on conversion of convertible debt 212 186 Interest on convertible debt prior to conversion 955 837 Net loss attributable to common stockholders $ ( 249,869 ) $ ( 219,073 ) Denominator: Basic Weighted average shares outstanding, basic 84,385,884 73,982,039 Total-basic 84,385,884 73,982,039 Diluted Weighted average common shares outstanding, diluted 84,385,884 73,982,039 Weighted average common shares attributable to convertible debt prior to conversion 438,344 438,344 Total-diluted 84,824,228 74,420,383 Net loss per share attributable to common stockholders: Basic $ ( 2.78 ) $ ( 2.78 ) Diluted $ ( 2.95 ) $ ( 2.94 ) The following common stock equivalents, presented based on amounts outstanding, were excluded from the calculation of diluted net loss per share attributable to common stockholders because their inclusion would have been anti-dilutive: Year ended June 30, 2022 2021 2020 Stock options, including early exercise of options 18,922,009 44,178,776 42,573,405 Restricted stock units 21,387,592 14,238,738 8,235,170 Common stock warrants 5,817,203 350,000 706,065 Employee stock purchase plan shares 614,659 — — Convertible debt — — 7,182,478 Redeemable convertible preferred stock — — 122,115,971 Total 46,741,463 58,767,514 180,813,089 158 Table o f Contents 19. Segments and Geographical Information We conduct our operations through a single operating segment and, therefore, one reportable segment. Revenue Revenue by geography is based on the billing addresses of the borrower or the location of the merchant’s national headquarters. The following table sets forth revenue by geographic area (in thousands): Year ended June 30, 2022 2021 2020 United States $ 1,304,304 $ 857,222 $ 506,212 Canada 44,852 13,242 3,316 Other 136 — — Total $ 1,349,292 $ 870,464 $ 509,528 Long-Lived Assets The following table sets forth our long-lived assets, consisting of property, equipment and software, net and operating lease right-of-use assets, by geographic area (in thousands): Year ended June 30, 2022 2021 United States $ 217,532 $ 118,076 Canada 4,390 2,251 Other $ 231 $ — Total $ 222,153 $ 120,327 159 Table o f Contents ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.