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 107 Consolidated Balance Sheets 110 Consolidated Statements of Operations and Comprehensive Loss 112 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity ( Deficit ) 113 Consolidated Statements of Cash Flows 115 Notes to Consolidated Financial Statements 117 106 T able of C ontents 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, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, 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, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. 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 Public Company Accounting Oversight Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 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 is a material estimate of the Company and as of June 30, 2021, the total balance was $117.8 million. On July 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326) (“ASC 326”): Measurement of Credit Losses on Financial Instruments , which modified the accounting for the allowance for credit losses from an incurred loss model to an expected loss model (the “Current Expected Credit Losses” or “CECL” model) The Company utilized the modified retrospective approach upon adoption, which resulted in an increase in the allowance for credit losses of $10.1 million and a cumulative effect adjustment to the beginning balance of accumulated deficit of $10.1 million. 107 T able of C ontents 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, actual credit loss experience, as well as current economic conditions and expectations of future market conditions. Management also incorporates qualitative adjustments to the quantitative model to capture the impact of events that are not easily captured in the model. 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 allowance for credit losses required a high degree of auditor judgment, an increased extent of audit effort, 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 evaluated the appropriateness of the ACL modeling framework, including the use of qualitative adjustments. • We involved our credit specialists to review the CECL model code, perform procedures to evaluate completeness of datasets, and recalculate management’s comparison of actual results with previously estimated reserves and charge-offs • We evaluated the extent, accuracy, and completeness of the data used to develop the CECL model and to estimate the allowance for credit losses at the date of the adoption and the end of the year. • We evaluated the qualitative adjustments to the quantitative loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions. • We evaluated the reasonableness of the Company’s assumptions and judgments in estimating qualitative adjustments, including obtaining third-party macroeconomic data and evaluating any contradictory evidence. • We evaluated the magnitude and proportion of the overall allowance, including the directional consistency and magnitude of the qualitative adjustments as of the adoption date and through the end of the year. • In order to identify potential bias in the determination of the ACL, we performed analytical analysis, including a retrospective review, various coverage and ratio analysis to evaluate the relevance of the underlying drivers used to determine the qualitative adjustments. /s/ Deloitte & Touche LLP San Francisco, California September 17, 2021 We have served as the Company’s auditor since 2020. 108 T able of C ontents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Affirm Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated statement of operations, changes in redeemable convertible preferred stock and stockholders’ deficit, and cash flows of Affirm Holdings, Inc. (the Company) for the year ended June 30, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the 2019 financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended June 30, 2019, in conformity with U.S. generally accepted accounting principles. 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 audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion. /s/ Ernst & Young LLP San Francisco, California October 7, 2020 We served as the Company’s auditor from 2017 to 2020. 109 T able of C ontents AFFIRM HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except shares and per share amounts) June 30, 2021 June 30, 2020 Assets Cash and cash equivalents $ 1,466,558 $ 267,059 Restricted cash 226,074 61,069 Loans held for sale 13,030 4,459 Loans held for investment 2,022,320 1,034,312 Allowance for credit losses ( 117,760 ) ( 95,137 ) Loans held for investment, net 1,904,560 939,175 Accounts receivable, net 91,575 59,001 Securitization notes receivable and residual certificates (at fair value) 16,170 — Property, equipment and software, net 62,499 48,140 Goodwill 516,515 1,255 Intangible assets 67,930 2,496 Commercial agreement assets 227,377 — Other assets 274,679 19,597 Total Assets $ 4,866,967 $ 1,402,251 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) Liabilities: Accounts payable $ 57,758 $ 18,361 Payable to third-party loan owners 50,079 24,998 Accrued interest payable 2,751 1,860 Accrued expenses and other liabilities 317,951 27,810 Convertible debt — 74,222 Notes issued by securitization trusts 1,176,673 — Funding debt 680,602 817,926 Total liabilities 2,285,814 965,177 Commitments and contingencies (Note 9) Redeemable convertible preferred stock, $ 0.00001 par value, 30,000,000 and 124,453,009 shares authorized as of June 30, 2021 and June 30, 2020, respectively; zero and 122,115,971 shares issued and outstanding as of June 30, 2021 and June 30, 2020, respectively; liquidation preference of $ 0 and $ 809,032 as of June 30, 2021 and June 30, 2020, respectively — 804,170 Stockholders’ equity (deficit): Common stock, $ 0.00001 par value, no shares authorized, issued and outstanding at June 30, 2021; 232,000,000 shares authorized, 47,684,427 shares issued and outstanding as of June 30, 2020 — — Class A common stock, par value $ 0.00001 per share: 3,030,000,000 shares authorized, 181,131,728 shares issued and outstanding as of June 30, 2021; no shares authorized, issued and outstanding as of June 30, 2020 2 — Class B common stock, par value $ 0.00001 per share: 88,226,376 shares authorized, issued and outstanding as of June 30, 2021; no shares authorized, no shares issued and outstanding as of June 30, 2020 1 — Additional paid in capital 3,462,762 80,373 Accumulated deficit ( 888,381 ) ( 447,167 ) Accumulated other comprehensive gain (loss) 6,769 ( 302 ) Total stockholders’ equity (deficit) 2,581,153 ( 367,096 ) Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) $ 4,866,967 $ 1,402,251 The accompanying notes are an integral part of these consolidated financial statements. 110 T able of C ontents 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, 2021 June 30, 2020 Assets of consolidated VIEs, included in total assets above Restricted cash $ 142,385 $ 28,788 Loans held for investment 1,743,810 935,085 Allowance for credit losses ( 94,463 ) ( 87,467 ) Loans held for investment, net 1,649,347 847,618 Accounts receivable, net 8,209 8,146 Other assets 3,683 3,345 Total assets of consolidated VIEs $ 1,803,624 $ 887,897 Liabilities of consolidated VIEs, included in total liabilities above Accounts payable $ 2,927 $ 492 Accrued interest payable 2,613 1,732 Accrued expenses and other liabilities 3,820 565 Notes issued by securitization trusts 1,176,673 — Funding debt 607,394 817,926 Total liabilities of consolidated VIEs 1,793,427 820,715 Total net assets $ 10,197 $ 67,182 The accompanying notes are an integral part of these consolidated financial statements. 111 T able of C ontents AFFIRM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except share and per share amounts) Year Ended June 30, 2021 2020 2019 Revenue Merchant network revenue $ 379,551 $ 256,752 $ 132,363 Virtual card network revenue 49,851 19,340 7,911 Total network revenue 429,402 276,092 140,274 Interest income 326,417 186,730 119,404 Gain (loss) on sales of loans 89,926 31,907 ( 440 ) Servicing income 24,719 14,799 5,129 Total Revenue, net $ 870,464 $ 509,528 $ 264,367 Operating Expenses Loss on loan purchase commitment $ 246,700 $ 161,452 $ 73,383 Provision for credit losses 65,878 105,067 78,025 Funding costs 52,700 32,316 25,895 Processing and servicing 73,767 49,831 32,669 Technology and data analytics 256,082 122,378 76,071 Sales and marketing 184,279 25,044 16,863 General and administrative 370,251 121,230 88,902 Total Operating Expenses 1,249,657 617,318 391,808 Operating Loss $ ( 379,193 ) $ ( 107,790 ) $ ( 127,441 ) Other income (expense), net ( 54,073 ) ( 4,432 ) 7,022 Loss Before Income Taxes $ ( 433,266 ) $ ( 112,222 ) $ ( 120,419 ) Income tax (benefit) expense ( 2,343 ) 376 36 Net Loss $ ( 430,923 ) $ ( 112,598 ) $ ( 120,455 ) Excess return to preferred stockholders on repurchase — ( 13,205 ) ( 14,113 ) Net Loss Attributable to Common Stockholders $ ( 430,923 ) $ ( 125,803 ) $ ( 134,568 ) Other Comprehensive Income (Loss) Foreign currency translation adjustments $ 7,042 $ ( 302 ) $ — Unrealized gains on investments 29 — — Net Other Comprehensive Income (Loss) 7,071 ( 302 ) — Comprehensive Loss $ ( 423,852 ) $ ( 112,900 ) $ ( 120,455 ) Per share data: Net loss per share attributable to common stockholders for Class A and Class B: Basic $ ( 2.72 ) $ ( 2.63 ) $ ( 2.84 ) Diluted $ ( 2.88 ) $ ( 2.63 ) $ ( 2.84 ) Weighted average common shares outstanding: Basic 158,367,923 47,856,720 47,345,328 Diluted 159,244,611 47,856,720 47,345,328 The accompanying notes are an integral part of these consolidated financial statements. 112 T able of C ontents 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 Total Stockholders' Equity (Deficit) Shares Amount Shares Amount Balance as of June 30, 2018 100,443,538 $ 495,376 44,486,618 $ — $ 28,092 $ ( 197,364 ) $ — $ ( 169,272 ) Issuance of common stock — — 3,451,035 — 6,475 — — 6,475 Repurchases of common stock — — ( 859,445 ) — ( 2,212 ) ( 419 ) — ( 2,631 ) Issuance of redeemable convertible preferred stock, net of issuance costs of $ 4,217 23,310,166 303,083 — — — — — — Repurchases of redeemable convertible preferred stock ( 1,100,000 ) ( 385 ) — — ( 14,113 ) — — ( 14,113 ) Stock-based compensation — — — — 36,582 — — 36,582 Net loss — — — — — ( 120,455 ) — ( 120,455 ) 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 ) The accompanying notes are an integral part of these consolidated financial statements. 113 T able of C ontents 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 Total Stockholders' Equity (Deficit) Shares Amount Shares 2 Amount 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 options — — 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 — — — — 302,032 — — 302,032 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 — — — — — — 7,042 7,042 Unrealized gains on investments — — — — — — 29 29 Net Loss — — — — — ( 430,923 ) — ( 430,923 ) Balance as of June 30, 2021 — $ — 269,358,104 $ 3 $ 3,462,762 $ ( 888,381 ) $ 6,769 $ 2,581,153 The accompanying notes are an integral part of these consolidated financial statements. 2 The share amounts listed above combine common stock, Class A common stock and Class B common stock. 114 T able of C ontents AFFIRM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended June 30, 2021 2020 2019 Cash Flows from Operating Activities Net Loss $ ( 430,923 ) $ ( 112,598 ) $ ( 120,455 ) Adjustments to reconcile net loss to net cash used in operating activities: Provision for credit losses 65,878 105,067 78,025 Amortization of premiums and discounts on loans, net ( 90,371 ) ( 27,605 ) ( 19,375 ) (Gain) loss on sales of loans ( 89,926 ) ( 31,907 ) 440 Changes in fair value of assets and liabilities 51,655 2,847 ( 940 ) Amortization of commercial agreement assets 69,103 — — Amortization of debt issuance costs 6,416 2,313 1,698 Stock-based compensation 288,033 29,625 33,701 Depreciation and amortization 19,979 9,444 5,266 Impairment of right of use assets 11,544 — — Other 5,129 81 36 Purchases of loans held for sale ( 2,640,734 ) ( 2,101,483 ) ( 858,661 ) Proceeds from the sale of loans held for sale 2,594,835 2,021,938 813,309 Change in operating assets and liabilities: Accounts receivable, net ( 22,934 ) ( 19,049 ) ( 24,791 ) Other assets ( 209,139 ) 19,936 ( 17,105 ) Accounts payable 32,223 7,514 4,435 Payable to third-party loan owners 25,082 8,279 6,311 Accrued interest payable 1,395 428 675 Accrued expenses and other liabilities 119,625 13,868 9,782 Net Cash Used in Operating Activities ( 193,130 ) ( 71,302 ) ( 87,649 ) Cash Flows from Investing Activities Purchases and originations of loans held for investment ( 5,897,252 ) ( 2,830,320 ) ( 1,892,508 ) Proceeds from the sale of loans held for investment 824,011 303,433 147,103 Principal repayments and other loan servicing activity 4,324,618 2,294,833 1,412,927 Acquisitions, net of cash and restricted cash acquired ( 222,433 ) — — Additions to property, equipment and software ( 20,252 ) ( 21,019 ) ( 19,406 ) Purchases of intangibles — — ( 1,844 ) Other investing cash inflows 1,453 — — Other investing cash outflows ( 32,178 ) — — Net Cash Used in Investing Activities ( 1,022,033 ) ( 253,073 ) ( 353,728 ) Cash Flows from Financing Activities Proceeds from funding debt 2,942,254 2,132,805 1,354,550 Payment of debt issuance costs ( 12,499 ) ( 7,687 ) ( 4,850 ) Principal repayments of funding debt ( 3,165,103 ) ( 1,882,155 ) ( 1,080,481 ) Proceeds from issuance of notes by securitization trusts 1,395,879 — — Principal repayments of notes issued by securitization trusts ( 210,368 ) — — Proceeds from issuance of convertible debt, net — 75,000 — Proceeds from issuance of redeemable convertible preferred stock, net 434,542 15,481 303,083 Repurchases and conversion of redeemable convertible preferred stock ( 13 ) ( 22,591 ) ( 14,498 ) Proceeds from initial public offering, net 1,305,176 — — Proceeds from exercise of common stock options and warrants 47,042 2,733 6,475 Repurchases of common stock ( 800 ) ( 18,854 ) ( 2,631 ) Payments of tax withholding for stock-based compensation ( 158,280 ) — — Net Cash Provided by Financing Activities 2,577,830 294,732 561,648 Effect of exchange rate changes on cash, cash equivalents and restricted cash 1,837 — — Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash 1,364,504 ( 29,643 ) 120,271 Cash and cash equivalents and restricted cash, beginning of period 328,128 357,771 237,500 Cash and Cash Equivalents and Restricted Cash, end of period $ 1,692,632 $ 328,128 $ 357,771 The accompanying notes are an integral part of these consolidated financial statements. 115 T able of C ontents AFFIRM HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT. (in thousands) Year Ended June 30, 2021 2020 2019 Supplemental Disclosures of Cash Flow Information Cash payments for interest $ 41,690 $ 28,085 $ 27,838 Cash paid for income taxes 219 — — Cash paid for operating leases 13,215 — — Supplemental Disclosures of Non-Cash Investing and Financing Activities Stock-based compensation included in capitalized internal-use software $ 13,999 $ 2,921 $ 2,882 Additions to property and equipment included in accrued expenses 6 27 3,023 Issuance of warrants in exchange for commercial agreement 270,579 — — Acquisition of commercial agreement assets 25,900 — — Conversion of redeemable convertible preferred stock 1,327,271 — — Conversion of convertible debt 88,559 — — Issuance of common stock in connection with acquisition 331,498 — — Right of use assets obtained in exchange for operating lease liabilities 78,421 — — The accompanying notes are an integral part of these consolidated financial statements. 116 T able of C ontents 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 and partnerships with originating banks, we enable consumers to confidently pay for a purchase over time, with terms ranging from one to sixty months . When a consumer applies for a loan through our platform, the loan is underwritten using our proprietary risk model, and once approved, the consumer selects their preferred repayment option. The majority of loans are funded and issued by our originating bank partners. Merchants partner with us to transform the consumer shopping experience and to acquire and convert customers more effectively through our frictionless point-of-sale payment solution. Consumers get the flexibility to buy now and make simple monthly payments for their purchases and merchants see increased average order value, repeat purchase rate, and an overall more satisfied customer base. Unlike legacy payment options and our competitors’ product offerings, which charge deferred or compounding interest and unexpected costs, we disclose up-front to consumers exactly what they will owe — no hidden fees, no deferred interest, no penalties. On January 15, 2021, we closed our initial public offering ("IPO") of 28,290,000 shares of Class A common stock, including 3,690,000 shares pursuant to the option granted to the underwriters to purchase additional shares of Class A common stock, at an offering price of $ 49.00 per share. The proceeds from the IPO, before expenses, were approximately $ 1.3 billion. 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The 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 asset-backed securitization transactions. Our variable interests in VIEs generally arise from contractual, ownership, or other monetary interests in the entity that value 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 the variable consideration for revenue, the allowance for credit losses, capitalized internal-use software development costs, valuation allowance for deferred tax assets, convertible debt derivatives, loss on loan purchase commitment, the fair value of servicing assets and liabilities, discount on self-originated loans, the fair value and useful lives of tangible and intangible assets acquired and liabilities assumed resulting from business 117 T able of C ontents combinations, the fair value of contingent consideration related to business combinations, the evaluation for impairment of intangible assets and goodwill, the incremental borrowing rate used in discounting our lease liabilities, the fair value of residual certificates issued by our securitization trusts, and stock-based compensation. We base our estimates on historical experience, current events and other factors we believe to be reasonable under the circumstances. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results will be materially affected. These estimates are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ materially from those estimates. 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 Combinations 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 or highly liquid investments 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; (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. 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. 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 loan commitment liability, where applicable, adjusted for any charge-offs and the allowance for credit losses. 118 T able of C ontents Loans Held for Sale We sell certain loans to third-party loan buyers. A loan is initially classified as held for sale when the whole loan is identified as for sale. 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 at a gain. As of June 30, 2021, on a portfolio level, the fair value of loans held for sale exceeds amortized cost. 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, 2021, 2020, and 2019, 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 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 (loss) on sales of loans. The recognition of a servicing liability results in a corresponding decrease to gain (loss) 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 repurchase 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 (loss) 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 119 T able of C ontents 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, actual credit loss experience, and current economic conditions. We also take into consideration certain qualitative factors where we adjust our quantitative baseline using our best judgement to consider the inherent uncertainty regarding future economic conditions and consumer loan performance. For example, the Company considers the impact of current economic and environmental factors at the reporting date that did not exist over the period from which historical experience was used. As of June 30, 2021, we have considered the impact of government intervention and legislation in the form of stimulus checks, extended unemployment benefits, and small business relief on loan repayment and consumer behavior patterns. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. 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, and servicing fees due from third-party loan owners. We evaluate accounts receivable estimated to be uncollectible and provide allowances, as necessary, for doubtful accounts. This allowance was $ 4.1 million and $ 3.1 million as of June 30, 2021 and June 30, 2020, respectively. Property, Equipment and Software, net Property, equipment and software consist of computer and office equipment, capitalized internal-use 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 internal-use 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 ranges from three to five 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 internal-use 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. 120 T able of C ontents 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 perform a quantitative goodwill impairment test by determining the fair value of the reporting unit and comparing it to the carrying value of the reporting unit. 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, and trade names resulting from 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 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. Funding Debt and Debt Issuance Costs We borrow from various lenders to finance the purchase of loans from our originating bank partner. 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 debt used to fund purchases of loans from our originating bank partners are 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. 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 121 T able of C ontents 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 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. For equity investments, including equity securities and partnership interests that do not have a “readily determinable fair value,” or are not traded in a verifiable public market or are restricted for sale in the public market by a restricted stock legend or otherwise, we present and carry our investments using the measurement alternative which is cost minus impairment, if any, plus or minus changes resulting from observable price changes in “orderly transactions,” as defined in ASC Topic 321, "Investments — Equity Securities" ("ASC 321"), for the identical or a similar investment of the same issuer. 122 T able of C ontents 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 terms of the executed merchant agreement have been fulfilled and the merchant successfully confirms the transaction. 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 when we estimate that these losses will be recoverable over the term of our contract with the merchant. In order to continue to expand our consumer base, we may originate loans under certain merchant arrangements that we do not expect to achieve positive revenue. In these instances, the loss is recorded as sales and marketing expense. On May 5, 2021, our largest merchant partner, 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 have 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 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, which is ultimately funded and maintained by us. Our originating bank partner then originates a loan to the consumer once the transaction is confirmed by the merchant. The non-integrated merchants are charged interchange fees by the issuer processor for virtual debit card transactions, as with all debit card purchases, and the issuer processor shares a portion of this revenue with us. We also leverage this issuer processor as a means of integrating certain merchants. Similarly, for these arrangements with integrated merchants, the merchant is charged interchange fees by the issuer processor and the issuer processor shares a portion of this revenue with us. 123 T able of C ontents 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. Our service comprises a single performance obligation to the issuer processors to facilitate transactions with consumers. 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, 2021 and June 30, 2020, the balance of loans held for investment on non-accrual status was $ 1.1 million and $ 0.3 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 fees are contractual fees specified in our servicing agreements with third-party loan owners 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 and our originating bank partner puts back to us. Under the terms of the agreements with our originating bank partners, we are generally required to pay the principal amount plus accrued interest for such loans. In certain instances, our originating bank partners may originate loans with zero or below market interest rates that we are required to purchase. In these instances, we may be required to purchase the loan for a price in excess of the fair market value of such loans, which results in a loss. These losses are recognized as loss on loan purchase commitment in our 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. 124 T able of C ontents 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 not considered to be our customers are expensed over the period of benefit and recorded in processing and servicing within our consolidated statements of operations and comprehensive loss. Advertising Costs Advertising costs are expensed as incurred and are included within sales and marketing in our consolidated statements of operations and comprehensive loss. For the years ended June 30, 2021, 2020, and 2019, advertising costs totaled $ 48.1 million, $ 3.3 million and $ 2.6 million, respectively. 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. Stock-Based Compensation We account for stock-based compensation expense in accordance with the fair value recognition and measurement guidance, 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 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. 125 T able of C ontents 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 We have granted RSUs that vest upon the satisfaction of both service-based and performance-based conditions. The service-based condition for these awards generally is satisfied over four years . The performance-based condition is satisfied upon the occurrence of a qualifying event, defined as the earlier of (i) the closing of certain specific liquidation or change in control transactions, or (ii) an IPO. We record stock-based compensation expense for performance-based equity awards and stock on an accelerated attribution method over the requisite service period, which is generally four years , and only if performance-based conditions are considered probable of being satisfied. Upon exercise or vesting of a stock-based award, if the tax deduction exceeds the compensation cost that was previously recorded for financial statement purposes, this will result in an excess tax benefit. 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 such as RSUs and stock options on an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable of being satisfied. Basic and Diluted Net Loss per Common Share We calculate net income or loss per share using the two-class method required for participating securities. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Our common stock issued upon the early exercise of stock options and redeemable convertible preferred stock are participating securities. 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 to our participating securities. We calculate basic 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 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 after giving consideration to the dilutive effect of our redeemable convertible preferred stock, stock options, restricted stock units, convertible debt and common stock warrants that are outstanding during the period. We have generated a net loss in all periods 126 T able of C ontents 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 , 2020 and 2019, the excess of the repurchase price of preferred stock over its carrying value has been recorded as an increase to net loss to determine net loss attributable to common stockholders, basic and diluted. Recently Adopted Accounting Standards As of March 31, 2021, we no longer qualified as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are no longer entitled to take advantage of the exemptions from various reporting requirements applicable to emerging growth companies, including extended transition periods for complying with new or revised accounting standards. Accordingly, as discussed more fully below, we adopted certain new or revised accounting standards during the year ended June 30, 2021 for which adoption previously had been deferred. Revenue Recognition In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("ASC 606"). ASC 606 requires revenue to be recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services and also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts. Subsequent to the issuance of ASU 2014-09, the FASB issued several amendments to ASC 606 to clarify or improve the revenue recognition standard such as principal versus agent considerations in ASU 2016-08, technical corrections and improvements to ASC 606 in ASU 2016-20, and clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial asset in ASU 2017-05. In June 2020, the FASB issued ASU 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities” ("ASC 842"), which amends the effective dates of ASC 606 and ASC 842 to give immediate relief to certain entities as a result of the widespread adverse economic effects and business disruptions caused by the COVID-19 pandemic. ASU 2020-05 permits certain entities that have not yet made statements available for issuance to adopt ASC 606 for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020. Under ASU 2020-05, we adopted ASC 606 on July 1, 2020 using the modified retrospective transition method. Under this method, we evaluated contracts that were not complete as of the date of adoption as if those contracts had been accounted for under ASC 606. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with revenue accounting literature in effect during those periods. The adoption of ASC 606 did not have a material impact on our revenue arrangements. ASC 606 explicitly excludes revenue generated in accordance with ASC 310, "Receivables" and ASC 860, "Transfers and Servicing." Accordingly, we have concluded that interest income, gains on loan sales and servicing income are not affected by the adoption of ASC 606 and its related amendments. Merchant network revenue and virtual card network revenue are within the scope of ASC 606. Stock-Based Compensation In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” that expands on the scope of ASC 718 to include stock-based payment transactions for acquiring goods and services from non-employees. For non-public business entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption of ASC 606. We adopted ASC 606 effective July 1, 2020 and have correspondingly adopted ASU 2018-07 as of that date. There was no material impact to existing stock-based awards to non-employees. 127 T able of C ontents Income Taxes In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which removes certain exceptions related to the approach for intraperiod tax allocation, recognizing deferred tax liabilities for outside basis differences and calculating income taxes in interim periods. The guidance also reduces complexity in certain areas, including franchise taxes that are partially based on income and accounting for tax law changes in interim periods. We early adopted the new standard effective July 1, 2020 on a prospective basis. The adoption of the new standard did not have a material impact on our consolidated financial statements. Leases In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” ("ASC 842") which substantially modifies lessee accounting for leases, and requires most leases to be recognized on the balance sheet with enhanced disclosures. ASC 842 provides that a contract is, or contains, a lease if it conveys the right to control the use of an identified asset and, accordingly, a lease liability and a related right-of-use ("ROU") asset is recognized at the commencement date. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Subsequent to the issuance of ASC 842, the FASB issued several amendments to ASC 842 to clarify or improve the new leases standard, including the codification and targeted improvements in ASUs 2018-10 and 2019-01 and the narrow-scope improvements for lessors in ASU 2018-20. In August 2018, the FASB issued ASU 2018-11, “Targeted Improvements to ASC 842,” which included an option to not restate comparative periods in transition and elect to use the effective date of ASU 2016-02 as the date of initial application (the “effective date” method). Following the loss of our emerging growth company status during the third quarter of fiscal 2021, we adopted ASC 842 with an effective date of July 1, 2020 using the modified retrospective transition approach by applying the standard to all leases existing at the date of initial application and not restating comparative periods. Refer to Note 7. Leases for further information on the implementation of the standard. We have elected the practical expedients permitted under the transition guidance, which allowed us not to reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) the accounting for any initial direct costs for any expired or existing leases. We also elected the practical expedients allowing the combination of lease and non-lease components by class of underlying asset. In addition, we have elected the short-term lease exception and will not recognize ROU assets or lease liabilities for qualifying leases (leases with a term of less than 12 months from lease commencement). As a result of the adoption of ASC 842, we recognized ROU assets included in other assets in the consolidated balance sheets and lease liabilities for operating leases included in accrued expenses and other liabilities in the consolidated balance sheets of $ 66.7 million and $ 71.2 million, respectively, as of July 1, 2020 with a $ 0.1 million in cumulative effect adjustment to accumulated deficit. The aggregate lease liability differs from the ROU asset primarily due the unamortized balance of deferred rent, which, prior to July 1, 2020, was included in accrued expenses and other liabilities in the consolidated balance sheet. ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After an ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life. We currently have no finance leases. The adoption of the new lease accounting standard had no material impact on cash provided by or used in operating, investing or financing activities in our consolidated statements of cash flows. The adoption of the new lease accounting standard also did not have a material impact our consolidated statements of operations and comprehensive loss. 128 T able of C ontents Financial Instruments — Credit Losses In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326)” ("ASC 326"). The amendments replaced the incurred loss impairment methodology with the current expected credit loss model ("CECL"). Subsequent to the issuance of ASU 2016-13, the FASB issued several amendments to ASC 326 to clarify or improve the financial instruments credit losses standard such as codification and targeted improvements in ASUs 2018-19, 2019-04, 2019-05, 2019-11 and 2020-03. Following the loss of our emerging growth company status, we adopted ASC 326 effective July 1, 2020 using the modified retros pective approach for our loans held for investment, which resulted in an increase in the allowance for credit losses of $ 10.1 million and a cumulative effect adjustment to the beginning balance of accumulated deficit of $ 10.1 million. Results for reporting periods beginning on or after July 1, 2020 are presented under the new standard, while prior period results before the adoption of CECL on July 1, 2020 continue to be reported in accordance with previously applicable GAAP. Upon adoption of ASC 326, we maintained our current allowance model and included credit loss allowance assumptions in compliance with ASC 326, which included forecasts for prepayments, recoveries, historical performance, credit rating, as well as current market conditions and expectations for future market conditions. Effective April 1, 2021 we implemented a more granular credit loss allowance forecasting model for loans with an initial term of 18 months or less, while maintaining our existing model for loans with an initial term greater than 18 months. Under our revised methodology, we estimate delinquency transitions at the loan-level based on current loan status, loan age, credit tier, and other loan characteristics in order to predict the likelihood that any particular loan will be charged off. We have included the disclosures required by ASC 326 in Note 4. Loans Held for Investment and Allowance for Credit Losses. We have adopted all new accounting pronouncements that are in effect and applicable to us for the period ended June 30, 2021. Recent Accounting Pronouncements Not Yet Adopted Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Interbank Offered Rate (“LIBOR”). This ASU is effective for all entities upon issuance as of March 12, 2020 through December 31, 2022. In January 2021, the FASB also issued ASU 2021-01, “Reference Rate Reform (Topic 848)” which provides additional optional expedients and exceptions applicable to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This ASU is effective for all entities upon issuance as of January 7, 2021 through December 31, 2022. We are in the process of reviewing our derivatives agreements, revolving credit agreements and loan sale agreements that utilize LIBOR as the reference rate and evaluating the impact of Reference Rate Reform. Throughout the remaining effective period for ASU 2020-04 and ASU 2021-01, we will continue to evaluate the applicable relief measures within each of these amendments and will determine any impact on our consolidated financial statements. 129 T able of C ontents Convertible Debt Instruments In August 2020, the FASB issued 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 are in the process of evaluating the impact of this amendment on our consolidated financial statements. 3. Interest Income Interest income consisted of the following components (in thousands): Year Ended June 30, 2021 2020 2019 Interest income on unpaid principal balance $ 237,526 $ 163,374 $ 103,731 Amortization of discount on loans held for investment 101,078 35,251 21,833 Amortization of premiums on loans held for investment ( 9,018 ) ( 6,157 ) ( 2,458 ) Interest receivable charged-off, net of recoveries ( 3,169 ) ( 5,738 ) ( 3,702 ) Total interest income $ 326,417 $ 186,730 $ 119,404 4. Loans Held for Investment and Allowance for Credit Losses Loans held for investment consisted of the following (in thousands): June 30, 2021 June 30, 2020 Unpaid principal balance $ 2,058,863 $ 1,049,618 Accrued interest receivable 15,466 8,707 Premiums on loans held for investment 7,071 4,646 Less: Discount due to loss on loan purchase commitment ( 53,177 ) ( 28,659 ) Less: Discount on loans acquired through business combination ( 5,903 ) — Total loans held for investment $ 2,022,320 $ 1,034,312 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 $ 7,927.7 million, $ 4,726.5 million, and $ 2,744.8 million for the years ended June 30, 2021, 2020, and 2019, respectively. These loans have a variety of lending terms as well as maturities ranging from one to sixty months . Given that our loan portfolio focuses on one product segment, point-of-sale unsecured installment loans, we evaluate the entire portfolio as a single homogeneous loan portfolio. We closely monitor credit quality for our loan receivables to manage and evaluate our related exposure to credit risk. Credit risk management begins with initial underwriting, where loan applications are assessed against the credit underwriting policy and procedures of our originating bank partners, and continues through to full repayment 130 T able of C ontents 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 in turn the lowest likelihood of loss. The ITACs model analyzes the characteristics of a consumer's attributes that are shown to be predictive of both willingness and ability to repay including, but not limited to: basic features of a consumer's credit profile, a consumer's prior repayment performance with other creditors, current credit utilization, and legal and policy changes. When a consumer passes both fraud and credit policy checks, the application is assigned an ITACs score. ITACs is also used for portfolio performance monitoring. Our credit risk organization closely tracks the distribution of a consumer ITACs as well as the ITACs of loans 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 (in thousands) as of June 30, 2021: Amortized Costs Basis by Fiscal Year of Origination 2021 2020 2019 2018 2017 Prior Total 96+ $ 1,222,579 $ 107,997 $ 7,368 $ 115 $ — $ — $ 1,338,059 94 – 96 399,207 7,914 407 11 — — 407,539 90 – 94 137,099 1,879 13 — — — 138,991 <90 26,260 119 — — — — 26,379 No score (1) 93,721 13,166 1,632 368 28 1 108,916 Total loan receivables $ 1,878,866 $ 131,075 $ 9,420 $ 494 $ 28 $ 1 $ 2,019,884 Current period charge-offs $ 32,747 $ 30,488 $ 1,862 $ 58 $ ( 4 ) $ ( 2 ) $ 65,149 Current period recoveries ( 1,058 ) ( 4,593 ) ( 4,516 ) ( 2,108 ) ( 1,484 ) ( 175 ) ( 13,934 ) Current period net charge-offs $ 31,689 $ 25,895 $ ( 2,654 ) $ ( 2,050 ) $ ( 1,488 ) $ ( 177 ) $ 51,215 (1) This balance represents loan receivables in new markets without sufficient data currently available for use of the Affirm scoring methodology as well as loan receivables originated by PayBright. 131 T able of C ontents Loan receivables are defined as past due if either the principal or interest have not been received within four calendars days of when they are due in accordance with the agreed upon contractual terms. The following table presents an aging analysis of the amortized cost basis on loans held for investment by delinquency status (in thousands): June 30, 2021 June 30, 2020 Non-delinquent loans $ 1,939,976 $ 1,019,492 4 – 29 calendar days past due 43,838 16,765 30 – 59 calendar days past due 17,267 5,393 60 – 89 calendar days past due 12,044 6,268 90 – 119 calendar days past due 6,759 6,159 Total amortized cost basis $ 2,019,884 $ 1,054,077 We maintain an allowance for credit losses at a level that we believe is appropriate to absorb probable losses inherent in our loans. The allowance for credit losses covers estimated losses for individually assessed loans and includes estimates which rely on economic conditions, forecasts, and historical loan performance. When loans are charged off, we recognize this as a charge against the allowance for credit losses. We may continue to attempt to recover amounts from the respective consumers. The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. It is comprised of specific allowance for individually assessed loans which are regularly evaluated to maintain a level adequate to absorb expected losses inherent in the loan portfolio. Refer to Note 2. Summary of Significant Accounting Policies for additional information. The following table details activity in the allowance for credit losses (in thousands): Year Ended June 30, 2021 2020 2019 Balance at beginning of period $ 95,137 $ 66,260 $ 35,949 Adjustment due to adoption of new accounting standard 10,083 — — Provision for credit losses 63,755 101,540 77,416 Charge-offs ( 65,149 ) ( 81,052 ) ( 50,107 ) Recoveries of charged-off receivables 13,934 8,389 3,002 Balance at end of period $ 117,760 $ 95,137 $ 66,260 5. Business Combinations 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. 132 T able of C ontents 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 13. 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, "Business Combinations" ("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 (Years) Developed technology $ 6,127 3 Merchant relationships 9,505 4 Trade name 1,021 5 Total intangible assets $ 16,653 133 T able of C ontents 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. 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, 2021 2020 Revenue $ 886,937 $ 524,657 Net loss $ ( 447,116 ) $ ( 128,244 ) 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 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 15. Equity and Cash 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 income (expense), 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 134 T able of C ontents 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 The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands) Fair Value Useful Life (Years) Developed technology $ 16,200 3 Merchant relationships 29,200 5 Trade name 500 1 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. 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. 135 T able of C ontents Year Ended June 30, 2021 2020 Revenue $ 880,603 $ 517,438 Net loss $ ( 465,875 ) $ ( 132,721 ) 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”). 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 For further details on our fair value methodology with respect to the contingent consideration asset, see Note 13. Fair Value of Financial Assets and Liabilities. 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 (Years) Developed technology $ 6,900 3 Trademarks 75 1 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. 136 T able of C ontents 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. 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 years ended June 30, 2021 and 2020. 6. Balance Sheet Components Property, Equipment and Software, net Property, equipment and software, net consisted of the following (in thousands): June 30, 2021 June 30, 2020 Internally developed software $ 68,197 $ 40,444 Leasehold improvements 15,212 16,645 Furniture and equipment 5,284 4,713 Computer equipment 6,707 3,990 Total Property, equipment and software, at cost $ 95,400 $ 65,792 Less: Accumulated depreciation and amortization $ ( 32,901 ) $ ( 17,652 ) Total Property, equipment and software, net $ 62,499 $ 48,140 Depreciation and amortization expense on property, equipment and software was $ 15.4 million, $ 9.4 million, and $ 5.3 million for the years ended June 30, 2021, 2020, and 2019, 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 internal-use software is included as a component of technology and data analytics in the consolidated statements of operations and comprehensive loss. We recorded impairment expense of $ 1.5 million related to leasehold improvements during the year ended June 30, 2021. No impairment losses related to property, equipment and software were recorded during the years ended June 30, 2020 and 2019. 137 T able of C ontents Goodwill and Intangible Assets The changes in the carrying amount of goodwill during the years ended June 30, 2021 and 2020 were as follows (in thousands): Carrying Value Balance as of June 30, 2019 $ 1,255 Additions — 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 Refer to Note 5. Business Combinations for a description of additions to goodwill during the years ended June 30, 2021 and 2020. No impairment losses related to goodwill were recorded during the years ended June 30, 2021, 2020 and 2019. Intangible assets consisted of the following (in thousands): 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 3,769 ( 194 ) 3,575 3.3 Other intangibles 350 — 350 Indefinite Total intangible assets $ 73,246 $ ( 5,316 ) $ 67,930 June 30, 2020 Gross Accumulated Amortization Net Weighted Average Remaining Useful Life (in years) Developed technology $ 790 $ ( 790 ) $ — — Trademarks and domains 2,146 — 2,146 Indefinite Other intangibles 350 — 350 Indefinite Total intangible assets $ 3,286 $ ( 790 ) $ 2,496 Amortization expense for intangible assets was $ 4.6 million for the year ended June 30, 2021 and nil for both the years ended June 30, 2020 and 2019. No impairment losses related to intangible assets were recorded during the years ended June 30, 2021, 2020 and 2019. 138 T able of C ontents The expected future amortization expense of these intangible assets as of June 30, 2021 is as follows (in thousands): 2022 $ 18,768 2023 18,283 2024 16,143 2025 7,268 2026 and thereafter 4,972 Total amortization expense $ 65,434 Commercial Agreement Assets During the year ended June 30, 2021, we recognized an asset in connection with a commercial agreement with Shopify Inc., in which we granted warrants in exchange for the benefit of acquiring new merchant partners. This asset represents the probable future economic benefit to be realized over a four-year expected benefit period and is valued based on the fair value of the warrants on the grant date. Refer to Note 14. Redeemable Convertible Preferred Stock and Stockholders’ Deficit for further discussion of the warrants. 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. For the year ended June 30, 2021, we recorded amortization expense related to the commercial agreement asset of $ 64.9 million 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. During the year ended June 30, 2021, we recorded amortization expense related to the asset of $ 4.3 million 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, 2021 June 30, 2020 Operating lease right-of-use assets $ 57,828 $ — Prepaid payroll taxes for stock-based compensation 111,278 — Prepaid expenses 21,069 6,406 Investments, held at cost 11,278 1,850 Processing reserves 14,042 924 Other receivables 26,423 3,169 Other assets 32,761 7,248 Total other assets $ 274,679 $ 19,597 139 T able of C ontents Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consisted of the following (in thousands) June 30, 2021 June 30, 2020 Contingent consideration liability $ 147,820 $ — Operating lease liability 74,952 — Deferred lease liability — 4,492 Accrued expenses 47,674 16,088 Commercial agreement liability 25,357 — Other liabilities 22,148 7,230 Total accrued expenses and other liabilities $ 317,951 $ 27,810 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 will remeasure the liability to its fair value at each reporting date until the contingency is resolved. As of June 30, 2021, the fair value of the contingent consideration liability was $ 147.8 million. For further details on our fair value methodology with respect to the contingent consideration, see Note 13. Fair Value of Financial Assets and Liabilities. During the year ended June 30, 2021, we recognized a liability in connection with a commercial agreement with an enterprise partner of $ 25.4 million. Fifty percent of this liability is to be settled 180 days after the date of the final prospectus, or January 12, 2021, and the remaining 50 percent is to be settled on the first year anniversary of this date. 7. Leases We lease facilities under operating leases with various expiration dates through 2030. We have the option to renew or extend our leases ranging from one month to ten years . Some lease agreements include the option to terminate the lease with prior written notice ranging from 180 days to one year . As of June 30, 2021, we have not elected to exercise renewal or termination options. Lease terms range from one year to ten 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 $ 9.9 million and $ 9.7 million as of June 30, 2021 and June 30, 2020, respectively. The weighted average remaining lease term as of June 30, 2021 wa s 5.8 years. The discount rate used in determining the lease liability for each individual lease was derived from a corporate yield curve which corresponded with the remaining lease term as of July 1, 2020 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered into after July 1, 2020 . As of June 30, 2021, right-of-use assets of $ 57.8 million were included in other assets , and the related operating lease liability totaled $ 75.0 million and was included in accrued expenses and other liabilities in the consolidated balance sheet. For the year ended June 30, 2021, we recognized impairment expense of $ 11.5 million 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 years ended June 30, 2020 and 2019. 140 T able of C ontents Total rent expense incurred for all locations totaled $ 15.3 million, $ 13.7 million, and $ 7.7 million for the years ended June 30, 2021, 2020, and 2019, respectively. Total rent expense incurred for short term leases with a term 12 months or less totaled $ 1.1 million, $ 1.2 million, and $ 0.3 million for the years ended June 30, 2021, 2020, and 2019, respectively. Lease term and discount rate information are summarized as follows: June 30, 2021 Weighted average remaining lease term (in years) 5.8 Weighted average discount rate 5.5 % Maturities of operating lease liabilities as of June 30, 2021 are as follows (in thousands) for the years ended: 2022 $ 15,303 2023 15,754 2024 15,684 2025 15,807 2026 15,567 Thereafter 10,420 Total lease payments 88,535 Less imputed interest ( 13,583 ) Present value of lease liabilities $ 74,952 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 $ 10.5 million, $ 7.1 million, and $ 4.4 million for the years ended June 30, 2021, 2020, and 2019, respectively. 141 T able of C ontents 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. We would only experience a loss if the contractual repurchase price of the loan exceeds the fair value on the repurchase date. Generally, this would occur where a loan has been identified as subject to verified or suspected fraud. As of June 30, 2021, the aggregate outstanding balance of loans held by third-party investors or unconsolidated VIEs was $ 2,453.9 million, of which we have recorded a repurchase liability of $ 2.1 million within accrued expenses and other liabilities. 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. All such liabilities arising from current legal and regulatory matters have been recorded in accrued expenses and other liabilities in our consolidated balance sheets and these matters are immaterial. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents and restricted cash. We maintain our cash and cash equivalents and restricted cash in accounts at regulated domestic financial institutions and conduct ongoing evaluations of the creditworthiness of the financial institutions with which we do business. We are exposed to default risk on both loan receivables purchased from our originating bank partners and that are self-originated. The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions. As of both June 30, 2021 and June 30, 2020, approximately 15 % of loan receivables related to customers residing in the state of California. No other states or provinces exceeded 10% for either period. Concentrations of Revenue For the years ended June 30, 2021, 2020, and 2019, approximately 20 % , 28 %, and 20 % of total revenue was driven by one merchant, respectively. 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, 2021, the outstanding balance and interest earned on such accounts is immaterial. 142 T able of C ontents 11. Debt As of June 30, 2021 and June 30, 2020, outstanding debt encompasses funding debt and convertible debt. We have unutilized funding capacity through our revolving credit facility which did not have any borrowings outstanding as of June 30, 2021. Funding Debt Funding debt and its aggregate future maturities consists of the following (in thousands): Final Maturity Fiscal Year Ending June 30, 2021 June 30, 2020 2022 $ 104,159 $ 171,133 2023 460,289 653,447 2024 22,705 — 2025 — — 2026 102,203 — Total $ 689,356 $ 824,580 Deferred debt issuance costs ( 8,754 ) ( 6,654 ) Total funding debt, net of deferred debt issuance costs $ 680,602 $ 817,926 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 these 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 2023 and 2026, 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, 2021, the aggregate commitment amount of these facilities was $ 1,825.0 million on a revolving basis, of which $ 585.2 million was drawn, with $ 1,239.8 million remaining available. Some of the loans purchased from the originating bank partners are pledged as collateral for borrowings in our facilities. The unpaid principal balance of these loans totaled $ 664.1 million and $ 990.7 million as of June 30, 2021 and June 30, 2020, respectively. Borrowings under these warehouse credit facilities bear interest at an annual benchmark rate of LIBOR or at an alternative commercial paper rate (which is either (i) the per annum rate equivalent to the weighted-average of the per annum rates at which all commercial paper notes were issued by certain lenders to fund advances or maintain loans, or (ii) the daily weighted-average of LIBOR, as set forth in the applicable credit agreement), plus a spread ranging from 1.70 % to 4.00 %. Interest is payable monthly. In addition, these agreements require payment of a monthly unused commitment fee ranging from 0.20 % 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 liquidity, leverage, and tangible net worth. As of June 30, 2021, 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, 143 T able of C ontents borrowings under these agreements are referred to as funding debt, and proceeds from the borrowings may only be used for the purposes of facilitating loan funding and origination. These facilities are secured by PayBright loan receivables pledged to the respective facility as collateral, mature in 2022, and bear interest based on a commercial paper rate plus a spread ranging from 1.25 % to 4.25 %. As of June 30, 2021, the aggregate commitment amount of these facilities was $ 177.3 million on a revolving basis, of which $ 90.3 million was drawn, with $ 87.0 million remaining available. The unpaid principal balance of loans pledged to these facilities totaled $ 74.1 million as of June 30, 2021. These agreements contain certain customary negative covenants and financial covenants including maintaining certain levels of liquidity, leverage, and tangible net worth at the PayBright subsidiary level. As of June 30, 2021, we were in compliance with all applicable covenants in the agreements. Repurchase Agreement On June 16, 2021, we entered into a sale and repurchase agreement pursuant to which we sold securities to a counterparty with an obligation to repurchase at a future date and price. As of June 30, 2021, we had $ 13.9 million in debt outstanding under our repurchase agreement disclosed within funding debt on the consolidated balance sheets. The outstanding debt relates to $ 16.2 million in pledged securities disclosed within securitization notes receivable and residual certificates (at fair value) on the consolidated balance sheets and will be amortized through regular principal and interest payments on the pledged securities. The interest rate is 1.07 % on the senior pledged securities and 2.62 % on the residual certificate pledged securities. The contractual repurchase date is in September 2021. Prior to the repurchase date and subject to mutual agreement by Affirm and the counterparty, we may enter into a repurchase date extension subject to market interest rates on such extension date. Convertible Debt In April 2020, we entered into an agreement with various investors pursuant to which we issued convertible notes in an aggregate principal amount of $ 75.0 million with maturity dates in April 2021 and bearing interest at a rate of 1.00 % per annum. The principal and any unpaid accrued interest of each convertible note automatically converts into shares of redeemable convertible preferred stock upon the closing of financing in which we receive no less than $ 50.0 million in proceeds from the issuance of redeemable convertible preferred stock. Upon completion of the Series G equity financing in September 2020, the convertible notes were redeemed under the next equity financing feature, in which the proceeds from the issuance of redeemable convertible preferred stock was not less than $ 50.0 million. The aggregate outstanding principal and accrued interest balance of the convertible notes of $ 75.5 million was converted into 4,444,321 shares of Series G-1 redeemable convertible preferred stock at a conversion price of $ 16.9374 per share. This conversion resulted in issuance of $ 88.6 million of Series G-1 redeemable convertible preferred stock at a fair value of $ 19.9263 per share. The total proceeds were allocated between the liability component of $ 46.5 million and equity component of $ 42.1 million. The conversion of the convertible notes was accounted for as a debt extinguishment, which resulted in a gain of $ 30.1 million. This gain represented the difference between the carrying value of the debt at the time of extinguishment and the allocated proceeds. This gain was recorded in other income (expense), net on the consolidated statements of operations and comprehensive loss. The reacquisition of the beneficial conversion feature was measured using the intrinsic value of the conversion option at the extinguishment date, which totaled $ 42.1 million, and was recorded in equity. Revolving Credit Facility On January 19, 2021, we entered into a revolving credit agreement with a syndicate of commercial banks for a $ 185.0 million unsecured revolving credit facility. This facility bears interest at a rate equal to, at our option, either (a) a Eurodollar rate determined by reference to adjusted LIBOR for the interest period, plus an applicable 144 T able of C ontents margin of 2.50 % per annum or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50 % per annum, (ii) the rate last quoted by The Wall Street Journal as the U.S. prime rate, and (iii) the one-month adjusted LIBOR plus 1.00 % per annum, in each case, plus an applicable margin of 1.50 % per annum. The revolving credit agreement has a final maturity date of January 19, 2024. The facility contains certain covenants and restrictions, including certain financial maintenance covenants, and requires payment of a monthly unused commitment fee of 0.35 % per annum on the undrawn balance available. There are no borrowings outstanding under the facility at June 30, 2021. 12. Securitizations 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. 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 VIE’s 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. 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 both 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. For the year ended June 30, 2021, 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") and 145 T able of C ontents Affirm Asset Securitization Trust 2021-A (“2021-A”). Each securitization trust issued senior notes and residual certificates to finance the purchase of the loans facilitated by our platform. At the closing of each securitization, we contributed loans, facilitated through our technology platform and purchased from our originating bank partners, with an aggregate outstanding principal balance of $ 1,856.8 million. The 2020-Z1 and 2020-Z2 securitizations are secured by static pools of loans contributed at closing, whereas the 2020-A and 2021-A securitization 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 all the residual cash collected on the loans held by the securitization trust after paying off the senior notes. All the senior notes were sold to third-party investors. For 2020-Z1, 2020-A and 2021-A, we retained 100 % of the residual certificates issued by the securitization trusts. For 2020-Z2, 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. 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 associated debt issuance costs, which totaled $ 0.7 million as of June 30, 2021, are deferred and amortized into interest expense over the contractual life of the notes. 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 $ 75.1 million on the consolidated balance sheets at June 30, 2021 and are secured by loan receivables at amortized cost of $ 78.4 million included in loans held for investment on the consolidated balance sheets at June 30, 2021. 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”). The Class A, Class B, and Class C notes bear interest at a fixed rate of 2.10 %, 3.54 %, and 6.23 %, respectively, and each class has a maturity date of February 18, 2025. Principal and interest payments began in September 2020 and are payable monthly. These notes are recorded at amortized cost on the consolidated balance sheet. The associated debt issuance costs, which totaled $ 2.6 million as of June 30, 2021, are deferred and amortized into interest expense over the contractual life of the notes. The 2020-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 $ 368.2 million on the consolidated balance sheets at June 30, 2021 and are secured by loan receivables at amortized cost of $ 384.9 million included in loans held for investment on the consolidated balance sheets as of June 30, 2021. 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 associated debt issuance costs, which totaled $ 1.3 million as of June 30, 2021, are deferred and amortized into interest expense over 146 T able of C ontents the contractual life of the notes. 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 $ 241.1 million on the consolidated balance sheets at June 30, 2021 and are secured by loan receivables at amortized cost of $ 248.3 million included in loans held for investment on the consolidated balance sheets at June 30, 2021. 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 13. 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, which totaled $ 3.1 million as of June 30, 2021, are deferred and amortized into interest expense over the contractual life of the notes. 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 $ 499.9 million on the consolidated balance sheets at June 30, 2021 and are secured by loan receivables at amortized cost of $ 489.8 million included in loans held for investment on the consolidated balance sheets as of June 30, 2021. The following tables present the aggregate carrying value of financial assets and liabilities from our involvement with consolidated VIEs. 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 June 30, 2020 Assets Liabilities Net Assets Warehouse credit facilities $ 887,897 $ 820,715 $ 67,182 Securitizations — — — Total consolidated VIEs $ 887,897 $ 820,715 $ 67,182 Unconsolidated VIEs For the year ended June 30, 2021, Affirm Asset Securitization Trust 2021-Z1 (“2021-Z1”) was an unconsolidated VIE. As the servicer of the loans held within the trust, we have the power to direct the activities that are most significant to the performance of the VIE. However, 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, 2021. 147 T able of C ontents 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 consolidating the 2021-Z1 trust, we recognized a gain of $ 16.7 million, primarily driven by the gain on sale of the loans sold to the trust at closing. We did not have any unconsolidated VIEs in prior periods. The following table presents the aggregate carrying value of financial assets and liabilities for unconsolidated VIEs where we hold a variable interest but are not the primary beneficiary as of June 30, 2021 : 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 trust and cash held in the collection and reserve accounts established for the trust. Liabilities include the outstanding principal balance of the 2021-Z1 notes. Maximum exposure to losses represents our exposure through our continuing involvement as servicer and through our retained interests. For 2021-Z1, this includes $ 16.2 million in retained 2021-Z1 notes and residual certificates disclosed within securitization notes receivable and residual certificates (at fair value) in our consolidated balance sheets and $ 0.7 million related to our 2021-Z1 servicing asset and receivables disclosed within other assets in our consolidated balance sheets. 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, this amount was not material as of June 30, 2021. 148 T able of C ontents 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 as “available-for-sale” and as such they are disclosed at fair value in our consolidated balance sheets. The following table contains the amortized cost basis, effect of allowance for credit losses recorded in other income (expense), net, and unrealized gains and losses recorded in other comprehensive income (loss) as of June 30, 2021 (in thousands) : June 30, 2021 Amortized Cost Allowance for Credit Losses Total Unrealized Gains Total Unrealized Losses Fair Value Securitization notes receivable and residual certificates $ 16,144 $ ( 3 ) $ 29 $ — $ 16,170 Total $ 16,144 $ ( 3 ) $ 29 $ — $ 16,170 See Note 13. Fair Value of Financial Assets and Liabilities for additional information on the fair value sensitivity of the residual certificates. Additionally, as of June 30, 2021 , we have pledged the 2021-Z1 retained beneficial interests as collateral in connection with a repurchase agreement as described in Note 11. Debt . 13. Fair Value of Financial Assets and Liabilities ASC 820, "Fair Value Measurement" ("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. 149 T able of C ontents 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, 2021 (in thousands): Level 1 Level 2 Level 3 Total Assets: Securitization notes receivable $ — $ — $ 15,224 $ 15,224 Residual trust certificates — — 946 946 Servicing assets — — 2,349 2,349 Interest rate cap agreement — 2,880 — 2,880 Total assets $ — $ 2,880 $ 18,519 $ 21,399 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 — — 147,820 147,820 Profit share liability — — 2,464 2,464 Total liabilities $ — $ — $ 156,449 $ 156,449 The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2020 (in thousands): Level 1 Level 2 Level 3 Total Assets: Servicing assets $ — $ — $ 2,132 $ 2,132 Total assets $ — $ — $ 2,132 $ 2,132 Liabilities: Constant maturity swaps $ — $ 3,297 $ — $ 3,297 Servicing liabilities — — 1,540 1,540 Performance fee liability — — 875 875 Convertible debt derivative — — 6,607 6,607 Total liabilities $ — $ 3,297 $ 9,022 $ 12,319 There were no transfers between levels during the years ended June 30, 2021 and June 30, 2020. 150 T able of C ontents Assets and Liabilities Measured at Fair Value on a Recurring Basis (Level 2) Securitization Notes Receivable As of the year ended June 30, 2021, we held a retained interest in senior notes issued by our 2021-Z1 securitization. Refer to Note 12. Securitizations and Variable Interest Entities for a description of the securitization notes receivable. As of the year ended June 30, 2021, the securitization notes receivables are recorded at fair value based on an observable market-based transaction price and are classified as Level 2. Derivative Instruments (Interest Rate Cap Agreement and Constant Maturity Swaps) As of the year ended June 30, 2021, we had one interest rate cap agreement outstanding to manage interest costs and the risk associated with variable interest rates. This derivative has not been designated as a hedging instrument. As of the year June 30, 2021 the interest rate cap is classified as Level 2 and recorded at fair value, based on prices quoted for similar financial instruments in markets that are not active. The interest rate cap is presented within other assets or accrued expenses and other liabilities on the consolidated balance sheets. Any changes in the fair value of the financial instrument is reflected in other income (expense), net, on the consolidated statements of operations and comprehensive loss. During the year ended June 30, 2020, we acquired a series of constant maturity swaps from an institutional bank for the purpose of offsetting variable cash flows related to loan sale pricing fluctuations with a third-party loan buyer. These derivatives have not been designated as hedging instruments. The constant maturity swaps are recorded at fair value, based on prices quoted for similar financial instruments in markets that are not active, and are presented within other assets or accrued expenses and other liabilities on the consolidated balance sheets, together with the collateral amount required by the agreements. Any changes in the fair value of these financial instruments are reflected in other income (expense), net, on the consolidated statements of operations and comprehensive loss. 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, 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 $ 3,232.9 million, $ 2,664.4 million, and $ 1,014.2 million for the years ended June 30, 2021, 2020, and 2019, respectively, for which we retained servicing rights. As of June 30, 2021 and June 30, 2020, we serviced loans which we sold with a remaining unpaid principal balance of $ 2,453.9 million and $ 1,365.6 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. 151 T able of C ontents 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 $ 24.7 million, $ 14.8 million, and $ 5.1 million of servicing income for the years ended June 30, 2021, 2020, and 2019, respectively. As of June 30, 2021 and June 30, 2020, the aggregate fair value of the servicing assets was measured at $ 2.3 million and $ 2.1 million, respectively, and presented within other assets on the consolidated balance sheets. As of June 30, 2021 and June 30, 2020, the aggregate fair value of the servicing liabilities was measured at $ 4.0 million and $ 1.5 million, respectively, and presented within accrued expenses and other liabilities on the consolidated balance sheets. The following table summarizes the activity related to the aggregate fair value of our servicing assets (in thousands): Servicing Assets Year Ended June 30, 2021 2020 Fair value at beginning of period $ 2,132 $ 1,680 Initial transfers of financial assets 2,915 1,899 Subsequent changes in fair value ( 2,698 ) ( 1,447 ) Fair value at end of period $ 2,349 $ 2,132 The following table summarizes the activity related to the aggregate fair value of our servicing liabilities (in thousands): Servicing Liabilities Year Ended June 30, 2021 2020 Fair value at beginning of period $ 1,540 $ 1,130 Initial transfers of financial assets 8,794 2,845 Subsequent changes in fair value ( 6,373 ) ( 2,435 ) Fair value at end of period $ 3,961 $ 1,540 152 T able of C ontents 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 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, 2020: Unobservable Input Minimum Maximum Weighted Average Servicing assets Discount rate 30.00 % 30.00 % 30.00 % Adequate compensation (1) 0.73 % 0.89 % 0.76 % Net default rate 0.81 % 0.82 % 0.82 % Servicing liabilities Discount rate 30.00 % 30.00 % 30.00 % Adequate compensation (1) 2.00 % 3.18 % 2.55 % Net default rate 6.45 % 10.99 % 9.16 % (1) Estimated cost of servicing a loan as a percentage of unpaid principal balance 153 T able of C ontents 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, 2021 June 30, 2020 Servicing assets Net default rate assumption: Net default rate increase of 25% $ ( 7 ) $ ( 9 ) Net default rate increase of 50% $ ( 15 ) $ ( 21 ) Adequate compensation assumption: Adequate compensation increase of 25% $ ( 2,006 ) $ ( 1,338 ) Adequate compensation increase of 50% $ ( 4,011 ) $ ( 2,675 ) Discount rate assumption: Discount rate increase of 25% $ ( 4 ) $ ( 27 ) Discount rate increase of 50% $ ( 1 ) $ ( 56 ) Servicing liabilities Net default rate assumption: Net default rate increase of 25% $ ( 40 ) $ ( 8 ) Net default rate increase of 50% $ ( 61 ) $ ( 12 ) Adequate compensation assumption: Adequate compensation increase of 25% $ 3,060 $ 1,438 Adequate compensation increase of 50% $ 6,119 $ 2,875 Discount rate assumption: Discount rate increase of 25% $ ( 137 ) $ ( 48 ) Discount rate increase of 50% $ ( 263 ) $ ( 91 ) 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 income (expense), net, on the consolidated statements of operations and comprehensive loss. 154 T able of C ontents The following table summarizes the activity related to the fair value of the performance fee liability (in thousands): Year Ended June 30, 2021 2020 Fair value at beginning of period $ 875 $ 488 Purchases of loans 1,372 1,054 Subsequent changes in fair value ( 957 ) ( 667 ) Fair value at end of period $ 1,290 $ 875 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, 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 % 1.8 % 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, 2020: Unobservable Input Minimum Maximum Weighted Average Discount rate 10.00 % 10.00 % 10.00 % Refund rate 4.50 % 4.50 % 4.50 % Default rate 2.17 % 3.71 % 2.72 % Convertible Debt Derivative Refer to Note 11. Debt for a description of the convertible debt derivative liability. On September 11, 2020, the convertible notes were converted into 4,444,321 shares of Series G-1 redeemable convertible preferred stock. The conversion of the notes was accounted for as a debt extinguishment and as such the convertible debt derivative liability was extinguished. 155 T able of C ontents Residual Trust Certificates Held by Third-Parties in Consolidated VIEs Refer to Note 12. Securitizations 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 income (expense), 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 (in thousands): Year Ended June 30, 2021 Fair value at beginning of period $ — Initial transfer of financial assets 1,468 Repayments ( 354 ) Subsequent changes in fair value ( 200 ) Fair value at end of period $ 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. 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, 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, 2021 Discount rate assumption: Discount rate increase of 25% $ ( 21 ) Discount rate increase of 50% $ ( 42 ) Loss rate assumption: Loss rate increase of 25% $ ( 28 ) Loss rate increase of 50% $ ( 56 ) Prepayment rate assumption: Prepayment rate decrease of 25% $ ( 10 ) Prepayment rate decrease of 50% $ ( 20 ) 156 T able of C ontents Retained Beneficial Interests in Unconsolidated VIEs As of June 30, 2021 , the Company held residual trust certificates with an aggregate fair value of $ 0.9 million in connection with the 2021-Z1 securitization, which is an unconsolidated securitization. The balances consist of residual trust certificates corresponding to the 5 % economic risk retention the Company is required to maintain as the securitization sponsor. Refer to Note 12. Securitizations and Variable Interest Entities for further description of the 2021-Z1 securitization trust. These assets are measured at fair value using a discounted cash flow model, and presented within securitization notes receivable and residual certificates (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 impairment, 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 income (expense), 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 (in thousands): Year Ended June 30, 2021 Fair value at beginning of period $ — Additions 15,655 Cash received (due to payments or sales) ( 14,754 ) Change in unrealized gain (loss) 29 Accrued interest 16 Reversal of (impairment on) securities available for sale — Fair value at end of period $ 946 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, 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): 157 T able of C ontents June 30, 2021 Discount rate assumption: Discount rate increase of 25% $ ( 22 ) Discount rate increase of 50% $ ( 44 ) Loss rate assumption: Loss rate increase of 25% $ ( 24 ) Loss rate increase of 50% $ ( 48 ) Prepayment rate assumption: Prepayment rate decrease of 25% $ ( 13 ) Prepayment rate decrease of 50% $ ( 27 ) Contingent Consideration Our acquisition of PayBright included consideration transferred and shares held in escrow where the shares released from escrow are contingent upon the achievement of future milestones. We classified the contingent consideration as a liability and will remeasure the liability to its fair value at each reporting date until the contingency is resolved. The acquisition date fair value of the contingent consideration liability was estimated using a Monte Carlo simulation. The number of shares released from escrow is determined based on simulated revenue, and the acquisition date fair value of the contingent consideration is equal to the number of shares released from escrow multiplied by the simulated share price, discounted at the risk-free rate. The change in fair value of the contingent consideration at each reporting date is recognized as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss for the respective period. 158 T able of C ontents The following table summarizes the activity related to the fair value of the PayBright contingent consideration (in thousands): Year Ended June 30, 2021 Fair value at beginning of period $ — Acquisition date fair value 57,275 Subsequent changes in fair value 87,231 Effect of foreign currency translation 3,314 Fair value at end of period $ 147,820 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 PayBright 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 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 will be remeasured to fair value at each reporting date based on the remaining amount held in escrow, passage of time, and 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 income (expense), net in the consolidated statements of operations and comprehensive loss for the respective period. The acquisition date fair value as of June 1, 2021 was $ 1.2 million. For the year ended June 30, 2021, the change in fair value of the contingent consideration asset related to the Kite acquisition was not material. Profit Share Liability During the year ended June 30, 2021, we entered into a commercial agreement with an enterprise partner, pursuant to which we are obligated to share in the profitability of transactions facilitated by our platform on their properties. 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. 159 T able of C ontents The following table summarizes the activity related to the fair value of the profit share liability (in thousands): Year Ended June 30, 2021 Fair value at beginning of period $ — Facilitation of loans 4,206 Actual performance ( 1,661 ) Subsequent changes in fair value ( 81 ) Fair value at end of period $ 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, 2021: Unobservable Input Minimum Maximum Weighted Average Discount rate 30.00 % 30.00 % 30.00 % Program profitability 1.79 % 3.75 % 3.75 % 160 T able of C ontents 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, 2021 (in thousands): Carrying Amount Level 1 Level 2 Level 3 Balance at Fair Value Assets: Cash and cash equivalents $ 1,466,558 $ 1,466,558 $ — $ — $ 1,466,558 Restricted cash 226,074 226,074 — — 226,074 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 $ 3,873,047 $ 1,692,632 $ 275,855 $ 1,883,364 $ 3,851,851 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 $ 2,146,109 161 T able of C ontents The following table presents the fair value hierarchy for financial assets and liabilities not recorded at fair value as of June 30, 2020 (in thousands): Carrying Amount Level 1 Level 2 Level 3 Balance at Fair Value Assets: Cash and cash equivalents $ 267,059 $ 267,059 $ — $ — $ 267,059 Restricted cash 61,069 61,069 — — 61,069 Loans held for sale 4,459 — 4,459 — 4,459 Loans held for investment, net 939,175 — — 922,919 922,919 Accounts receivable, net 59,001 — 59,001 — 59,001 Other assets 7,984 — 7,984 — 7,984 Total assets $ 1,338,747 $ 328,128 $ 71,444 $ 922,919 $ 1,322,491 Liabilities: Accounts payable $ 18,361 $ — $ 18,361 $ — $ 18,361 Payable to third-party loan owners 24,998 — 24,998 — 24,998 Accrued interest payable 1,860 — 1,860 — 1,860 Accrued expenses and other liabilities 25,395 — 25,395 — 25,395 Convertible debt 67,615 — — 67,615 67,615 Funding debt 817,926 — — 805,910 805,910 Total liabilities $ 956,155 $ — $ 70,614 $ 873,525 $ 944,139 14. Redeemable Convertible Preferred Stock and Stockholders’ Deficit 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. During the year ended June 30, 2020, we issued 75,872 shares of Series F redeemable convertible preferred stock at $ 13.18 per share for an aggregate purchase amount of $ 1.0 million. Additionally, we reissued 1,100,000 shares of our Series A redeemable convertible preferred stock at $ 13.18 per share for gross proceeds of $ 14.5 million and repurchased 1,326,611 shares of our Series C redeemable convertible preferred stock at $ 13.18 per share for an aggregate purchase price of $ 17.5 million and 386,994 shares of our Series D redeemable convertible preferred stock at $ 13.18 per share for an aggregate purchase price of $ 5.1 million. The repurchases were recorded as a decrease to the carrying value of redeemable convertible preferred stock and the excess of the purchase price over the carrying amount of redeemable convertible preferred stock was recorded to additional paid in capital. During the year ended June 30, 2019, we issued 23,310,166 shares of Series F redeemable convertible preferred stock at $ 13.18 per share for an aggregate purchase amount of $ 307.3 million. Additionally, we repurchased 1,100,000 shares of our Series A redeemable convertible preferred stock at $ 13.18 per share for an aggregate purchase price of $ 14.5 million. The repurchase was recorded as a decrease to the carrying value of 162 T able of C ontents redeemable convertible preferred stock and the excess of the purchase price over the carrying amount of the redeemable convertible preferred stock was recorded to additional paid in capital. On January 12, 2021, prior to our initial public offering, 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, 2021, there were no shares of redeemable convertible preferred stock issued and outstanding. A summary of the authorized, issued and outstanding redeemable convertible preferred stock as of June 30, 2020 is as follows: Shares Carrying Value (in thousands) Liquidation Preference (in thousands) Series Authorized Issued and Outstanding A 21,428,572 21,428,572 $ 21,598 $ 21,616 B 19,788,417 19,788,417 25,941 26,000 C 15,129,141 13,802,530 72,661 72,905 D 22,705,526 22,318,532 137,471 137,614 E 21,391,882 21,391,882 242,435 242,597 F 24,009,471 23,386,038 304,064 308,300 Total 124,453,009 122,115,971 $ 804,170 $ 809,032 Significant terms of the redeemable convertible preferred stock were as follows: Liquidation Preference In the event of any liquidation event, either voluntary or involuntary, the holders of each series of redeemable convertible preferred stock shall be entitled to receive on a pari passu basis, prior and in preference to any distributions of any assets of the Company to the holders of the common stock by reason of their ownership thereof, an amount per share equal to the sum of one times the applicable original issuance price plus any declared but unpaid dividends. The original issuance price for Series A redeemable convertible preferred stock, Series B redeemable convertible preferred stock, Series C redeemable convertible preferred stock, Series D redeemable convertible preferred stock, Series E redeemable convertible preferred stock, Series F redeemable convertible preferred stock, Series G redeemable convertible preferred stock, and Series G-1 redeemable convertible preferred stock is $ 0.3500 , $ 1.3139 , $ 5.2766 , $ 6.1659 , $ 11.3406 , $ 13.1831 , $ 19.9263 , and $ 16.9374 per share, respectively. If the proceeds distributed among the holders of the redeemable convertible preferred shares are insufficient to permit the payment to such holders of the full preferential amounts, the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of the redeemable convertible preferred stock in proportion to the preferential amount that each such holder is otherwise entitled to receive. After payment has been made to the holders of the redeemable convertible preferred stock of their full respective preferential amounts, all of the remaining assets of the Company shall be distributed ratably among the holders of common stock. Dividends The holders of each series of redeemable convertible preferred stock shall be entitled to receive dividends, out of any funds legally available the rate of $ 1.3550 per annum for each share of Series G-1 redeemable preferred stock, $ 1.5941 per annum for each share of Series G redeemable convertible preferred stock, $ 1.0546 per annum for each share of Series F redeemable convertible preferred stock, $ 0.9072 per annum for each share of Series E 163 T able of C ontents redeemable convertible preferred stock, $ 0.4933 per annum for each share of Series D redeemable convertible preferred stock, $ 0.4221 per annum for each share of Series C redeemable convertible preferred stock, $ 0.1051 per annum for each share of Series B redeemable convertible preferred stock and $ 0.0280 per annum for each share of Series A redeemable convertible preferred stock (each as adjusted for stock splits, stock dividends, reclassification and the like) payable quarterly when, as, and if declared by the Board of Directors. Such dividends shall not be cumulative. Following the payment in full of any dividends to the holders of redeemable convertible preferred stock, any additional dividends shall be distributed first to the holders of the common stock until each holder of common stock has received an amount equal to $ 0.0280 per share (as adjusted for stock splits, stock dividends, reclassification and the like) and then among the holders of Series A redeemable convertible preferred stock and common stock pro rata based on the number of shares of common stock then held by each holder (assuming conversion of all such Series A redeemable convertible preferred stock into common stock), until each such holder of common stock or Series A redeemable convertible preferred stock has received an additional $ 0.0771 per share (as adjusted for stock splits, stock dividends, reclassification and the like) and then among the holders of Series A redeemable convertible preferred stock, the Series B redeemable convertible preferred stock and common stock pro rata based on the number of shares of common stock then held by each holder (assuming conversion of all such Series A redeemable convertible preferred stock into common stock), until each such holder of common stock, Series A redeemable convertible preferred stock or Series B redeemable convertible preferred stock has received an additional $ 0.3170 per share (as adjusted for stock splits, stock dividends, reclassification and the like) and then among the holders of Series A redeemable convertible preferred stock, the Series B redeemable convertible preferred stock, the Series C redeemable convertible preferred stock and common stock pro rata based on the number of shares of common stock then held by each holder (assuming conversion of all such Series A redeemable convertible preferred stock, Series B redeemable convertible preferred stock and Series C redeemable convertible preferred stock into Common Stock), until each holder of common stock, Series A redeemable convertible preferred stock, Series B redeemable convertible preferred stock or Series C redeemable convertible preferred stock has received an additional $ 0.0712 per share (as adjusted for stock splits, stock dividends, reclassification and the like) and then among holders of Series A redeemable convertible preferred stock, the Series B redeemable convertible preferred stock, the Series C redeemable convertible preferred stock, the Series D redeemable convertible preferred stock and common stock pro rata based on the number of shares of common stock then held by each holder (assuming conversion of all such Series A redeemable convertible preferred stock, Series B redeemable convertible preferred stock, Series C redeemable convertible preferred stock and Series D redeemable convertible preferred stock into Common Stock) until each such holder of common stock, Series A redeemable convertible preferred stock, Series B redeemable convertible preferred stock, Series C redeemable convertible preferred stock or Series D redeemable convertible preferred stock has received an additional $ 0.4139 per share (as adjusted for stock splits, stock dividends, reclassification and the like), and then among the holders of Series A redeemable convertible preferred stock, Series B redeemable convertible preferred stock, Series C redeemable convertible preferred stock, Series D redeemable convertible preferred stock, Series E redeemable convertible preferred stock, Series F redeemable convertible preferred stock, Series G redeemable convertible preferred stock, Series G-1 redeemable convertible preferred stock and common stock pro rata based on the number of shares of common stock then held by each holder (assuming conversion of all such Series A redeemable convertible preferred stock, Series B redeemable convertible preferred stock, Series C redeemable convertible preferred stock, Series D redeemable convertible preferred stock, Series E redeemable convertible preferred stock, Series F redeemable convertible preferred stock, Series G redeemable convertible preferred stock, and Series G-1 redeemable convertible preferred stock into common stock). Voting The holders of redeemable convertible preferred stock have the same voting rights as a holder of common stock. The holders of common stock and redeemable convertible preferred stock vote together as a single class in all matters. Each holder of common stock is entitled to one vote for each share of common stock held, and each holder of redeemable convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of redeemable convertible preferred stock could then be converted. The holders of the common stock, voting separately as a single class, are entitled to elect three directors of the 164 T able of C ontents corporation. The holders of the Series B redeemable convertible preferred stock, voting separately as a single class, are entitled to elect two of the corporation. The holders of the Series C redeemable convertible preferred stock, voting separately as a single class, are entitled to elect one director of the corporation. The holders of the Series D redeemable convertible preferred stock, voting separately as a single class, are entitled to elect one director of the corporation. The holders of the Series F redeemable convertible preferred stock, voting separately as a single class, are entitled to elect one director of the corporation. The holders of the common stock and redeemable convertible preferred stock (excluding the Series E redeemable convertible preferred stock), voting together as a single class, on an as converted basis, are entitled to elect all other directors of the corporation. Conversion Each share of redeemable convertible preferred stock is convertible to common stock at the option of the holder. Such conversion is determined by dividing the original issue price by the then-effective conversion price (adjusted for any stock dividends, combinations, or splits with respect to such shares). As of June 30, 2020, each share of redeemable convertible preferred stock was convertible into one share of common stock. Each share of redeemable convertible preferred stock is automatically converted into shares of common stock at the conversion rate then in effect for such series of redeemable convertible preferred stock immediately upon the earlier of (i) the Company’s sale of its common stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, resulting in a post-offering market capitalization of the Company of at least $ 2 billion and for the total offering with gross proceeds to the Company of not less than $ 100 million or (ii) the date or upon the occurrence of an event, specified by written consent or agreement of each of (A) the holders of at least sixty percent of the Series B redeemable convertible preferred stock then outstanding, voting as a separate series, (B) the holders of at least seventy-five percent of the Series C redeemable convertible preferred stock then outstanding, voting as a separate series and (C) the holders of at least a majority of the Series D redeemable convertible preferred stock then outstanding, voting as a separate series, (D) the holders of a majority of the Series E redeemable convertible preferred stock then outstanding, voting as separate series, and (E) either (x) the holders of at least eighty-five percent of the then outstanding shares of Series F redeemable convertible preferred stock, voting as a separate series, or (y) the holders of a majority of the then outstanding shares of Series F redeemable convertible preferred stock, voting as a separate series, provided that such majority includes the Special Series F Investor Vote, and (F) the holders of a majority of the Series G redeemable convertible preferred stock then outstanding, voting as a separate series. Redemption The redeemable convertible preferred stock does not have any redemption rights that are at the election of the holders. However, the redeemable convertible preferred stock is entitled to payment upon the occurrence of certain contingent liquidity events that do not cause the entire entity to be liquidated, such as certain change of control provisions. As it relates to payment upon the occurrence of a contingent event, we evaluated the redeemable convertible preferred stock in accordance with the guidance in ASC 480, “Distinguishing Liabilities from Equity,” and determined that the payment of liquidation amounts due upon the occurrence of a contingent event is not solely within our control and accordingly the redeemable convertible preferred stock is classified in temporary equity in the consolidated balance sheet. As it relates to the accretion to redemption value, the redeemable convertible preferred stock is not currently redeemable, nor is it probable that the instrument will become redeemable, as it is only redeemable upon the occurrence of a contingent event that is not probable to occur. Accordingly, no accretion has been recognized for the redeemable convertible preferred stock and it will not be accreted until it is probable that the shares will become redeemable. 165 T able of C ontents Common Stock The Company had shares of common stock reserved for issuance as follows: June 30, 2021 June 30, 2020 Conversion of redeemable convertible preferred stock — 122,115,971 Exercise of warrants — 706,065 Available outstanding under stock option plan 58,417,514 50,771,657 Available for future grant under stock option plan 29,793,755 4,904,531 Total 88,211,269 178,498,224 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, 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. This asset is recorded in our consolidated balance sheets within other assets. Refer to Note 6. Balance Sheet Components for more information on the asset and related amortization. During the year ended June 30, 2020, we issued warrants to purchase 400,000 shares of common stock in connection with an agreement with a merchant partner. The exercise price was $ 3.80 per share and the term of the warrants was 10 years. We valued the warrants at issuance 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 55 % and a risk-free rate of 1.54 %. In connection with these warrants issued during the year ended June 30, 2020, we recorded an expense of $ 2.8 million representing the fair value of these warrants which is recorded in our consolidated statements of operations as a component of sales and marketing within operating expenses. 166 T able of C ontents The following table summarizes the warrant activity for the years ended June 30, 2021 and June 30, 2020: 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 15. Equity and Cash Incentive Plans 2012 Equity Incentive Plan Under our 2012 Equity Incentive Plan (the “Plan”), we may grant incentive and nonqualified stock options, restricted stock, and RSUs to employees, officers, directors, and consultants. As of June 30, 2021, the maximum number of shares of common stock reserved for issuance under the Plan is 118,374,202 shares. As of June 30, 2021 and June 30, 2020, there were 29,793,755 and 4,904,531 shares of common stock, respectively, available for future grants under the Plan. Stock Options Under the Plan, stock options may be granted at a price per share not less than 100 % of the fair market value at the date of grant. If the option is granted to a stockholder who holds 10% of our common stock or more, then the exercise price per share shall not be less than 110 % of the fair market value per share of common stock on the grant date. For stock options granted before our IPO in January 2021, the minimum expiration period is 7 years or 10 years from the date of grant. For stock options granted after our IPO, the minimum expiration period is 3 months after termination or 10 years from the date of grant. Stock options generally vest over a period of 4 years or with 25 % vesting on the 12 month anniversary of the employment commencement date, and the remaining on a pro-rata basis each month over the next 3 years. The following table summarizes our stock option activity for the year ended June 30, 2021: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balance, June 30, 2020 42,536,487 $ 5.17 7.54 Granted 3,721,339 49.96 Exercised ( 12,322,236 ) 3.76 Forfeited, expired or cancelled ( 2,272,840 ) 12.42 Balance, June 30, 2021 31,662,750 10.42 6.30 Vested and exercisable, June 30, 2021 21,016,185 $ 4.68 6.30 $ 2,801,256 Vested and expected to vest thereafter (1) June 30, 2021 30,043,681 $ 8.64 6.87 $ 3,465,589 (1) Options expected to vest reflect the application of an estimated forfeiture rate. 167 T able of C ontents The weighted-average grant date fair value of employee options granted for the years ended June 30, 2021, 2020, and 2019, was $ 59.83 , $ 3.26 , and $ 4.66 , respectively. The aggregate intrinsic value of options exercised was approximately $ 706.7 million, $ 3.1 million, and $ 24.3 million for the years ended June 30, 2021, 2020, and 2019, respectively. The total fair value of stock options vested during the years ended June 30, 2021, 2020, and 2019 was $ 97.4 million, $ 53.9 million, and $ 26.0 million, respectively. Stock-based compensation expense for all stock-based awards is based on the grant-date fair value on a straight-line basis over the requisite service period of the awards, which is generally the option vesting term of 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 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, 2021 2020 2019 Volatility 46 % 45 % 54 % Risk-free interest rate 0.70 % - 1.05 % 0.28 % - 1.76 % 1.91 % - 3.07 % Expected term (in years) 6.35 5.87 6 Expected dividend — — — As of June 30, 2021, unrecognized compensation expense related to unvested stock options was approximately $ 140.6 million. The weighted-average period over which such compensation expense will be recognized is approximately 5.33 years. Stock Options for Non-Employees In accounting for stock options to non-employees, the fair value of services related to the options granted is recorded as an expense as these services are provided to the Company over the relevant service periods. We remeasure any non-vested, non-employee options to fair value at the end of each reporting period using the Black Scholes-Merton option pricing model. Stock Options with Early Exercise Rights In accordance with the Plan, we allow for early exercise of stock options while retaining the right to repurchase any unvested options upon termination at the original exercise price. The proceeds received from early exercise of stock options has been recorded within accrued expenses and other liabilities on the consolidated balance sheets. For the years ended June 30, 2021 and 2020, the early exercise liability totaled $ 0.9 million and $ 0.2 million, respectively. Value Creation Award 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 168 T able of C ontents 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 on an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable of being satisfied. During the year ended June 30, 2021, we incurred stock-based compensation expense of $ 83.9 million associated with the Value Creation Award as a component of general and administrative expense within the consolidated statements of operations and comprehensive loss. As of June 30, 2021, unrecognized compensation expense related to the Value Creation Award was approximately $ 367.2 million. The period over which such compensation expense will be recognized is approximately 4.50 years. Restricted Stock Units During the year ended June 30, 2021, we awarded 11,860,237 RSUs to certain employees under the Plan. 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. We record stock-based compensation expense for performance-based equity awards and stock on an accelerated attribution method over the requisite service period, which is generally four years , and only if performance-based conditions are considered probable of being satisfied. 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 four years . 169 T able of C ontents The following table summarizes our RSU activity during the year ended June 30, 2021: Number of Shares Weighted Average Grant Date Fair Value Non-vested at June 30, 2020 8,235,170 $ 7.95 Granted 11,860,237 31.26 Vested ( 4,651,977 ) 13.97 Forfeited, expired or cancelled ( 1,201,319 ) 18.85 Non-vested at June 30, 2021 14,242,111 $ 36.69 As of June 30, 2021, unrecognized compensation expense related to unvested RSUs was approximately $ 294.1 million. The weighted-average period over which such compensation expense will be recognized is approximately 6.22 years. Stock-Based Compensation Expense The following table presents the components and classification of stock-based compensation (in thousands): Year Ended June 30, 2021 2020 2019 General and administrative $ 183,055 $ 13,682 $ 22,647 Technology and data analytics 83,390 12,285 13,913 Sales and marketing 19,181 4,040 4,179 Processing and servicing 2,407 82 132 Total stock-based compensation in operating expenses 288,033 30,089 40,871 Capitalized into property, equipment and software, net 13,999 2,921 2,882 Total stock-based compensation expense $ 302,032 $ 33,010 $ 43,753 Upon our IPO, we recognized $ 77.8 million of stock-based compensation expense for awards with a performance-based vesting condition satisfied at IPO. Shares were then issued related to the vesting of the RSUs with such performance-based vesting conditions. To meet the related tax withholding requirements, we withheld approximately 1.0 million of the 2.6 million shares of common stock issued. Based on the closing trading market price on the day of IPO of $ 97.24 per share, the tax withholding obligation was approximately $ 102.5 million. As a result of stock-based compensation expense for vested and unvested RSUs upon the IPO, we recorded an additional deferred tax asset that is offset by a full valuation allowance. In connection with the acquisition of Returnly on May 1, 2021, we issued 304,364 shares of our 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. 170 T able of C ontents Cash Incentive Plan On March 4, 2021, the Compensation Committee of the Board of Directors approved the terms of a cash incentive plan (the “Fiscal 2021 Cash Incentive Plan”) for its senior executives who do not participate in a Company sales incentive plan. The Fiscal 2021 Cash Incentive Plan provides such individuals with the opportunity to earn cash incentive plan awards based upon the achievement of Company performance goals during the second half of the Company’s 2021 fiscal year (the “Performance Period”). The target incentive plan award for each senior executive is determined by multiplying the senior executive’s target percentage by the total amount of his or her base pay received during the Performance Period. We recorded expense related to the cash incentive plan of $ 1.9 million f or the year ended June 30, 2021. As of June 30, 2021, we had accrued $ 1.9 million related to the cash incentive plan. 16. Income Taxes The U.S. and foreign components of loss before income taxes for the years ended June 30, 2021, 2020, and 2019 are as follows (in thousands): Year Ended June 30, 2021 2020 2019 U.S. $ 325,839 $ 112,080 $ 120,417 Foreign 107,427 142 2 Total loss before income taxes $ 433,266 $ 112,222 $ 120,419 Income tax (benefit) expense for the years ended June 30, 2021, 2020, and 2019 is summarized as follows (in thousands): Year Ended June 30, 2021 2020 2019 Current Federal $ — $ — $ — State ( 10 ) 351 — Foreign ( 410 ) 436 — Total current expense $ ( 420 ) $ 787 $ — Deferred Federal 88 6 21 State ( 2,570 ) 28 15 Foreign 559 ( 445 ) — Total deferred expense ( 1,923 ) ( 411 ) 36 Income tax (benefit) expense $ ( 2,343 ) $ 376 $ 36 The income tax benefit for the year ended June 30, 2021 was primarily attributable to a $ 2.8 million adjustment to the Company's valuation allowance resulting from a deferred tax liability assumed with the acquisition of Returnly, while the income tax expense for the years ended June 30, 2020 and June 30, 2019 was primarily attributable to various state income taxes and the tax amortization of certain intangibles, respectively. 171 T able of C ontents 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, 2021, 2020, and 2019: Year Ended June 30, 2021 2020 2019 U.S. statutory federal income tax rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal tax benefit 9.2 % 10.5 % 6.6 % Foreign rate differential 1.4 % — % — % Non-deductible expenses ( 9.1 ) % ( 1.1 ) % ( 0.4 ) % Impact of change in fair value of contingent consideration ( 5.4 ) % — % — % Stock-based compensation 67.9 % ( 0.4 ) % ( 2.9 ) % Impact of convertible debt extinguishment 2.4 % — % — % Tax benefit related to tax credits, net 0.5 % — % — % Other 0.2 % ( 0.8 ) % 0.5 % Change in valuation allowance ( 87.6 ) % ( 29.6 ) % ( 24.9 ) % Effective income tax rate 0.5 % ( 0.4 ) % ( 0.1 ) % Significant components of deferred tax assets and liabilities are as follows (in thousands): June 30, 2021 June 30, 2020 Net operating loss carryforwards $ 430,464 $ 82,077 Allowance for credit losses 41,155 30,162 Stock-based compensation 51,126 17,210 Operating lease liabilities 23,914 1,363 Tax credit carryforwards 2,054 — Other 4,837 2,858 Total deferred tax assets $ 553,550 $ 133,670 Internally developed software ( 15,214 ) ( 8,943 ) Fixed assets ( 1,860 ) — Purchased intangible assets ( 18,150 ) ( 152 ) Right-of-use lease assets ( 18,386 ) — Convertible debt discount — ( 2,209 ) Mark to market adjustment — ( 9,657 ) Other ( 600 ) ( 262 ) Total deferred tax liabilities $ ( 54,210 ) $ ( 21,223 ) Valuation allowance ( 499,828 ) ( 112,107 ) Deferred tax assets (liabilities), net of valuation allowance $ ( 488 ) $ 340 We continue to recognize a full valuation allowance against our U.S. federal and state as well as the majority of our foreign 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, 2021, 2020, and 2019. The presence of a three-year cumulative loss limits the ability to consider other subjective evidence, such as our expectations of future taxable 172 T able of C ontents income and projections for growth. The valuation allowance increased by $ 387.7 million during the year ended June 30, 2021. At June 30, 2021, we had pretax U.S. federal net operating loss ("NOL") carryforwards of approximately $ 1,335.9 million, state NOL carryforwards of $ 1,608.8 million, and foreign NOL carryforwards of $ 41.4 million from the acquisition of PayBright. 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, 2021, we also had state tax credit carryforwards of $ 2.6 million, which will begin to expire in 2024 if not utilized. Of the above NOL carryforwards, approximately $ 43.0 million pretax U.S. federal NOL carryforwards and $ 39.0 million state NOL carryforwards are from domestic acquisitions, which may be subject to an annual utilization limitation under Internal Revenue Code Section 382. The future utilization of all 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. We did not have any material unrecognized tax benefits for the years ended June 30, 2021, 2020, and 2019. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease in 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, 2021, 2020, and 2019, 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 Canadian federal and provincial income tax returns with varying statutes of limitation. We also expect to file Spain income tax returns due to the acquisition of a Spanish subsidiary during the year ended June 30, 2021. All tax years remain open to examination due to the carryover of unused net operating losses. 173 T able of C ontents 17. 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 table presents basic and diluted net loss per share attributable to common stockholders for common stock (in thousands, except share and per share data): Year Ended June 30, 2020 2019 Numerator: Basic Net Loss $ ( 112,598 ) $ ( 120,455 ) Excess return to preferred stockholders on repurchase ( 13,205 ) ( 14,113 ) Net Loss Attributable to Common Stockholders $ ( 125,803 ) $ ( 134,568 ) Diluted Net Loss $ ( 112,598 ) $ ( 120,455 ) Excess return to preferred stockholders on repurchase ( 13,205 ) ( 14,113 ) Net Loss Attributable to Common Stockholders $ ( 125,803 ) $ ( 134,568 ) Denominator: Basic Weighted average shares outstanding, basic 47,856,720 47,345,328 Total-basic 47,856,720 47,345,328 Diluted Weighted average common shares outstanding, diluted 47,856,720 47,345,328 Total-diluted 47,856,720 47,345,328 Net loss per share attributable to common stockholders: Basic $ ( 2.63 ) $ ( 2.84 ) Diluted $ ( 2.63 ) $ ( 2.84 ) 174 T able of C ontents The following table presents 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, 2021 Class A Class B Numerator: Basic Net Loss $ ( 229,616 ) $ ( 201,307 ) Net Loss Attributable to Common Stockholders $ ( 229,616 ) $ ( 201,307 ) Diluted Net Loss $ ( 229,616 ) $ ( 201,307 ) 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 $ ( 244,485 ) $ ( 214,353 ) 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 $ ( 2.72 ) $ ( 2.72 ) Diluted $ ( 2.88 ) $ ( 2.88 ) 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: June 30, 2021 June 30, 2020 June 30, 2019 Redeemable convertible preferred stock — 122,115,971 122,653,704 Stock options, including early exercise of options 44,178,776 42,573,405 43,669,224 Restricted stock units 14,238,738 8,235,170 — Convertible debt — 7,182,478 — Common stock warrants 350,000 706,065 1,608,370 Total 58,767,514 180,813,089 167,931,298 175 T able of C ontents 18. 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, 2021 2020 2019 United States $ 857,222 $ 506,212 $ 264,367 Canada 13,242 3,316 — Total $ 870,464 $ 509,528 $ 264,367 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, 2021 2020 United States $ 118,076 $ 48,140 Canada 2,251 — Total $ 120,327 $ 48,140 19. Subsequent Events We have evaluated subsequent events through September 17, 2021, which is the date that these consolidated financial statements were available to be issued. There were no significant subsequent events identified other than the matters described below. Business Combination On July 1, 2021, Affirm Canada Holdings Ltd. (“Affirm Canada”), a subsidiary of Affirm, and Affirm completed the closing of the transaction contemplated by an Asset Purchase Agreement entered into with Yroo Inc., a developer of technologies that enable and enhance consumer e-commerce shopping intelligence and experience (“Shopbrain”), and the shareholder representative party thereto to acquire certain assets and assume certain liabilities of 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 initial accounting for the business combination is incomplete at the time of this filing due to the limited amount of time between the acquisition date and the date that these financial statements are issued. It is impracticable for us to provide all of the disclosures required for a business combination pursuant to ASC 805, Business Combinations. 2021-B Securitization On August 4, 2021, Affirm Asset Securitization Trust 2021-B (“2021-B”) entered into a note purchase agreement to issue $ 500.0 million of fixed rate asset-backed notes with a maturity date of August 17, 2026. 176 T able of C ontents ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 177 T able of C ontents