AFFIRM HOLDINGS, INC.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the interim condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q ("Form 10-Q") and our audited consolidated financial
statements and the related notes and the discussion under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the fiscal year ended June 30, 2021 included in our Annual
Report on Form 10-K (our "Annual Report"). Some of the information contained in
this discussion and analysis, including information with respect to our planned
investments to drive future growth, includes forward-looking statements that
involve risks and uncertainties. You should review the sections titled
"Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" of
this Form 10-Q and our most recently filed Annual Report on Form 10-K for a
discussion of forward-looking statements and important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis. For the periods presented, references to originating bank partners are
to Cross River Bank and Celtic Bank .
Overview
We are building the next generation platform for digital and mobile-first commerce. We believe that by using modern technology, the very best engineering talent, and a mission-driven approach, we can reinvent payments and commerce. Our solutions, which are built on trust and transparency, make it easier for consumers to spend responsibly and with confidence, easier for merchants to convert sales and grow, and easier for commerce to thrive. Our point-of-sale solutions allow consumers to pay for purchases in fixed amounts without deferred interest, hidden fees, or penalties. We empower consumers to pay over time rather than paying for a purchase entirely upfront. This increases consumers' purchasing power and gives them more control and flexibility. Our platform facilitates both true 0% APR payment options and interest-bearing loans. On the merchant side, we offer commerce enablement, demand generation, and customer acquisition tools. Our solutions empower merchants to more efficiently promote and sell their products, optimize their customer acquisition strategies, and drive incremental sales. We also provide valuable product-level data and insights - information that merchants cannot easily get elsewhere - to better inform their strategies. Finally, our consumer app unlocks the full suite of Affirm products for a delightful end-to-end consumer experience. Consumers can use our app to manage payments, open a high-yield savings account, and access a personalized marketplace. Our company is predicated on the principles of simplicity, transparency, and putting people first. By adhering to these principles, we have built enduring, trust-based relationships with consumers and merchants that we believe will set us up for long-term, sustainable success. We believe our innovative approach uniquely positions us to define the future of commerce and payments. Technology and data are at the core of everything we do. Our expertise in sourcing, aggregating, and analyzing data has been what we believe to be the key competitive advantage of our platform since our founding. We believe our proprietary technology platform and data give us a unique advantage in pricing risk. We use data to inform our risk scoring in order to generate value for our consumers, merchants, and capital partners. We collect and store petabytes of information that we carefully structure and use to regularly recalibrate and revalidate our models, thereby getting to risk scoring and pricing faster, more efficiently, and with a higher degree of confidence. We also prioritize building our own technology and investing in product and engineering talent as we believe these are enduring competitive advantages that are difficult to replicate. Our solutions use the latest in machine learning, artificial intelligence, cloud-based technologies, and other modern tools to create differentiated and scalable products.
We have achieved significant growth in recent periods. Our total revenue, net
was approximately
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Table of Contents
million and $608.7 million for the three and nine months ended March 31, 2021 ,
respectively. We incurred net losses of $54.7 million and $521.0 million for the
three and nine months ended March 31, 2022 , respectively, and $287.1 million and
$317.6 million for the three and nine months ended March 31, 2021 , respectively.
The combination of our differentiated product offerings, efficient go-to-market strategy, and strong monetization engine has resulted in fast growth.
•Rapid GMV growth. We grew our Gross Merchandise Volume ("GMV") by approximately
73% period-over-period to $3.9 billion during the three months ended March 31,
2022 from $2.3 billion during the three months ended March 31, 2021 . During the
nine months ended March 31, 2022 , GMV was $11.1 billion , which represented 91%
growth over the nine months ended March 31, 2021 .
•Increased consumer engagement. The number of active consumers on our platform
grew by 7.4 million consumers from March 31, 2021 to March 31, 2022 , an increase
of 137%, to a total of 12.7 million.
•Expanded merchant network. We have also continued to scale the breadth and
reach of our platform. From March 31, 2021 to March 31, 2022 , our merchant base
expanded from 11,513 to 207,049 active merchants due primarily to continued
expansion to merchants related to the Shopify partnership.
Our business is designed to scale efficiently. Our partnerships with banks and
other funding relationships have allowed us to remain equity capital efficient.
Since July 1, 2016 , we have processed approximately $28.6 billion of GMV on our
platform. As of March 31, 2022 , we had over $9.0 billion in funding capacity
from a diverse set of capital partners, including through our warehouse
facilities, securitization trusts, and forward flow arrangements, an increase of
$2.5 billion from $6.5 billion as of June 30, 2021 .
Through the diversity of these funding relationships, the equity capital
required to build our total platform portfolio has declined from approximately
4% of the total platform portfolio as of June 30, 2021 , to approximately 2% as
of March 31, 2022 . This metric measures the equity intensity of our business or
the amount of capital used in relation to the scale of our enterprise. We define
our total platform portfolio as the unpaid principal balance outstanding of all
loans facilitated through our platform as of the balance sheet date, including
both those loans held for investment and those loans owned by third-parties.
This amount totaled $6.7 billion and $4.7 billion as of March 31, 2022 and
June 30, 2021 , respectively. Additionally, we define the equity capital required
as the balance of loans held for investment plus loans held for sale less
funding debt and notes issued by securitization trusts, per our interim
condensed consolidated balance sheet. This amount totaled $157.7 million and
$178.1 million as of March 31, 2022 and June 30, 2021 , respectively. Equity
capital required as a percent of the last twelve months' GMV was 1% and 2% as of
March 31, 2022 and June 30, 2021 , respectively.
We believe that our continued success will depend on many factors, including our
ability to attract additional merchant partners, retain our existing merchant
partners, and grow and develop our relationships with new and existing merchant
partners, help our merchants grow their revenue on our platform, and develop new
innovative solutions to establish the ubiquity of our network and breadth of our
platform. For a further discussion of trends, uncertainties and other factors
that could impact our operating results, see the section entitled "Risk Factors"
in Item 1A, which is incorporated herein by reference.
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Table of Contents Our Financial Model Our Revenue Model From merchants, we earn a fee when we help them convert a sale and facilitate a transaction. While merchant fees depend on the individual arrangement between us and each merchant and vary based on the terms of the product offering, we generally earn larger merchant fees on 0% APR financing products. For both the three and nine months endedMarch 31, 2022 , 0% APR financing represented 43% of total GMV facilitated through our platform. For the three and nine months endedMarch 31, 2021 , 0% APR financing represented 43% and 45%, respectively, of total GMV facilitated through our platform. From consumers, we earn interest income on the simple interest loans that we originate or purchase from our originating bank partners. Interest rates charged to our consumers vary depending on the transaction risk, creditworthiness of the consumer, the repayment term selected by the consumer, the amount of the loan, and the individual arrangement with a merchant. Because our consumers are never charged deferred or compounding interest, late fees, or penalties on the loans, we are not incentivized to profit from our consumers' hardships. In addition, interest income includes the amortization of any discounts or premiums on loan receivables created upon either the purchase of a loan from one of our originating bank partners or the origination of a loan. In order to accelerate our ubiquity, we facilitate the issuance of virtual cards directly to consumers through our app, allowing them to shop with merchants that may not yet be fully integrated with Affirm. When these virtual cards are used over established card networks, we earn a portion of the interchange fee from the transaction.
Our Loan Origination and Servicing Model
When a consumer applies for a loan through our platform, the loan is underwritten using our proprietary risk model. Once approved for the loan, the consumer then selects his/her preferred repayment option. The substantial majority of these loans are funded and issued by our originating bank partners.
A substantial majority of the loans facilitated through our platform are originated through our originating bank partners:Cross River Bank , anFDIC -insuredNew Jersey state-chartered bank, andCeltic Bank , anFDIC -insuredUtah state-chartered industrial bank. These partnerships allow us to benefit from our partners' ability to originate loans under their banking licenses while complying with various federal, state, and other laws. Under this arrangement, we must comply with our originating bank partners' credit policies and underwriting procedures, and our originating bank partners maintain ultimate authority to decide whether to originate a loan or not. When an originating bank partner originates a loan, it funds the loan through its own funding sources and may subsequently offer and sell the loan to us. Pursuant to our agreements with these partners, we are obligated to purchase the loans facilitated through our platform that our partner offers us and our obligation is secured by cash deposits. To date, we have purchased all of the loans facilitated through our platform and originated by our originating bank partners. When we purchase a loan from an originating bank partner, the purchase price is equal to the outstanding principal balance of the loan, plus a fee and any accrued interest. The originating bank partner also retains an interest in the loans purchased by us through a loan performance fee that is payable by us on the aggregate principal amount of a loan that is paid by a consumer. See Note 13. Fair Value of Financial Assets and Liabilities for more information on the performance fee liability. We are also able to originate loans directly under our lending, servicing, and brokering licenses inCanada and across various states in theU.S. through our consolidated subsidiaries. For the three and nine months endedMarch 31, 2022 , we originated approximately$216.0 million and$645.7 million of loans inCanada , respectively, compared to approximately$103.4 million and$164.7 million for the three and nine months endedMarch 31, 2021 , respectively. For the three and nine months endedMarch 31, 2022 , we directly originated$659.7 million and$1,774.4 million , respectively, of loans in theU.S. pursuant to our state licenses, compared to approximately$108.1 million and$180.7 million for the three and nine months endedMarch 31, 2021 , respectively. For both the three and nine months endedMarch 31, 2022 , we self-originated 22% of total loans through our state and other licenses, compared to 9% and 6% for the three and nine months endedMarch 31, 2021 , respectively. 62 -------------------------------------------------------------------------------- Table of Contents We act as the servicer on all loans that we originate directly or purchase from our originating bank partners and earn a servicing fee on loans we sell to our funding sources. We do not sell the servicing rights on any of the loans, allowing us to control the consumer experience end-to-end. To allow for flexible staffing to support overflow and seasonal traffic, we partner with several sub-servicers to manage customer care, first priority collections, and third-party collections in accordance with our policies and procedures.
Our Funding Sources
We maintain a capital-efficient model through a diverse set of funding sources. When we originate a loan directly or purchase a loan originated by our originating bank partners, we often utilize warehouse facilities with certain lenders to finance our lending activities or loan purchases. We sell the loans we originate or purchase from our originating bank partners to whole loan buyers and securitization investors through forward flow arrangements and securitization transactions, and earn servicing fees from continuing to act as the servicer on the loans. Key Operating Metrics We collect and analyze operating and financial data of our business to assess our performance, formulate financial projections, and make strategic decisions. In addition to revenue, net (loss) income, and other results under accounting principles generally accepted inthe United States ("U.S. GAAP"), the following tables set forth key operating metrics we use to evaluate our business. Three Months Ended Nine Months Ended March 31, March 31, 2022 2021 2022 2021 (in thousands)
Gross Merchandise Volume (GMV)
GMV We measure gross merchandise volume to assess the volume of transactions that take place on our platform. We define GMV as the total dollar amount of all transactions on the Affirm platform during the applicable period, net of refunds. GMV does not represent revenue earned by us. However, the GMV processed through our platform is an indicator of the success of our merchants and the strength of our platform. For the three months endedMarch 31, 2022 , GMV was$3.9 billion , which represented an increase of approximately 73% as compared to$2.3 billion for the three months endedMarch 31, 2021 . For the nine months endedMarch 31, 2022 , GMV was$11.1 billion , which represents an increase of approximately 91% as compared to$5.8 billion for the nine months endedMarch 31, 2021 . March 31, 2022 June 30, 2021 March 31, 2021 (in thousands, except per consumer data) Active Consumers 12,733 7,121 5,364 Transactions per Active Consumer (x) 2.7 2.3 2.3 Active Consumers We assess consumer adoption and engagement by the number of active consumers across our platform. Active consumers are the primary measure of the size of our network. We define an active consumer as a consumer who engages in at least one transaction on our platform during the 12 months prior to the measurement date. As ofMarch 31, 2022 , we had 12.7 million active consumers, representing an increase of approximately 79% compared to 7.1 million as ofJune 30, 2021 , and approximately 137% compared to 5.4 million as ofMarch 31, 2021 . 63 -------------------------------------------------------------------------------- Table of Contents Transactions per Active Consumer We believe the value of our network is amplified with greater consumer engagement and repeat usage, highlighted by increased transactions per active consumer. Transactions per active consumer is defined as the average number of transactions that an active consumer has conducted on our platform during the 12 months prior to the measurement date. As ofMarch 31, 2022 , we had approximately 2.7 transactions per active consumer, an increase of approximately 19% compared to bothJune 30, 2021 andMarch 31, 2021 . Transactions per active consumer includes incremental transactions completed by active consumers on the PayBright and Returnly platforms during the twelve months prior to the measurement date and prior to the acquisitions of PayBright and Returnly by Affirm.
Factors Affecting Our Performance
Expanding our Network, Diversity, and Mix of Funding Relationships
Our capital efficient funding model is integral to the success of our platform. As we scale the number of transactions on our network and grow GMV, we maintain a variety of funding relationships in order to support our network. Our diversified funding relationships include warehouse facilities, securitization trusts, forward flow arrangements, and partnerships with banks. Given the short duration and strong performance of our assets, funding can be recycled quickly, resulting in a high-velocity, capital efficient funding model. We have continued to reduce the percentage of our equity capital required to fund our total platform portfolio from approximately 4% as ofJune 30, 2021 , to approximately 2% as ofMarch 31, 2022 . The mix of on-balance sheet and off-balance sheet funding is a function of both how we choose to allocate loan volume and the available supply of capital, both of which may also impact our results in any given period.
Mix of Business on Our Platform
The mix of products that our merchants offer and our consumers purchase in any
period affects our operating results. In addition, shifts in volume among
merchants in any period also affects our operating results. These mix impacts
affect GMV, revenue, our financial results, and our key operating metric
performance for that period. Differences in product mix relate to different loan
durations, APR mix, and varying proportion of 0% APR versus interest-bearing
financings.
Differences in merchant mix relate to the variations in the product and economic
terms of the commercial agreements among our merchants. For example, our low
average order value ("AOV") products generally benefit from shorter duration,
but also have lower revenue as a percentage of GMV when compared to high AOV
products. Merchant mix shifts are driven in part by the products offered by the
merchant, the economic terms negotiated with the merchant, merchant-side
activity relating to the marketing of their products, whether the merchant is
fully integrated within our network, and general economic conditions affecting
consumer demand. Our revenue as a percentage of GMV in any given period varies
across products. As such, as we continue to expand our network to include more
merchants, revenue as a percentage of GMV will vary. In addition, our commercial
agreement with Shopify to offer Shop Pay Installments powered by Affirm and our
recent Split Pay offering, a short-term payment plan with 0% APR, will continue
to increase the mix of our shorter duration, low AOV products. Differences in
the mix of high versus low AOV will also impact our results. For example, we
expect that transactions per active consumer may increase while revenue as a
percentage of GMV may decline in the medium term to the extent that a greater
portion of our GMV comes from Split Pay and other low-AOV offerings.
Sales and
We rely on the strength of our merchant relationships and positive user experience to develop our consumer brand and grow the ubiquity of our platform. During the three and nine months endedMarch 31, 2022 , we increased our investment in sales and marketing channels that we believe will drive further brand awareness and preference among both consumers and merchants. Given the nature of our revenue, our investment in sales and marketing in a given period may not impact results until subsequent periods. Additionally, given the increasingly competitive 64 -------------------------------------------------------------------------------- Table of Contents nature of merchant acquisition, we have previously made, and expect that we may make, significant investments in retaining and acquiring new merchants. We are focused on the effectiveness of sales and marketing spending and will continue to be strategic in maintaining efficient consumer and merchant acquisition.
Seasonality
We experience seasonal fluctuations in our revenue as a result of consumer spending patterns. Historically, our revenue has been the strongest during the second quarter of our fiscal year due to increases in retail commerce during the holiday season. Adverse events that occur during these months could have a disproportionate effect on our financial results for the fiscal year.
Impact of COVID-19
The COVID-19 pandemic has had, and continues to have, a significant impact on theU.S. economy and the markets in which we operate. Our positive performance during this period demonstrates the value and effectiveness of our platform, the resiliency of our business model, and the capabilities of our risk management and underwriting approach. As we enter a new phase of the pandemic, our focus will turn to both changing macro-economic conditions and individual consumer spending habits. As we observe new behavior, we will rely on our flexible and robust risk infrastructure to make appropriate decisions for our business.
Diversified Mix of
We have a diversified set of merchant partners across industries, which allows us to capitalize on industry tailwinds and changing consumer spending behavior, economic conditions, and other factors that may affect a particular type of merchant or industry. For example, following the onset of the COVID-19 pandemic, our revenue from merchant partners in the travel, hospitality, and entertainment industries declined significantly, but we saw a significant increase in revenue from merchant partners offering home fitness equipment, home office products, and home furnishings. As we move past the period of extended lock-downs due to COVID-19, we have observed strong changes in consumer preferences. Industries impacted by the lock-down such as travel and hospitality have seen a strong resurgence and have either replaced or offset the spending decreases we experienced in the aforementioned categories.
Dynamic Changes to Risk Model
As part of our risk mitigation platform, we closely track data and trends to measure risk and manage exposure, leveraging our flexibility to quickly adjust and adapt. In response to the macroeconomic impact of the COVID-19 pandemic, we initiated a series of refinements to our risk model based on our real-time data observations and analysis. We were able to respond, implement, and test the updates to our model quickly due to the adaptability of our infrastructure, underwriting, and risk management models. This resulted in continued decreases across both charge-offs and delinquencies. As macroeconomic conditions improved, the embedded flexibility of the model allowed our risk tolerances to return closer to pre-pandemic levels while still maintaining low losses. Our proprietary risk model was not designed to take into account the longer-term impacts of social, economic, and financial disruptions caused by the COVID-19 pandemic, and while we continue to make refinements to our risk model as new information becomes available to us, any changes to our risk model may be ineffective and the performance of our risk model may decline.
Resilient Allowance Model
At the onset of the COVID-19 pandemic inMarch 2020 , we factored in updated loss multiples using macroeconomic data to reflect stressed expected loss scenarios emerging from forecasted delinquencies and defaults. This stressing of the model resulted in an increase of the allowance for credit losses as a percentage of loans held for investment to a high of 14.8% as ofMarch 31, 2020 . In the months subsequent to this and during fiscal year 2021, we saw stronger than expected repayment history in the portfolio and increased credit quality of loans held on our balance sheet from credit tightening, resulting in a release of the allowance over time. As the economic reopening 65 -------------------------------------------------------------------------------- Table of Contents and recovery continues, we believe our allowance model is well equipped to forecast expected loss scenarios resulting from both the shifting product mix of loans on our balance sheet as well as a return to pre-pandemic credit levels over time. The allowance for credit losses as a percentage of loans held for investment increased from 5.8% as ofJune 30, 2021 to 6.4% as ofMarch 31, 2022 due to a shift in the composition of loans retained on balance sheet. Should macroeconomic factors or expected losses change, we may increase or decrease the allowance for credit losses.
Components of Results of Operations
Revenue
Merchant Network Revenue
Merchant partners are generally charged a fee based on GMV processed through the Affirm platform. The fees vary depending on the individual arrangement between us and each merchant and on the terms of the product offering. The fee is recognized at the point in time the terms of the executed merchant agreement have been fulfilled and the merchant successfully confirms the transaction. 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 and/or virtual card network revenue. In order to continue to expand our consumer base, we may originate loans under certain merchant arrangements that we do not expect to achieve positive revenue. In these instances, the loss is recorded as sales and marketing expense unless it is determined as recoverable in future periods. During the three and nine months endedMarch 31, 2022 , we generated 33% and 35% of our revenue from merchant network fees, respectively. During the three and nine months endedMarch 31, 2021 , we generated 43% and 47% of our revenue from merchant network fees, respectively.
Virtual Card Network Revenue
A smaller portion of our revenue comes from our Virtual Card product. We have an agreement with an issuer processor to facilitate transactions through the issuance of virtual debit cards to be used by consumers at checkout. Consumers can apply for a virtual debit card through the Affirm app and, upon approval, receive a single-use virtual debit card to be used for their purchase online or offline at a non-integrated merchant. The virtual debit card is funded at the time a transaction is authorized using cash held by the issuer processor in a reserve fund, which is ultimately funded and maintained by us. We, or our originating bank partner, then originate a loan to the consumer once the transaction is confirmed by the merchant. The non-integrated merchants are charged interchange fees by the issuer processor for virtual debit card transactions, as with all debit card purchases, and the issuer processor shares a portion of this revenue with us. We also leverage this issuer processor as a means of integrating certain merchants. Similarly, for these arrangements with integrated merchants, the merchant is charged interchange fees by the issuer processor and the issuer processor shares a portion of this revenue with us. This revenue is recognized as a percentage of both our captured volume transacted on the payment processor network and net interchange income, and this revenue is presented net of associated processing fees. We generated 7% of our revenue from virtual card network fees for both the three and nine months endedMarch 31, 2022 , and 6% and 5% of our revenue from virtual card network fees for the three and nine months endedMarch 31, 2021 , respectively.
Interest Income
We also earn revenue through interest earned on loans facilitated by our platform. Interest income includes interest charged to consumers over the term of the consumers' loans based on the principal outstanding and is calculated using the effective interest method. In addition, interest income includes the amortization of any discounts or premiums on loan receivables created upon either the purchase of a loan from our originating bank partners or the origination of a loan. These discounts and premiums are accreted or amortized over the life of the loan using the effective interest method and represented 34% and 36% of total interest income for the three and nine months endedMarch 31, 2022 , respectively, compared to 33% and 31% for the three and nine months endedMarch 31, 2021 . During the three and nine months endedMarch 31, 2022 , we generated 38% and 40% of our revenue from interest 66 -------------------------------------------------------------------------------- Table of Contents income, respectively. During the three and nine months endedMarch 31, 2021 , we generated 41% and 37% of our revenue from interest income, respectively.
Gain on Sales of Loans
We sell a portion of the loans we originate or purchase from our originating bank partners to third-party investors. We recognize a gain or loss on sale of such loans as the difference between the proceeds received, adjusted for initial recognition of servicing assets and liabilities obtained at the date of sale, and the carrying value of the loan. During the three and nine months endedMarch 31, 2022 , gain on sale was reduced by$0.9 million and$3.1 million due to the net impact of the servicing assets and liabilities of the loans sold, respectively. During both the three and nine months endedMarch 31, 2022 , we generated 15% of our revenue from gain on sales of loans. During the three and nine months endedMarch 31, 2021 , we generated 7% and 8% of our revenue from gain on sales of loans, respectively.
Servicing Income
We earn a specified fee from providing professional services to manage loan portfolios on behalf of our third-party loan owners. Under the servicing agreements with our third-party loan owners, we are entitled to collect servicing fees on the loans that we service, which are paid monthly based upon an annual fixed percentage of the outstanding loan portfolio balance. During the three and nine months endedMarch 31, 2022 , we generated 7% and 4% of our revenue from servicing fees, respectively. During both the three and nine months endedMarch 31, 2021 , we generated 3% of our revenue from servicing fees. We expect our revenue may vary from period to period based on, among other things, the timing of onboarding and size of new merchants, the mix of 0% APR loans versus interest-bearing loans with simple interest, loan funding strategy and mix, type and mix of products that our merchants offer to their customers, the rate of repeat transactions, transaction volume, and seasonality of or fluctuations in usage of our platform.
Operating Expenses
Our operating expenses consist of the loss on loan purchase commitment made to our originating bank partners, the provision for credit losses, funding costs, processing and servicing, technology and data analytics, sales and marketing, and general and administrative expenses. Salaries and personnel-related costs, including benefits, bonuses, stock-based compensation expense and occupancy, comprise a significant component of several of these expense categories. An allocation of overhead, such as rent and other overhead, is based on employee headcount and included in processing and servicing, technology and data analytics, sales and marketing, and general and administrative expenses. As ofMarch 31, 2022 , we had 2,233 employees, compared to 1,641 employees as ofJune 30, 2021 . We increased our headcount and personnel related costs across our business in order to support our growth expansion strategy. We expect headcount to continue to increase during fiscal year 2022 given our focus on growth and expansion.
Loss on Loan Purchase Commitment
We purchase certain loans from our originating bank partners that are processed
through our platform and our originating bank partner puts back to us. Under the
terms of the agreements with our originating bank partners, we are generally
required to pay the principal amount plus accrued interest for such loans. In
certain instances, our originating bank partners may originate loans with zero
or below market interest rates that we are required to purchase. In these
instances, we may be required to purchase the loan for a price in excess of the
fair market value of such loans, which results in a loss. These losses are
recognized as loss on loan purchase commitment in our interim condensed
consolidated statements of operations and comprehensive loss. These costs are
incurred on a per loan basis.
67-------------------------------------------------------------------------------- Table of Contents Provision for Credit Losses Provision for credit losses consists of amounts charged against income during the period to maintain an allowance for credit losses. Our allowance for credit losses represents our estimate of the credit losses inherent in our loans held for investment and is based on a variety of factors, including the composition and quality of the portfolio, loan specific information gathered through our collection efforts, current economic conditions, future reasonable and supportable forecasts, and our historical net charge-off and loss experience. These costs are incurred on a per loan basis.
Funding Costs
Funding costs consist of interest expense and the amortization of fees for certain borrowings including on balance sheet VIEs and sale and repurchase agreements, and other costs incurred in connection with funding the purchases and originations of loans. Amortization of debt issuance costs totaled$3.6 million and$13.2 million for the three and nine months endedMarch 31, 2022 , respectively, and$1.3 million and$3.7 million for the three and nine months endedMarch 31, 2021 , respectively.
Processing and Servicing
Processing and servicing expense consists primarily of payment processing fees, third-party customer support and collection expense, salaries and personnel-related costs of our customer care team, platform fees, and allocated overhead. Payment processing costs are primarily driven by the number and dollar value of consumer repayments which grow as the number of transactions and GMV processed on our platform increases. Customer care loan servicing costs are primarily staffing costs related to third-party and in-house loan servicing agents, the demand for which generally increases with the number of transactions on our platform. Collection fees are fees paid to agencies as percentages of the dollars of repayment they recuperate from borrowers whose loans had previously been charged off. Platform fees are revenue sharing fees paid to our e-commerce platform partners.
Technology and Data Analytics
Technology and data analytics expense consists primarily of the salaries, stock-based compensation, and personnel-related costs of our engineering and product employees as well as our credit and analytics employees who develop our proprietary risk model, which totaled$68.5 million and$172.4 million for the three and nine months endedMarch 31, 2022 , respectively, and$77.5 million and$123.5 million for the three and nine months endedMarch 31, 2021 , respectively. Additionally, for the three and nine months endedMarch 31, 2022 ,$34.4 million and$95.2 million , respectively, of salaries and personnel costs that relate to the creation of internally-developed software were capitalized into property, equipment and software, net on our interim condensed consolidated balance sheets, and we recorded amortization expense of$6.4 million and$15.3 million for the three and nine months endedMarch 31, 2022 , respectively. For the three and nine months endedMarch 31, 2021 ,$11.2 million and$18.8 million , respectively, of salaries and personnel costs that relate to the creation of internally-developed software were capitalized into property, equipment and software, net on the interim condensed consolidated balance sheets, and amortized into technology and data analytics expense over the useful life of the developed software. This amortization expense totaled$2.2 million and$7.4 million for the three and nine months endedMarch 31, 2021 , respectively. Additional technology and data analytics expenses include platform infrastructure and hosting costs, third-party data acquisition expenses, and expenses related to the maintenance of existing technology assets and our technology platform as a whole. 68 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing Sales and marketing costs consist of the expense related to warrants and other share-based payments granted to our enterprise partners, salaries and personnel-related costs, as well as costs of general marketing and promotional activities, promotional event programs, sponsorships, and allocated overhead. InJuly 2020 , we recognized an asset in connection with a commercial agreement with Shopify in which we granted warrants in exchange for their promotion of the Affirm platform with potential new merchant partners. This asset represents the probable future economic benefit to be realized over the four-year expected benefit period and is valued based on the fair value of the warrants at the grant date. This value is amortized on a straight-line basis over the four-year expected benefit period into sales and marketing expense, due to the nature of the expected benefit. InNovember 2021 , we entered into a commercial agreement with Amazon and granted warrants in exchange for certain exclusivity provisions and the benefit of acquiring new users. In connection with the agreements, we recognized an asset associated with the portion of the warrants that were fully vested upon execution of the agreement. The asset is valued based on the fair value of the warrants on the grant date and represents the probable future economic benefit to be realized over the approximately 3.2 year remaining initial term of the commercial agreement. For the three and nine months endedMarch 31, 2022 , we recognized$102.4 million and$173.0 million of expenses related to the warrants within sales and marketing expense, respectively, which included the amortization expense of the commercial agreement asset and the expense based upon the grant-date fair value for the warrant shares that vested during the period. For the three and nine months endedMarch 31, 2022 , the expense related to warrants and other share-based payments comprised 76% and 62% of sales and marketing expenses, respectively, compared to 29% and 40% for the three and nine months endedMarch 31, 2021 , respectively. Additionally, in order to continue to expand our consumer base, we may originate certain loans via our wholly-owned subsidiaries with zero or below market interest rates under certain merchant arrangements that we do not expect to achieve positive revenue. In these instances, the par value of the loans originated is in excess of the fair market value of such loans, which results in a loss. These losses are recorded as sales and marketing expense. These losses totaled$3.3 million and$19.1 million , respectively, during the three and nine months endedMarch 31, 2022 , compared to$3.1 million and$4.1 million for the three and nine months endedMarch 31, 2021 , respectively. We expect that our sales and marketing expense will continue to increase as we expand our sales and marketing efforts to drive our growth, expansion, and diversification.
General and Administrative
General and administrative expenses consist primarily of expenses related to our finance, legal, risk operations, human resources, and administrative personnel. General and administrative expenses also include costs related to fees paid for professional services, including legal, tax and accounting services, and allocated overhead. We continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , and increased expenses for insurance, investor relations, and professional services. We expect that our general and administrative expense will increase in absolute dollars as our business grows.
Other Income and Expenses
Other (Expense) Income, Net
Other (expense) income, net consists primarily of interest earned on our money
market funds included in cash and cash equivalents and restricted cash, interest
earned on securities available for sale, gains and losses incurred on derivative
agreements, amortization of convertible debt issuance cost and revolving debt
facility issuance costs, and fair value adjustments resulting from changes in
the fair value of our contingent consideration liability, primarily driven by
changes in the market price of our Class A common stock.
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Income Tax Expense
Our income tax expense (benefit) consists of
Results of Operations
The following tables set forth selected interim condensed consolidated statements of operations and comprehensive loss data for each of the periods presented in dollars:
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 2021
(in thousands)
Revenue
Merchant network revenue $ 121,054 $ 97,999 $ 340,385 $ 290,894
Virtual card network revenue 23,169 13,809 69,122 30,587
Total network revenue 144,223 111,808 409,507 321,481
Interest income (1) 134,599 94,530 390,256 222,624
Gain on sales of loans (1) 52,484 16,350 141,153 47,344
Servicing income 23,456 7,977 44,242 17,235
Total Revenue, net $ 354,762 $ 230,665 $ 985,158 $ 608,684
Operating Expenses (2)
Loss on loan purchase commitment $ 46,853 $ 62,054 $ 163,796 $ 195,690
Provision for credit losses 66,294 (1,063) 182,581 40,389
Funding costs 15,824 14,665 50,277 37,077
Processing and servicing 43,371 21,368 110,421 51,668
Technology and data analytics 110,291 104,806 283,293 180,208
Sales and marketing 156,214 58,184 363,650 119,878
General and administrative 142,466 179,999 419,962 253,188
Total Operating Expenses 581,313 440,013 1,573,980 878,098
Operating Loss $ (226,551) $
(209,348)
172,139 (77,773) 68,507 (48,088)
Loss Before Income Taxes $ (54,412) $
(287,121)
259 (70) 706 105
Net Loss $ (54,671) $
(287,051)
Other Comprehensive Income (Loss) Foreign currency translation adjustments $ 5,406$ 2,829 $ 3,945$ 5,048 Unrealized gain (loss) on securities available for sale, net (2,105) - (3,041) - Net Other Comprehensive Income (Loss) 3,301 2,829 904 5,048 Comprehensive Loss$ (51,370) $ (284,222) $ (520,117) $ (312,559) (1)Upon purchase of a loan from our originating bank partners at a price above the fair market value of the loan or upon the origination of a loan with a par value in excess of the fair market value of the loan, a discount is included in the amortized cost basis of the loan. For loans held for investment, this discount is amortized over 70 -------------------------------------------------------------------------------- Table of Contents the life of the loan into interest income. When a loan is sold to a third-party loan buyer, the unamortized discount is released in full at the time of sale and recognized as part of the gain or loss on sales of loans. However, the cumulative value of the loss on loan purchase commitment or loss on origination, the interest income recognized over time from the amortization of discount while retained, and the release of discount into gain on sales of loans, together net to zero over the life of the loan. The following table details activity for the discount, included in loans held for investment, for the periods indicated: Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 (in
thousands)
Balance at the beginning of the period$ 47,960 $ 71,571 $ 53,177 $ 28,659 Additions from loans purchased or originated, net of refunds 87,161 71,294 286,034 201,531 Amortization of discount (45,443) (31,625) (138,853) (68,843) Unamortized discount released on loans sold (40,177) (29,357) (150,857) (79,464)
Balance at the end of the period
$ 49,501 $ 81,883
(2) Amounts include stock-based compensation as follows:
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 2021
(in thousands)
General and administrative $ 58,100 $ 115,566 $ 187,789 $ 121,867
Technology and data analytics 33,639 52,058 75,133 56,827
Sales and marketing 5,998 10,568 15,655 11,909
Processing and servicing 650 1,447 1,536 1,760
Total stock-based compensation in
operating expenses 98,387 179,639 280,113 192,363
Capitalized into property, equipment
and software, net 14,618 6,567 39,691 7,792
Total stock-based compensation expense
$ 319,804 $ 200,155 71
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Comparison of the Three and Nine Months Ended
Total Revenue, net
Three Months Ended March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)Merchant network revenue$ 121,054 $ 97,999 $ 23,055 24 %$ 340,385 $ 290,894 $ 49,491 17 % Virtual card network revenue 23,169 13,809 9,360 68 % 69,122 30,587 38,535 126 % Total network revenue 144,223 111,808 32,415 29 % 409,507 321,481 88,026 27 % Interest income 134,599 94,530 40,069 42 % 390,256 222,624 167,632 75 % Gain on sales of loans 52,484 16,350 36,134 221 % 141,153 47,344 93,809 198 % Servicing income 23,456 7,977 15,479 194 % 44,242 17,235 27,007 157 % Total Revenue, net$ 354,762 $ 230,665 124,097 54 %$ 985,158 $ 608,684 376,474 62 % Total Revenue, net for the three and nine months endedMarch 31, 2022 increased by$124.1 million or 54% and$376.5 million or 62%, respectively, compared to the three and nine months endedMarch 31, 2021 . The increase is primarily due to an increase of$1.7 billion or 73% and$5.3 billion or 91% in GMV on our platform during the quarter, from$2.3 billion and$5.8 billion for the three and nine months endedMarch 31, 2021 , respectively, to$3.9 billion and$11.1 billion for the three and nine months endedMarch 31, 2022 , respectively. This increase in GMV was driven by the strong network effects of the expansion of our active merchant base from 11,513 as ofMarch 31, 2021 to 207,049 as ofMarch 31, 2022 , an increase in active consumers from 5.4 million as ofMarch 31, 2021 to 12.7 million as ofMarch 31, 2022 , and an increase in average transactions per consumer from 2.3 as ofMarch 31, 2021 to 2.7 as ofMarch 31, 2022 . Merchant network revenue for the three and nine months endedMarch 31, 2022 increased by$23.1 million or 24% and$49.5 million or 17%, compared to the three and nine months endedMarch 31, 2021 , respectively. Merchant network revenue as a percentage of GMV for the three months endedMarch 31, 2022 decreased to 3.1% compared to 4.3% for the three months endedMarch 31, 2021 , and decreased to 3.1% for the nine months endedMarch 31, 2022 compared to 5.0% for the nine months endedMarch 31, 2021 . Merchant network revenue growth is generally correlated with both GMV growth and the mix of loans on our platform as different loan characteristics are positively or negatively correlated with merchant fee revenue as a percentage of GMV. In particular, merchant network revenue as a percentage of GMV typically increases with the term length and AOV of our loans, and typically decreases with shorter duration and higher APR loans. Specifically, long-term 0% APR loans typically carry higher merchant fees as a percentage of GMV and have higher AOVs. The increase in merchant network revenue during the three and nine month period was primarily driven by an increase in GMV, partially offset by reductions in the concentration of long-term 0% APR loans, our highest merchant fee category. For the three and nine months endedMarch 31, 2022 , approximately 8% and 10%, respectively, of total revenue was driven by our largest merchant partner by merchant network revenue, Peloton, for which we facilitate long-term 0% APR loans with a higher merchant fee, compared with 20% and 31% of total revenue in the comparative periods. More broadly, for both the three and nine months endedMarch 31, 2022 , loans with term lengths greater than 12 months accounted for 21% of GMV, compared to 30% and 32% for the three and nine months endedMarch 31, 2021 , respectively, primarily due to the increased adoption of our Split Pay product. AOV was lower at$374 and$377 for the three and nine months endedMarch 31, 2022 , respectively, compared to$564 and$577 for the three and nine months endedMarch 31, 2021 , respectively, primarily due to the increased adoption of our Split Pay product. 72 -------------------------------------------------------------------------------- Table of Contents Additionally, we recorded reductions to merchant network revenue of$21.7 million and$63.9 million for the three and nine months endedMarch 31, 2022 , respectively, associated with the creation of discounts upon origination of loans with par values in excess of the fair value of such loans, compared to$5.4 million and$12.4 million during the three and nine months endedMarch 31, 2021 , respectively. These reductions to merchant network revenue are primarily due to our Split Pay product and our 0% APR lending programs outside ofthe United States . Virtual card network revenue for the three and nine months endedMarch 31, 2022 increased by$9.4 million or 68% and$38.5 million or 126%, compared to the three and nine months endedMarch 31, 2021 , respectively. This increase was driven by an increase in GMV processed through our issuer processor of 75% and 122% for the three and nine monthsMarch 31, 2022 , respectively, due to increased activity on our virtual card-enabled mobile application as well as growth in existing and new merchants integrated using our virtual card platform. Virtual card network revenue is also impacted by the mix of merchants as different merchants can have different interchange rates depending on their industry or size, among other factors. Interest income for the three and nine months endedMarch 31, 2022 increased by$40.1 million or 42% and$167.6 million or 75%, respectively, compared to the three and nine months endedMarch 31, 2021 . Generally, interest income is correlated with the changes in the average balance of loans held for investment, as we recognize interest on loans held for investment using the effective interest method over the life of the loan. The average balance of loans held for investment increased by 21% to$2,464.2 million , and by 39% to$2,262.6 million for the three and nine months endedMarch 31, 2022 , respectively, compared to the same period in the prior fiscal year. As an annualized percentage of average loans held for investment, total interest income increased from approximately 19% during the three months endedMarch 31, 2021 to 22% during the three months endedMarch 31, 2022 . This change was driven by a decrease in the average proportion of 0% APR loans being held on our interim condensed consolidated balance sheet as a percentage of the total loans held for investment, which decreased from 51% and 47% during the three and nine months endedMarch 31, 2021 to 39% and 41% during the three and nine months endedMarch 31, 2022 . The shift was largely due to increased concentration of loans with large enterprise merchant partners; those loans tend to be interest-bearing. We recognize interest income on 0% APR loans via the amortization of the loan discount. Short term 0% APR loans, including Split Pay loans, carry higher annualized discounts as percentages of annualized loan balances than longer term loans, and thus amortize more discount into interest income as percentages of unpaid principal balance than longer term loans. Therefore, the change in the mix of 0% APR loans held for investment is also contributing to the increase in interest income as an annualized percentage of average loans held for investment. The total amortization of discounts on loans held for investment increased by$13.8 million or 44% and$70.0 million or 102% for the three and nine months endedMarch 31, 2022 , respectively, compared with the three and nine months endedMarch 31, 2021 . The amortization of discounts represented 34% and 36% of total interest income for the three and nine months endedMarch 31, 2022 , compared to 33% and 31% for the three and nine months endedMarch 31, 2021 , respectively. This increase included the amortization of discounts arising from self-originated loans held for investment of$33.2 million and$79.7 million during the three and nine months endedMarch 31, 2022 , respectively, which was$7.8 million and$9.7 million for the three and nine months endedMarch 31, 2021 , respectively. Gain on sales of loans for the three and nine months endedMarch 31, 2022 increased by$36.1 million or 221%, and$93.8 million or 198%, compared to the three and nine months endedMarch 31, 2021 . We sold loans with an unpaid balance of$756.7 million and$2,013.2 million for the three and nine months endedMarch 31, 2021 , respectively, and$2,042.5 million and$5,647.5 million for the three and nine months ended andMarch 31, 2022 , for which we retained servicing rights. This increase was primarily due to higher loan sale volume, favorable loan sale pricing terms, and optimizing the allocation of loans to loan buyers with higher pricing terms. Servicing income for the three and nine months endedMarch 31, 2022 increased by$15.5 million or 194% and$27.0 million or 157%, compared to the three and nine months endedMarch 31, 2021 , respectively. This increase was primarily due to an increase in the average unpaid principal balance of loans owned by third-party loan owners and increases in negotiated servicing rates with new and existing third-party loan owners. Additionally, we recognized an increase of servicing income of$6.4 million related to the changes in fair value of servicing assets and liabilities during the three months endedMarch 31, 2022 , compared with an increase to servicing income of$0.9 73 -------------------------------------------------------------------------------- Table of Contents million during the three months endedMarch 31, 2021 . Similarly, during the nine months endedMarch 31, 2022 , we recognized an increase of$3.7 million compared with a reduction of$0.2 million during the nine months endedMarch 31, 2021 .
Operating Expenses
Three Months Ended March 31, Nine Months Ended March 31,
2022 2021 2022 2021
(in thousands)
Loss on loan purchase commitment $ 46,853 $ 62,054 $ 163,796 $ 195,690
Provision for credit losses 66,294 (1,063) 182,581 40,389
Funding costs 15,824 14,665 50,277 37,077
Processing and servicing 43,371 21,368 110,421 51,668
Total transaction costs 172,342 97,024 507,075 324,824
Technology and data analytics 110,291 104,806 283,293 180,208
Sales and marketing 156,214 58,184 363,650 119,878
General and administrative 142,466 179,999 419,962 253,188
Total operating expenses $ 581,313 $ 440,013 $ 1,573,980 $ 878,098 Loss on Loan Purchase Commitment
Three Months Ended
March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)
Loss on loan purchase
commitment $ 46,853 $ 62,054 $ (15,201) (24) % $ 163,796 $ 195,690 $ (31,894) (16) % Percentage of total revenue, net 13 % 27 % 17 % 32 % Loss on loan purchase commitment for the three and nine months endedMarch 31, 2022 decreased by$15.2 million or 24% and$31.9 million or 16%, compared to the three and nine months endedMarch 31, 2021 , respectively. This decrease was due to a decrease in the volume of long-term 0% APR loans purchased from our originating bank partners compared to the prior period, which are purchased above fair market value The decrease in loss on loan purchase commitment is also impacted by changes in the estimate of fair value of the loans driven primarily by the mix of loan terms. During the three and nine months endedMarch 31, 2022 , we purchased$790.6 million and$2,432.8 million , respectively, of 0% APR loan receivables from our originating bank partners, representing a decrease of$35.7 million or 4% and$58.3 million or 2% compared to the three and nine months endedMarch 31, 2021 , respectively. 74 --------------------------------------------------------------------------------
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Provision for Credit Losses
Three Months Ended
March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)
Provision for credit losses $ 66,294 $ (1,063) $ 67,357 (6,337) % $ 182,581 $ 40,389 $ 142,192 352 %
Percentage of total
revenue, net 19 % - % 19 % 7 %
Allowance as a percentage
of loans held for
investment 6.4 % 5.2 % 6.4 % 5.2 %
Provision for credit losses generally represents the amount of expense required
to maintain the allowance for credit losses on our interim condensed
consolidated balance sheet, which represents management's estimate of future
losses. In the event that our loans outperform expectation and/or we reduce our
expectation of credit losses in future periods, we may release reserves and
thereby reduce the allowance for credit losses, yielding income in the provision
for credit losses. The provision is determined by the change in estimates for
future losses and the net charge-offs incurred in the period. We record
provision expense for each loan we retain as loans held for investment, whether
we originate the loan or purchase it from one of our originating bank partners.
The allowance as a percentage of loans held for investment increased from 5.2%
as of March 31, 2021 to 6.4% as of March 31, 2022 primarily due to a
deconcentration of long-term, lower-credit-risk 0% APR loans on our balance
sheet and rapid growth of new platforms and partnerships with higher expected
losses.
Additionally, during the prior fiscal year, following the loss of our emerging
growth company status, we adopted ASU 2016-13, "Financial Instruments - Credit
Losses (Topic 326)" using the modified retrospective approach. The amendments
replaced the incurred loss impairment methodology for computing our allowance
for credit losses with the current expected credit loss model ("CECL"),
effective July 1, 2020 . As part of this modified retrospective approach to
adoption, we recorded an adjustment reducing the provision for credit losses by
$16.3 million for the nine months ended March 31, 2021 .
During the three months ended March 31, 2022 , provision for credit losses
expense increased $67.4 million compared to the $1.1 million provision for
credit losses income recognized for the three months ended March 31, 2021 . Prior
year provision for credit losses was recognized as income due to a combination
of factors reducing the allowance for credit losses during the three months
ended March 31, 2021 . Firstly, continued stronger than expected repayment
performance of the portfolio resulted in a decrease of approximately $12.3
million . Secondly, we began transitioning to a new underlying data model which
incorporates internal improvements to our underwriting and collections
processes. This change in model resulted in a decrease of approximately $48.2
million . These decreases were largely offset by allowances recognized on new
purchases and originations of loans held for investment in the period with
generally higher credit quality. For the nine months ended March 31, 2022 ,
provision for credit losses increased $142.2 million or 352% compared to the
nine months ended March 31, 2021 . The discrete adjustments in 2021 resulted in
prior year provision being unusually low while this year's figures reflect the
intentional normalization of credit.
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Funding Costs
Three Months Ended
March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)
Funding costs $ 15,824 $ 14,665 $ 1,159 8 % $ 50,277 $ 37,077 $ 13,200 36 %
Percentage of total
revenue, net 4 % 6 % 5 % 6 %
Funding costs for the three and nine months ended March 31, 2022 increased by
$1.2 million or 8%, and $13.2 million or 36%, compared to the three and
nine months ended March 31, 2021 , respectively. Funding costs for a given period
are correlated with the sum of the average balance of funding debt and the
average balance of notes issued by securitization trusts. This increase was
primarily due to the increase of notes issued by securitization trusts during
the current fiscal year, which bear interest at fixed rates. The average balance
of notes issued by securitization trusts during the three and nine months ended
March 31, 2022 was $1,512.4 million and $1,415.3 million , respectively, compared
with $1,029.8 million and $639.6 million , respectively, during the three and
nine months ended March 31, 2021 . The average balance of funding debt for the
three and nine months ended March 31, 2022 was $773.6 million and $688.9
million , respectively, compared with $782.7 million and $770.5 million ,
respectively, during the three and nine months ended March 31, 2021 . Combined,
average total debt for the three and nine months ended March 31, 2022 increased
by $473.6 million or 26% and $694.0 million or 49%, respectively, compared to
the three and nine months ended March 31, 2021 while the average reference
interest rate increased by 89% and decreased by 4% during each period,
respectively.
Processing and Servicing
Three Months Ended
March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)
Processing and
servicing $ 43,371 $ 21,368 $ 22,003 103 % $ 110,421 $ 51,668 $ 58,753 114 %
Percentage of total
revenue, net 12 % 9 % 11 % 8 %
Processing and servicing expense for the three and nine months ended March 31,
2022 increased by $22.0 million or 103% and $58.8 million or 114%, respectively,
compared to the three and nine months ended March 31, 2021 . This increase was
primarily due to a $15.4 million or 152% and $39.8 million or 169%, increase in
payment processing fees due to increased payments volume for the three and nine
months ended March 31, 2022 , respectively. Additionally, processing fees paid to
our customer referral partners increased by $1.9 million or 133% and $3.5
million or 117%, for the three and nine months ended March 31, 2022 ,
respectively. Personnel costs decreased by $0.4 million or 8% for the three
months ended March 31, 2022 primarily due to employee equity vesting during the
three months ended March 31, 2021 as the company went public. Personnel costs
increased by $4.1 million or 48% for the nine months ended March 31, 2022 driven
by growth in headcount. For the three and nine months ended March 31, 2022 ,
third-party loan servicing and collections spend increased 109% and 80%,
respectively, due to increased loan volume.
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Technology and Data Analytics
Three Months Ended
March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)
Technology and data
analytics $ 110,291 $ 104,806 $ 5,485 5 % $ 283,293 $ 180,208 $ 103,085 57 %
Percentage of total
revenue, net 31 % 45 % 29 % 30 %
Technology and data analytics expense for the three and nine months ended
March 31, 2022 increased by $5.5 million or 5% and $103.1 million or 57%,
respectively, compared to the three and nine months ended March 31, 2021 . For
the three months ended March 31, 2022 , we saw a $9.0 million or 12% decrease in
engineering, product, and data science personnel costs, net of capitalized costs
for internally developed software, primarily due to employee equity vesting
during the three months ended March 31, 2021 as the company went public. For the
nine months ended March 31, 2022 , we saw a $48.9 million or 40% increase in
personnel costs compared to the nine months ended March 31, 2021 as we continue
to support our growth and technology platform as a whole. The largest component
of these personnel costs was stock-based compensation, which accounted for an
$18.4 million decrease and an $18.3 million increase compared to the three and
nine months ended March 31, 2021 , respectively, largely due to vesting of RSUs.
Additionally, there was a $14.0 million or 146% and $36.5 million or 137%,
increase in data infrastructure and hosting costs for the three and nine months
ended March 31, 2022 , respectively, compared to the three and nine months ended
March 31, 2021 , due to increased capacity requirements of our technology
platform. There was a $3.4 million or 72% and a $9.1 million or 78%, increase in
underwriting data provider costs for the three and nine months ended March 31,
2022 , compared to the three and nine months ended March 31, 2021 , respectively,
due to an increase in applications, partially offset by cost improvements
achieved as a result of contract renegotiations.
Sales and Marketing
Three Months Ended
March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)
Sales and marketing $ 156,214 $ 58,184 $ 98,030 168 % $ 363,650 $ 119,878 $ 243,772 203 % Percentage of total revenue, net 44 % 25 % 37 % 20 % Sales and marketing expense for the three and nine months endedMarch 31, 2022 increased by$98.0 million or 168% and$243.8 million or 203%, compared to the three and nine months endedMarch 31, 2021 , respectively. This increase was primarily due to$102.4 million and$173.0 million of expense related to warrants granted to Amazon during the three and nine months endedMarch 31, 2022 , respectively. Additionally, stock-based compensation related to employees in the sales and marketing functions decreased$4.6 million or 43% compared to the three months endedMarch 31, 2021 , as a result of employee equity vesting during the three months endedMarch 31, 2021 as the company went public. Stock-based compensation increased$3.7 million or 31%, compared to the nine months endedMarch 31, 2021 largely due to an increased headcount. Loss on loan originations increased$0.2 million or 6% and$19.1 million or 367%, compared to the three and nine months endedMarch 31, 2021 , respectively, primarily due to an increase in self-originated loans. Furthermore, there was a$3.7 million or 71% and$23.9 million or 131%, increase in brand and consumer marketing spend during the three and nine months endedMarch 31, 2022 , respectively, compared to the three and nine months endedMarch 31, 2021 , associated with our expanded brand-activation, holiday shopping, lifestyle, and travel marketing campaigns, as well as a$0.6 million or 16% decrease and$7.2 million or 118% increase in business-to-business marketing spend compared to the three and nine months endedMarch 31, 2021 , respectively. 77 --------------------------------------------------------------------------------
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General and Administrative
Three Months Ended
March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)
General and
administrative $ 142,466 $ 179,999 $ (37,533) (21) % $ 419,962 $ 253,188 $ 166,774 66 %
Percentage of total
revenue, net 40 % 78 % 43 % 42 %
General and administrative expense for the three months ended March 31, 2022
decreased by $37.5 million or 21% compared to the three months ended March 31,
2021 . This decrease was primarily due to a decrease of $57.5 million or 50% in
stock-based compensation during the three months ended March 31, 2022 compared
to the three months ended March 31, 2021 , as a result of employee equity vesting
during the three months ended March 31, 2021 as the company went public. The
decrease was partially offset by a $22.6 million increase in payroll during the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 primarily due to an increased headcount. General and administrative expense
for the nine months ended March 31, 2022 increased by $166.8 million or 66%,
compared to the nine months ended March 31, 2021 primarily due to an increased
headcount as we continue to grow our finance, legal, operations, and
administrative organizations.
Additionally, professional fees increased by $2.7 million or 35% and $7.5
million or 37%, during the three and nine months ended March 31, 2022 ,
respectively, compared to the three and nine months ended March 31, 2021 , to
support our acquisitions, international expansion, and regulatory compliance
programs.
Other (Expense) Income, net
Three Months Ended
March 31, Change Nine Months Ended March 31, Change
2022 2021 $ % 2022 2021 $ %
(in thousands, except percentage)
Other (expense)
income, net $ 172,139 $ (77,773) $ 249,912 (321) % $ 68,507 $ (48,088) $ 116,595 (242) %
Percentage of total
revenue, net 49 % (34) % 7 % (8) %
For the three and nine months ended March 31, 2022 , other (expense) income, net,
was largely comprised of a gain of $136.2 million and a gain of $28.7 million ,
respectively, recognized based on the change in fair value of the contingent
consideration liability associated with our acquisition of PayBright, driven by
decreases in the value of our common stock.
For both the three and nine months ended March 31, 2021 , other (expense) income,
net was primarily comprised of a loss of $78.5 million recognized based on the
change in fair value of the contingent consideration liability associated with
our acquisition of PayBright, driven by changes in the value of our common
stock. Additionally, for the nine months ended March 31, 2021 , other (expense)
income, net included a gain of $30.1 million recognized upon the conversion of
convertible notes into shares of Series G-1 preferred stock. The conversion of
convertible notes was accounted for as a debt extinguishment since the number of
shares of Series G-1 preferred stock issued upon conversion was variable and
this gain represented the difference between the carrying value of the debt at
the time of extinguishment and the allocated proceeds.
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Liquidity and Capital Resources
Sources and Uses of Funds
We have incurred losses since our inception, accumulating a deficit of$1.4 billion and$0.9 billion as ofMarch 31, 2022 andJune 30, 2021 , respectively. We have historically financed the majority of our operating and capital needs through the sales of equity securities, borrowings from debt facilities and convertible debt, third-party loan sale arrangements, and cash flows from operations. In September andOctober 2020 , we issued an aggregate of 21,836,687 shares of Series G preferred stock for aggregate cash proceeds of$435.1 million . OnJanuary 15, 2021 , we closed an initial public offering of our Class A common stock with cash proceeds, before expenses, of$1.3 billion . OnNovember 23, 2021 , we issued the 2026 Notes, generating cash proceeds of$1.7 billion . As ofMarch 31, 2022 , our principal sources of liquidity were available for sale securities and cash and cash equivalents, available capacity from revolving debt facilities, revolving securitizations, forward flow loan sale arrangements, and certain cash flows from our operations. We believe that our existing cash balances, available capacity under our revolving debt facilities, revolving securitizations and off-balance sheet loan sale arrangements, and cash from operations, are sufficient to meet both our existing operating, working capital, and capital expenditure requirements and our currently planned growth for at least the next 12 months. We cannot provide assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to fund our liquidity needs in the long-term. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control. Our on- and off-balance sheet facilities provide funding subject to various constraining limits on the financed portfolios. These limits are generally tied to loan-level attributes such as loan term, credit quality, and interest rate, as well as borrower- and merchant-level attributes.
Cash and Cash Equivalents
As ofMarch 31, 2022 , we had approximately$2.3 billion of cash and cash equivalents to fund our future operations compared to approximately$1.5 billion as ofJune 30, 2021 . This increase is primarily due to the proceeds of the 2026 Notes issuance onNovember 23, 2021 . Our cash and cash equivalents were comprised of operating bank accounts, money market funds, certificates of deposits, corporate bonds, and other commercial paper with maturities less than three months. Cash and cash equivalents are held primarily for continued investment in our business, for working capital purposes, and to facilitate a portion of our lending activities. Our policy is to invest cash in excess of our immediate working capital requirements in liquid investments and deposit accounts to preserve the principal balance and maintain adequate liquidity.
Restricted Cash
Restricted cash consists primarily of: (i) deposits restricted by standby
letters of credit for office leases and merchant partnership agreements;
(ii) funds held in accounts as collateral for our originating bank partners; and
(iii) servicing funds held in accounts contractually restricted by agreements
with warehouse credit facilities and third-party loan owners. We have no ability
to draw on such funds as long as they remain restricted under the applicable
arrangements.
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Funding Debt
The following table summarizes our funding debt facilities as of March 31, 2022 :
Maturity Fiscal Year Borrowing Capacity Principal Outstanding
(in thousands)
2022 $ 419,018 $ 208,468
2023 - -
2024 1,325,000 393,480
2025 - -
2026 and thereafter 650,000 308,858
Total $ 2,394,018 $ 910,806
Warehouse Credit Facilities
Through trusts, we entered into warehouse credit facilities with certain lenders
to finance the purchase and origination of our loans. These trusts are
consolidated variable interest entities ("VIEs"), and each trust entered into a
credit agreement and security agreement with a commercial bank as administrative
agent and a national banking association as collateral trustee and paying agent.
Borrowings under these agreements are referred to as funding debt. These credit
agreements contain operating covenants, including limitations on the incurrence
of certain indebtedness and liens, restrictions on certain intercompany
transactions, and limitations on the amount of dividends and stock repurchases.
Our funding debt facilities include concentration limits for various loan
characteristics including credit quality, product mix, geography, and merchant
concentration. As of March 31, 2022 , we were in compliance with all applicable
covenants in the agreements. Refer to Note 10. Debt in the notes to the interim
consolidated financial statements included elsewhere in this Form 10-Q for
additional information.
These revolving facilities mature between 2022 and 2029, and subject to covenant
compliance generally permit borrowings up to 12 months prior to the final
maturity date. Borrowings under these facilities generally occur multiple times
per week, and generally coincide with the purchase of loans from our originating
bank partners. We manage liquidity by accessing diversified pools of capital and
avoid concentration with any single counterparty; we are diversified across
different types of investors including investment banks, asset managers, and
insurance companies.
Borrowings under these facilities bear interest at an annual benchmark rate of
LIBOR or at an alternative commercial paper rate (which is either (i) the per
annum rate equivalent to the weighted-average of the per annum rates at which
all commercial paper notes were issued by certain lenders to fund advances or
maintain loans, or (ii) the daily weighted-average of LIBOR, as set forth in the
applicable credit agreement), plus a spread ranging from 1.65% to 4.00%.
Interest is payable monthly. In addition, these agreements require payment of a
monthly unused commitment fee ranging from 0% to 0.75% per annum on the undrawn
portion available.
Other Funding Facilities
Prior to our acquisition of PayBright onJanuary 1, 2021 , PayBright entered into various credit facilities utilized to finance the origination of loans inCanada . Similar to our warehouse credit facilities, borrowings under these agreements are referred to as funding debt, and proceeds from the borrowings may only be used for the purposes of facilitating loan funding and origination. These facilities are secured by PayBright loan receivables pledged to the respective facility as collateral, mature in 2022, and bear interest based on a benchmark rate plus a spread ranging from 1.25% to 4.25%.
Revolving Credit Facility
On
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a rate equal to, at our option, either (a) a SOFR rate determined by reference
to the forward-looking term SOFR rate for the interest period, plus an
applicable margin of 1.85% per annum or (b) a base rate determined by reference
to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate
last quoted by the Wall Street Journal as the U.S. prime rate and (iii) the
one-month forward-looking term SOFR rate plus 1.0% per annum, in each case, plus
an applicable margin of 0.85% per annum. The facility contains certain covenants
and restrictions, including certain financial maintenance covenants, and
requires payment of a monthly unused commitment fee of 0.20% per annum on the
undrawn balance available. There are no borrowings outstanding under the
facility. Refer to Note 10. Debt.
Securitizations
In connection with asset-backed securitizations, we sponsor and establish trusts to ultimately purchase loans facilitated by our platform. Securities issued from our asset-backed securitizations are senior or subordinated, based on the waterfall criteria of loan payments to each security class. The subordinated residual interests issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria. The assets are transferred into a trust such that the assets are legally isolated from the creditors of Affirm and are not available to satisfy our obligations. These assets can only be used to settle obligations of the underlying trusts. Each securitization trust issued senior notes and residual certificates to finance the purchase of the loans facilitated by our platform. The 2020-Z1, 2020-Z2, 2021-Z1, 2021-Z2 and 2022-X1 securitizations are secured by static pools of loans contributed at closing, whereas the 2020-A, 2021-A and 2021-B securitizations are revolving and we may contribute additional loans from time to time until the end of the respective revolving period. Refer to Note 11. Securitization and Variable Interest Entities.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended
March 31,
2022 2021
(in thousands)
Net Cash Used in Operating Activities (103,085) (173,217)
Net Cash Used in Investing Activities (985,621)
(1,106,378)
Net Cash Provided by Financing Activities(1) 2,066,000 2,753,959
(1) Amounts include net cash provided by the issuance of redeemable convertible preferred stock and convertible debt as follows:
Nine Months Ended
March 31,
2022 2021
(in thousands)
Proceeds from issuance of convertible debt, net $ 1,704,300 $ -
Proceeds from issuance of common stock, net of
repurchases 67,656 43,029
Proceeds from initial public offering, net - 1,305,301
Proceeds from issuance and conversion of redeemable convertible preferred stock, net of repurchases and issuance costs
- 434,529
Net cash provided by equity-related financing
activities $ 1,771,956 $ 1,782,859
Net cash provided by debt-related financing activities 460,986 1,098,666
Payments of tax withholding for stock-based
compensation (166,942) (127,566)
Net cash provided by financing activities $ 2,066,000
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Operating Activities
Our largest sources of operating cash are fees charged to merchant partners on
transactions processed through our platform and interest income from consumers'
loans. Our primary uses of cash from operating activities are for general and
administrative, technology and data analytics, funding costs, processing and
servicing, and sales and marketing expenses.
Cash used in operating activities for the nine months ended March 31, 2022 was
$103.1 million , a decrease of $70.1 million from cash used in operating
activities of $173.2 million for the nine months ended March 31, 2021 . This
reflects our net loss of $520.3 million , adjusted for non-cash charges of $426.9
million . Additionally, we had net cash outflows of $8.6 million provided by
changes in our operating assets and liabilities.
Non-cash charges primarily consisted of: provision for credit losses, which
increased by $142.2 million or 352% due to a change in product mix for
on-balance sheet loans and an unusually low provision expense in the prior
comparative period driven by the release of stressed expected loss scenarios and
the adoption of CECL; gain on sales of loans, which increased by $93.8 million
from $47.3 million for the nine months ended March 31, 2021 due to improved loan
sale economics and increased loan sales since the third quarter of the prior
fiscal year; and amortization of premiums and discounts, which increased by
$69.0 million or 114% due to increased amortization of discounts related to
loans purchased from our originating bank partners at a price above fair market
value. Furthermore, we incurred $280.1 million of stock-based compensation, up
from $192.4 million due to accelerated vesting of RSUs for which the
service-based condition had been met prior to the IPO and the performance-based
condition was met on the IPO date, and gains of $136.2 million due to the
decrease in the fair value of our contingent consideration liability, driven by
changes in the value of our common stock.
Our net cash outflows resulting from changes in operating assets and liabilities
decreased to $8.6 million for the nine months ended March 31, 2022 , compared to
net cash outflows of $68.5 million for the nine months ended March 31, 2021 .
This change was primarily driven by a decrease in other assets due to a
reduction of prepaid payroll taxes during the nine months ended March 31, 2022 .
Investing Activities
Cash used in investing activities for the nine months endedMarch 31, 2022 was$985.6 million , a decrease of$120.8 million from$1,106.4 million for the nine months endedMarch 31, 2021 . The main driver of this was$5,867.6 million of repayments of loans, representing an increase of$2,865.2 million , or 95%, compared to the third quarter of the prior year, due to a higher average balance of loans held for investment and generally increasing credit quality of the portfolio. Additionally, we sold$1,330.3 million of loans, representing an increase of$982.1 million or 282% compared to the third quarter of the prior year. These cash inflows were partially offset by$7,529.3 million of purchases of loans, representing an increase of$3,215.5 million or 75% compared to the third quarter of the prior year, due partly to continued growth in GMV. Additionally, we recorded cash outflows of approximately$770.0 million related to purchases of available for sale securities in the current period.
Financing Activities
Cash provided by financing activities for the nine months endedMarch 31, 2022 was$2,066.0 million , a decrease of$688.0 million from$2,754.0 million during the nine months endedMarch 31, 2021 . A main driver of this was vesting of warrants for common stock of$1,305.3 million during the nine months endedMarch 31, 2021 compared to no activity during the nine months endedMarch 31, 2022 . Additionally, during the nine months endedMarch 31, 2022 , we saw a$986.0 million decrease in cash inflows from the issuance of notes by our securitization trusts, net of in-period principal repayments, from$1,251.7 million during the nine months endedMarch 31, 2021 . This decrease in net cash inflows was partially offset by the issuance of convertible debt during the nine months endedMarch 31, 2022 , which resulted in net cash inflows of$1,704.3 million , net of debt issuance costs. 82
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Liquidity and Capital Risks and Requirements
There are numerous risks to our financial results, liquidity, capital raising, and debt refinancing plans, some of which may not be quantified in our current liquidity forecasts. The principal factors that could impact our liquidity and capital needs are customer delinquencies and defaults, a prolonged inability to adequately access capital market funding, declines in loan purchases and therefore revenue, fluctuations in our financial performance, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products, and the continuing market adoption of our platform. We intend to support our liquidity and capital position by pursuing diversified debt financings (including new securitizations and revolving debt facilities) and extending existing secured revolving facilities to provide committed liquidity in case of prolonged market fluctuations. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing in connection with those efforts. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. Additionally, as a result of any of these actions, we may be subject to restrictions and covenants in the agreements governing these transactions that may place limitations on us, and we may be required to pledge additional collateral as security. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition. It is also possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect.
Concentrations of Revenue
For the three and nine months endedMarch 31, 2022 , there were no merchants that exceeded 10% of total revenue. For the three and nine months endedMarch 31, 2021 approximately 20% and 31% of total revenue, respectively, was driven by one merchant partner, Peloton. We believe we have a strong relationship with Peloton and, inSeptember 2020 , we entered into a renewed merchant agreement with Peloton with an initial three-year term ending inSeptember 2023 , which automatically renews for additional and successive one-year terms until terminated. While we believe our growth will facilitate both revenue growth and merchant diversification as we continue to integrate with a wide range of merchants, changes in merchant loan volume and revenue concentration may cause our financial and operating performance to fluctuate significantly from period to period. Our revenue as a percentage of GMV in any given period varies across products. As such, as we continue to expand our network to include more merchants, revenue as a percentage of GMV will vary.
Contractual Obligations
OnNovember 23, 2021 , the Company issued$1.7 billion in aggregate principal amount of 0% convertible senior notes due 2026 (the "2026 Notes"). The 2026 Notes represent senior unsecured obligations of the Company. The 2026 Notes do not bear interest except in special circumstances, and the principal amount of the 2026 Notes does not accrete. The 2026 Notes mature onNovember 15, 2026 .
Off-Balance Sheet Arrangements
Off-balance sheet loans relate to unconsolidated securitization transactions and loans sold to third-party investors for which we have some form of continuing involvement, including as servicer. For off-balance sheet loan sales where servicing is the only form of continuing involvement, we would only experience a loss if we were required to repurchase such a loan due to a breach in representations and warranties associated with our loan sale or servicing contracts. For unconsolidated securitization transactions where Affirm is the sponsor and risk retention holder, Affirm could experience a loss of up to 5% of both the senior notes and residual certificates. As ofMarch 31, 2022 , the aggregate outstanding balance of loans held by third-party investors or off-balance sheet VIEs was$4.0 billion . As ofMarch 31, 2022 , we had three off-balance sheet VIEs, the 2021-Z1, 2021-Z2, and 2022-X1 83 -------------------------------------------------------------------------------- Table of Contents securitization trusts. In the unlikely event principal payments on the loans backing any off-balance sheet securitization are insufficient to pay senior note holders, including any retained interest, then any amounts the Company contributed to the securitization reserve accounts may be depleted. See Note 11. Securitization and Variable Interest Entities of the accompanying notes to our interim condensed consolidated financial statements for more information.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP.U.S. GAAP requires us to make certain estimates and judgments that affect the amounts reported in consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because certain of these accounting policies require significant judgment, our actual results may differ materially from our estimates. To the extent that there are differences between our estimates and actual results, our future consolidated financial statement presentation, financial condition, results of operations, and cash flows will be affected. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to merchant network revenue, loss on loan purchase commitment, allowance for credit losses, stock-based compensation, including warrants granted to nonemployees, and income taxes. We believe these estimates have the greatest potential effect on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
For further information, our significant accounting policies are described in Note 2. Summary of Significant Accounting Policies within the notes to the interim condensed consolidated financial statements.
Recent Accounting Pronouncements
Refer to Note 2. Summary of Significant Accounting Policies within the notes to the interim condensed consolidated financial statements.
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