UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2023
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File NumberNumber: 001-39888
Affirm Holdings, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| Delaware | | 84-2224323 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
| 650 California Street | | | |
| San Francisco, California | | | 94108 |
| (Address of principal executive offices) | | (Zip Code) |
(415) 984-0490960-1518
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Class A common stock, par value $0.00001 per share | | AFRM | | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 5,November 3, 2023, the number of shares of the registrant’s Class A common stock outstandingoutstanding was 235,833,709242,120,237 and the number of shares of the registrant’s Class B common stock outstanding was 59,851,818.59,613,337.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”), as well as information included in oral statements or other written statements made or to be made by us, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this report,Report, including statements regarding our future results of operations and financial condition, business strategy, and plans and objectives of management forregarding future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as “anticipate,” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
•our expectations regarding our future revenue, expenses, and other operating results and key operating metrics;
•our ability to attract new merchants and commerce partners and retain and grow our relationships with existing merchants and commerce partners;
•our ability to compete successfully in a highly competitive and evolving industry;
•our ability to attract new consumers and retain and grow our relationships with our existing consumers;
•our expectations regarding the development, innovation, introduction of, and demand for, our products;
•our ability to successfully maintain our relationship with Celtic Bank as anexisting originating bank partnerpartners and engage additional originating bank partners;
•our ability to maintain, renew or replace our existing funding arrangements and build and grow new funding relationships;
•the impact of any of our funding sources becoming unwilling or unable to provide funding to us on terms acceptable to us, or at all;
•our ability to effectively price and score credit risk using our proprietary risk model;
•the performance of loans facilitated and originated through our platform;
•the future growth rate of our revenue and related key operating metrics;
•our ability to achieve or sustainsustained profitability in the future, including in the manner and timeframe we have previously communicated;future;
•our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business;
•our ability to protect our confidential, proprietary, or sensitive information;
•past and future acquisitions, investments, and other strategic investments;
•our ability to maintain, protect, and enhance our brand and intellectual property;
•litigation, investigations, regulatory inquiries, and proceedings;
•developments in our regulatory environment;
•the impact of macroeconomic conditions on our business, including the impacts of inflation, a rising interest rate environment and corresponding increases in negotiated interest rate spreads, increasing recessionary concerns and the instability of financial institutions; and
•the size and growth rates of the markets in which we compete.
Forward-looking statements, including statements such as “we believe” and similar statements, are based on our management’s current beliefs, opinions and assumptions and on information currently available.available as of the date of this Report. Such information may be limited or incomplete, and our statements should not be read to indicate that
we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These forward-looking statements are subject to a number of known and unknown risks,
uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this Form 10-Q in our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022, and in our most recently filed Annual Report on Form 10-K for the fiscal year ended June 30, 20222023 (the “Annual Report”). Other sections of this Form 10-Q may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive, heavily regulated and rapidly changing environment. New risk factorsrisks emerge from time to time, and it is not possible for our management to predict all risk factorsrisks that we may face, nor can we assess the impact of all factorsrisks on our business or the extent to which any factor,risk, or combination of factors,risks, may cause our actual results to differ from those contained in, or implied by, any forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable as of the date of this Report, we cannot guarantee future results, levels of activity, performance, achievements, events, outcomes, timing of results or circumstances. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this reportReport or to conform these statements to actual results or to changes in our expectations. You should read this Form 10-Q and the documents that we have filed as exhibits to this reportReport with the understanding that our actual future results, levels of activity, performance, outcomes, achievements and achievementstiming of results or outcomes may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
In addition, statements such as “we believe” and similar statements reflect our current beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (investors.affirm.com), our filings with the Securities and Exchange Commission (“SEC”), webcasts, press releases, conference calls, and social media. We use these mediums, including our website, to communicate with investors and the general public about our company, our products, and other issues. It is possible that the information that we make available on our website may be deemed to be material information. We therefore encourage investors and others interested in our companyCompany to review the information that we make available on our website. The contents of our website are not incorporated into this filing. We have included our investor relations website address only as an inactive textual reference for convenience and do not intend it to be an active link to our website.
Part I - Financial Information
Item 1. Unaudited Financial Statements
AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except shares and per share amounts)
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| Assets | Assets | | | | | Assets | | | | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 972,477 | | | $ | 1,255,171 | | Cash and cash equivalents | | $ | 1,079,261 | | | $ | 892,027 | |
| Restricted cash | Restricted cash | | 409,015 | | | 295,636 | | Restricted cash | | 409,231 | | | 367,917 | |
| Securities available for sale at fair value | Securities available for sale at fair value | | 1,059,031 | | | 1,595,373 | | Securities available for sale at fair value | | 1,021,630 | | | 1,174,653 | |
| Loans held for sale | Loans held for sale | | 122 | | | 2,670 | | Loans held for sale | | 145 | | | 76 | |
| Loans held for investment | Loans held for investment | | 3,775,542 | | | 2,503,561 | | Loans held for investment | | 4,549,422 | | | 4,402,962 | |
| Allowance for credit losses | Allowance for credit losses | | (176,336) | | | (155,392) | | Allowance for credit losses | | (232,068) | | | (204,531) | |
| Loans held for investment, net | Loans held for investment, net | | 3,599,206 | | | 2,348,169 | | Loans held for investment, net | | 4,317,354 | | | 4,198,431 | |
| Accounts receivable, net | Accounts receivable, net | | 135,816 | | | 142,052 | | Accounts receivable, net | | 236,234 | | | 199,085 | |
| Property, equipment and software, net | Property, equipment and software, net | | 277,156 | | | 171,482 | | Property, equipment and software, net | | 338,749 | | | 290,135 | |
| Goodwill | Goodwill | | 537,126 | | | 539,534 | | Goodwill | | 536,418 | | | 542,571 | |
| Intangible assets | Intangible assets | | 48,267 | | | 78,942 | | Intangible assets | | 19,828 | | | 34,434 | |
| Commercial agreement assets | Commercial agreement assets | | 198,994 | | | 263,196 | | Commercial agreement assets | | 156,115 | | | 177,672 | |
| Other assets | Other assets | | 270,639 | | | 281,567 | | Other assets | | 292,184 | | | 278,614 | |
| Total Assets | | $ | 7,507,849 | | | $ | 6,973,792 | | |
| Liabilities and Stockholders’ Equity | | | | | |
| Total assets | | Total assets | | $ | 8,407,149 | | | $ | 8,155,615 | |
| Liabilities and stockholders’ equity | | Liabilities and stockholders’ equity | | | | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Accounts payable | Accounts payable | | $ | 30,022 | | | $ | 33,072 | | Accounts payable | | $ | 27,345 | | | $ | 28,602 | |
| Payable to third-party loan owners | Payable to third-party loan owners | | 44,187 | | | 71,383 | | Payable to third-party loan owners | | 109,498 | | | 53,852 | |
| Accrued interest payable | Accrued interest payable | | 13,826 | | | 6,659 | | Accrued interest payable | | 19,589 | | | 13,498 | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | | 192,360 | | | 237,598 | | Accrued expenses and other liabilities | | 160,328 | | | 180,883 | |
| Convertible senior notes, net | Convertible senior notes, net | | 1,413,345 | | | 1,706,668 | | Convertible senior notes, net | | 1,415,080 | | | 1,414,208 | |
| Notes issued by securitization trusts | Notes issued by securitization trusts | | 1,788,853 | | | 1,627,580 | | Notes issued by securitization trusts | | 2,398,758 | | | 2,165,577 | |
| Funding debt | Funding debt | | 1,514,120 | | | 672,577 | | Funding debt | | 1,709,751 | | | 1,764,812 | |
| Total liabilities | | 4,996,713 | | | 4,355,537 | | |
| Total Liabilities | | Total Liabilities | | 5,840,349 | | | 5,621,432 | |
| Commitments and contingencies (Note 8) | Commitments and contingencies (Note 8) | | | | | Commitments and contingencies (Note 8) | | | | |
| Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
| Class A common stock, par value $0.00001 per share: 3,030,000,000 shares authorized, 234,561,926 shares issued and outstanding as of March 31, 2023; 3,030,000,000 shares authorized, 227,255,529 shares issued and outstanding as of June 30, 2022 | | 2 | | | 2 | | |
| Class B common stock, par value $0.00001 per share: 140,000,000 shares authorized, 60,088,662 shares issued and outstanding as of March 31, 2023; 140,000,000 authorized, 60,109,844 shares issued and outstanding as of June 30, 2022 | | 1 | | | 1 | | |
| Class A common stock, par value $0.00001 per share: 3,030,000,000 shares authorized, 241,468,132 shares issued and outstanding as of September 30, 2023; 3,030,000,000 shares authorized, 237,230,381 shares issued and outstanding as of June 30, 2023 | | Class A common stock, par value $0.00001 per share: 3,030,000,000 shares authorized, 241,468,132 shares issued and outstanding as of September 30, 2023; 3,030,000,000 shares authorized, 237,230,381 shares issued and outstanding as of June 30, 2023 | | 2 | | | 2 | |
| Class B common stock, par value $0.00001 per share: 140,000,000 shares authorized, 59,613,755 shares issued and outstanding as of September 30, 2023; 140,000,000 authorized, 59,615,836 shares issued and outstanding as of June 30, 2023 | | Class B common stock, par value $0.00001 per share: 140,000,000 shares authorized, 59,613,755 shares issued and outstanding as of September 30, 2023; 140,000,000 authorized, 59,615,836 shares issued and outstanding as of June 30, 2023 | | 1 | | | 1 | |
| Additional paid in capital | Additional paid in capital | | 4,918,756 | | | 4,231,303 | | Additional paid in capital | | 5,355,032 | | | 5,140,850 | |
| Accumulated deficit | Accumulated deficit | | (2,385,285) | | | (1,605,902) | | Accumulated deficit | | (2,763,030) | | | (2,591,247) | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (22,338) | | | (7,149) | | Accumulated other comprehensive loss | | (25,205) | | | (15,423) | |
| Total stockholders’ equity | Total stockholders’ equity | | 2,511,136 | | | 2,618,255 | | Total stockholders’ equity | | 2,566,800 | | | 2,534,183 | |
| Total Liabilities and Stockholders’ Equity | | $ | 7,507,849 | | | $ | 6,973,792 | | |
| Total liabilities and stockholders’ equity | | Total liabilities and stockholders’ equity | | $ | 8,407,149 | | | $ | 8,155,615 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONT.
(Unaudited)
(in thousands)
The following table presents the assets and liabilities of consolidated variable interest entities (“VIEs”), which are included in the interim condensed consolidated balance sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. The liabilities in the table below include liabilities for which creditors do not have recourse to the general credit of the Company. Additionally, the assets and liabilities in the table below include third-party assets and liabilities of consolidated VIEs only and exclude intercompany balances that eliminate upon consolidation.
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| Assets of consolidated VIEs, included in total assets above | Assets of consolidated VIEs, included in total assets above | | | | | Assets of consolidated VIEs, included in total assets above | | | | |
| Restricted cash | Restricted cash | | $ | 251,964 | | | $ | 164,530 | | Restricted cash | | $ | 216,243 | | | $ | 203,872 | |
| Loans held for investment | Loans held for investment | | 3,382,808 | | | 2,179,026 | | Loans held for investment | | 4,335,514 | | | 4,151,606 | |
| Allowance for credit losses | Allowance for credit losses | | (149,430) | | | (124,052) | | Allowance for credit losses | | (198,932) | | | (178,252) | |
| Loans held for investment, net | Loans held for investment, net | | 3,233,378 | | | 2,054,974 | | Loans held for investment, net | | 4,136,582 | | | 3,973,354 | |
| Accounts receivable, net | Accounts receivable, net | | 8,196 | | | 8,195 | | Accounts receivable, net | | 2,958 | | | 8,196 | |
| Other assets | Other assets | | 14,506 | | | 14,570 | | Other assets | | 16,499 | | | 18,210 | |
| Total assets of consolidated VIEs | Total assets of consolidated VIEs | | $ | 3,508,044 | | | $ | 2,242,269 | | Total assets of consolidated VIEs | | $ | 4,372,282 | | | $ | 4,203,632 | |
| Liabilities of consolidated VIEs, included in total liabilities above | Liabilities of consolidated VIEs, included in total liabilities above | | | | | Liabilities of consolidated VIEs, included in total liabilities above | | | | |
| Accounts payable | Accounts payable | | $ | 2,817 | | | $ | 2,897 | | Accounts payable | | $ | 2,845 | | | $ | 2,894 | |
| Accrued interest payable | Accrued interest payable | | 13,826 | | | 6,525 | | Accrued interest payable | | 19,588 | | | 13,498 | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | | 14,119 | | | 15,494 | | Accrued expenses and other liabilities | | 19,587 | | | 17,825 | |
| Notes issued by securitization trusts | Notes issued by securitization trusts | | 1,788,853 | | | 1,627,580 | | Notes issued by securitization trusts | | 2,398,758 | | | 2,165,577 | |
| Funding debt | Funding debt | | 1,358,666 | | | 514,033 | | Funding debt | | 1,648,297 | | | 1,656,400 | |
| Total liabilities of consolidated VIEs | Total liabilities of consolidated VIEs | | 3,178,281 | | | 2,166,529 | | Total liabilities of consolidated VIEs | | 4,089,075 | | | 3,856,194 | |
| Total net assets | | $ | 329,763 | | | $ | 75,740 | | |
| Total net assets of consolidated VIEs | | Total net assets of consolidated VIEs | | $ | 283,207 | | | $ | 347,438 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)LOSS (Unaudited)
(in thousands, except share and per share amounts)
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | | Three Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 | | | 2023 | | 2022 |
| Revenue | Revenue | | | | | | | | | Revenue | | | | | |
| Merchant network revenue | Merchant network revenue | | $ | 119,013 | | | $ | 121,054 | | | $ | 366,181 | | | $ | 340,385 | | Merchant network revenue | | | $ | 145,950 | | | $ | 113,149 | |
| Virtual card network revenue | | 29,469 | | | 23,169 | | | 85,294 | | | 69,122 | | |
| Card network revenue | | Card network revenue | | | 33,476 | | | 26,708 | |
| Total network revenue | Total network revenue | | 148,482 | | | 144,223 | | | 451,475 | | | 409,507 | | Total network revenue | | | 179,426 | | | 139,857 | |
| Interest income | Interest income | | 178,270 | | | 134,599 | | | 470,393 | | | 390,256 | | Interest income | | | 262,679 | | | 136,802 | |
| Gain on sales of loans | Gain on sales of loans | | 32,813 | | | 52,484 | | | 156,015 | | | 141,153 | | Gain on sales of loans | | | 34,285 | | | 63,595 | |
| Servicing income | Servicing income | | 21,413 | | | 23,456 | | | 64,277 | | | 44,242 | | Servicing income | | | 20,157 | | | 21,370 | |
| Total Revenue, net | | $ | 380,978 | | | $ | 354,762 | | | $ | 1,142,160 | | | $ | 985,158 | | |
| Operating Expenses | | | | | | | | | |
| Total revenue, net | | Total revenue, net | | | $ | 496,547 | | | $ | 361,624 | |
| Operating expenses | | Operating expenses | | | | | |
| Loss on loan purchase commitment | Loss on loan purchase commitment | | $ | 31,224 | | | $ | 46,853 | | | $ | 105,256 | | | $ | 163,796 | | Loss on loan purchase commitment | | | $ | 34,866 | | | $ | 35,610 | |
| Provision for credit losses | Provision for credit losses | | 66,438 | | | 66,294 | | | 237,377 | | | 182,581 | | Provision for credit losses | | | 99,696 | | | 64,250 | |
| Funding costs | Funding costs | | 51,188 | | | 15,824 | | | 120,005 | | | 50,277 | | Funding costs | | | 73,931 | | | 25,066 | |
| Processing and servicing | Processing and servicing | | 65,229 | | | 43,371 | | | 186,096 | | | 110,421 | | Processing and servicing | | | 75,671 | | | 54,359 | |
| Technology and data analytics | Technology and data analytics | | 161,792 | | | 110,291 | | | 463,500 | | | 283,293 | | Technology and data analytics | | | 132,965 | | | 144,961 | |
| Sales and marketing | Sales and marketing | | 140,942 | | | 156,214 | | | 493,149 | | | 363,650 | | Sales and marketing | | | 146,866 | | | 163,873 | |
| General and administrative | General and administrative | | 139,266 | | | 142,466 | | | 458,877 | | | 419,962 | | General and administrative | | | 140,334 | | | 160,972 | |
| Restructuring charges, net | | 34,934 | | | — | | | 34,934 | | | — | | |
| Total Operating Expenses | | 691,013 | | | 581,313 | | | 2,099,194 | | | 1,573,980 | | |
| Operating Loss | | $ | (310,035) | | | $ | (226,551) | | | $ | (957,034) | | | $ | (588,822) | | |
| Restructuring and other | | Restructuring and other | | | 1,665 | | | — | |
| Total operating expenses | | Total operating expenses | | | 705,994 | | | 649,091 | |
| Operating loss | | Operating loss | | | $ | (209,447) | | | $ | (287,467) | |
| Other income, net | Other income, net | | 103,522 | | | 172,139 | | | 175,067 | | | 68,507 | | Other income, net | | | 38,707 | | | 36,018 | |
| Loss Before Income Taxes | | $ | (206,513) | | | $ | (54,412) | | | $ | (781,967) | | | $ | (520,315) | | |
| Loss before income taxes | | Loss before income taxes | | | $ | (170,740) | | | $ | (251,449) | |
| Income tax (benefit) expense | Income tax (benefit) expense | | (836) | | | 259 | | | (2,584) | | | 706 | | Income tax (benefit) expense | | | 1,043 | | | (180) | |
| Net Loss | | $ | (205,677) | | | $ | (54,671) | | | $ | (779,383) | | | $ | (521,021) | | |
| Other Comprehensive Income (Loss) | | | | | | | | | |
| Net loss | | Net loss | | | $ | (171,783) | | | $ | (251,269) | |
| Other comprehensive loss | | Other comprehensive loss | | | | | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | | $ | 31 | | | $ | 5,406 | | | $ | (16,993) | | | $ | 3,945 | | Foreign currency translation adjustments | | | $ | (11,898) | | | $ | (21,546) | |
| Unrealized gain (loss) on securities available for sale, net | Unrealized gain (loss) on securities available for sale, net | | 4,520 | | | (2,105) | | | 2,061 | | | (3,041) | | Unrealized gain (loss) on securities available for sale, net | | | 1,353 | | | (5,528) | |
| Unrealized gain (loss) on cash flow hedges | | (257) | | | — | | | (257) | | | — | | |
| Net Other Comprehensive Income (Loss) | | 4,294 | | | 3,301 | | | (15,189) | | | 904 | | |
| Comprehensive Loss | | $ | (201,383) | | | $ | (51,370) | | | $ | (794,572) | | | $ | (520,117) | | |
| Gain on cash flow hedges | | Gain on cash flow hedges | | | 763 | | | — | |
| Net other comprehensive loss | | Net other comprehensive loss | | | (9,782) | | | (27,074) | |
| Comprehensive loss | | Comprehensive loss | | | $ | (181,565) | | | $ | (278,343) | |
| Per share data: | Per share data: | | | | | | | | | Per share data: | | | | | |
| Net loss per share attributable to common stockholders for Class A and Class B | Net loss per share attributable to common stockholders for Class A and Class B | | Net loss per share attributable to common stockholders for Class A and Class B | | | |
| Basic | Basic | | $ | (0.69) | | | $ | (0.19) | | | $ | (2.65) | | | $ | (1.86) | | Basic | | | $ | (0.57) | | | $ | (0.86) | |
| Diluted | Diluted | | $ | (0.69) | | | $ | (0.19) | | | $ | (2.65) | | | $ | (1.86) | | Diluted | | | $ | (0.57) | | | $ | (0.86) | |
| Weighted average common shares outstanding | Weighted average common shares outstanding | | Weighted average common shares outstanding | | | |
| Basic | Basic | | 297,204,715 | | | 285,641,820 | | | 293,915,268 | | | 279,570,015 | | Basic | | | 303,839,670 | | | 290,929,270 | |
| Diluted | Diluted | | 297,204,715 | | | 285,641,820 | | | 293,915,268 | | | 279,570,015 | | Diluted | | | 303,839,670 | | | 290,929,270 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share amounts)
| | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| | | Shares | | Amount | | | Shares (1) | | | Total Stockholders’ Equity |
| Balance as of June 30, 2022 | | | 287,365,373 | | | $ | 3 | | | $ | 4,231,303 | | | $ | (1,605,902) | | | $ | (7,149) | | | $ | 2,618,255 | | |
| Issuance of common stock upon exercise of stock options | | | 215,949 | | | — | | | 1,192 | | | — | | | — | | | 1,192 | | |
| Forfeiture of common stock related to acquisitions | | | (243,384) | | | — | | | — | | | — | | | — | | | — | | |
| Repurchases of Common Stock | | | (12,437) | | | — | | | (109) | | | — | | | — | | | (109) | | |
| Vesting of restricted stock units | | | 2,166,715 | | | — | | | — | | | — | | | — | | | — | | |
| Vesting of warrants for common stock | | | — | | | — | | | 108,742 | | | — | | | — | | | 108,742 | | |
| Stock-based compensation | | | — | | | — | | | 141,012 | | | — | | | — | | | 141,012 | | |
| Tax withholding on stock-based compensation | | | — | | | — | | | (27,311) | | | — | | | — | | | (27,311) | | |
| Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | (21,546) | | | (21,546) | | |
| Unrealized loss on securities available for sale | | | — | | | — | | | — | | | — | | | (5,528) | | | (5,528) | | |
| Net loss | | | — | | | — | | | — | | | (251,269) | | | — | | | (251,269) | | |
| Balance as of September 30, 2022 | | | 289,492,216 | | | $ | 3 | | | $ | 4,454,829 | | | $ | (1,857,171) | | | $ | (34,223) | | | $ | 2,563,438 | | |
| Issuance of common stock upon exercise of stock options | | | 300,903 | | | — | | | 1,372 | | | — | | | — | | | 1,372 | | |
| Issuance of common stock, employee share purchase plan | | | 500,443 | | | — | | | 5,921 | | | — | | | — | | | 5,921 | | |
| Vesting of restricted stock units | | | 1,798,218 | | | — | | | — | | | — | | | — | | | — | | |
| Vesting of warrants for common stock | | | — | | | — | | | 128,054 | | | — | | | — | | | 128,054 | | |
| Stock-based compensation | | | — | | | — | | | 144,218 | | | — | | | — | | | 144,218 | | |
| Tax withholding on stock-based compensation | | | — | | | — | | | (18,009) | | | — | | | — | | | (18,009) | | |
| Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | 4,522 | | | 4,522 | | |
| Unrealized loss on securities available for sale | | | — | | | — | | | — | | | — | | | 3,069 | | | 3,069 | | |
| Net loss | | | — | | | — | | | — | | | (322,437) | | | — | | | (322,437) | | |
| Balance as of December 31, 2022 | | | 292,091,780 | | | $ | 3 | | | $ | 4,716,385 | | | $ | (2,179,608) | | | $ | (26,632) | | | $ | 2,510,148 | | |
| Balance as of June 30, 2023 | | Balance as of June 30, 2023 | | 296,846,217 | | | $ | 3 | | | $ | 5,140,850 | | | $ | (2,591,247) | | | $ | (15,423) | | | $ | 2,534,183 | |
| Issuance of common stock upon exercise of stock options | Issuance of common stock upon exercise of stock options | | | 185,225 | | | — | | | 716 | | | — | | | — | | | 716 | | Issuance of common stock upon exercise of stock options | | 495,350 | | | — | | | 3,625 | | | — | | | — | | | 3,625 | |
| Vesting of restricted stock units | Vesting of restricted stock units | | | 2,373,583 | | | — | | | — | | | — | | | — | | | — | | Vesting of restricted stock units | | 3,740,320 | | | — | | | — | | | — | | | — | | | — | |
| Vesting of warrants for common stock | Vesting of warrants for common stock | | | — | | | — | | | 93,922 | | | — | | | — | | | 93,922 | | Vesting of warrants for common stock | | — | | | — | | | 95,910 | | | — | | | — | | | 95,910 | |
| Stock-based compensation | Stock-based compensation | | | — | | | — | | | 125,902 | | | — | | | — | | | 125,902 | | Stock-based compensation | | — | | | — | | | 151,162 | | | — | | | — | | | 151,162 | |
| Tax withholding on stock-based compensation | Tax withholding on stock-based compensation | | | — | | | — | | | (18,169) | | | — | | | — | | | (18,169) | | Tax withholding on stock-based compensation | | — | | | — | | | (36,515) | | | — | | | — | | | (36,515) | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | 31 | | | 31 | | Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | (11,898) | | | (11,898) | |
| Unrealized gain on securities available for sale | Unrealized gain on securities available for sale | | | — | | | — | | | — | | | — | | | 4,520 | | | 4,520 | | Unrealized gain on securities available for sale | | — | | | — | | | — | | | — | | | 1,353 | | | 1,353 | |
| Unrealized loss on cash flow hedges | | | — | | | — | | | — | | | — | | | (257) | | | (257) | | |
| Gain on cash flow hedges | | Gain on cash flow hedges | | — | | | — | | | — | | | — | | | 763 | | | 763 | |
| Net loss | Net loss | | | — | | | — | | | — | | | (205,677) | | | — | | | (205,677) | | Net loss | | — | | | — | | | — | | | (171,783) | | | — | | | (171,783) | |
| Balance as of March 31, 2023 | | | 294,650,588 | | | $ | 3 | | | $ | 4,918,756 | | | $ | (2,385,285) | | | $ | (22,338) | | | $ | 2,511,136 | | |
| Balance as of September 30, 2023 | | Balance as of September 30, 2023 | | 301,081,887 | | | $ | 3 | | | $ | 5,355,032 | | | $ | (2,763,030) | | | $ | (25,205) | | | $ | 2,566,800 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
| | Shares (1) | | Amount | | | | |
| Balance as of June 30, 2022 | | 287,365,373 | | | $ | 3 | | | $ | 4,231,303 | | | $ | (1,605,902) | | | $ | (7,149) | | | $ | 2,618,255 | |
| Issuance of common stock upon exercise of stock options | | 215,949 | | | — | | | 1,192 | | | — | | | — | | | 1,192 | |
| Forfeiture of common stock related to acquisitions | | (243,384) | | | — | | | — | | | — | | | — | | | — | |
| Repurchases of common stock | | (12,437) | | | — | | | (109) | | | — | | | — | | | (109) | |
| Vesting of restricted stock units | | 2,166,715 | | | — | | | — | | | — | | | — | | | — | |
| Vesting of warrants for common stock | | — | | | — | | | 108,742 | | | — | | | — | | | 108,742 | |
| Stock-based compensation | | — | | | — | | | 141,012 | | | — | | | — | | | 141,012 | |
| Tax withholding on stock-based compensation | | — | | | — | | | (27,311) | | | — | | | — | | | (27,311) | |
| Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | (21,546) | | | (21,546) | |
| Unrealized loss on securities available for sale | | — | | | — | | | — | | | — | | | (5,528) | | | (5,528) | |
| Net loss | | — | | | — | | | — | | | (251,269) | | | — | | | (251,269) | |
| Balance as of September 30, 2022 | | 289,492,216 | | | $ | 3 | | | $ | 4,454,829 | | | $ | (1,857,171) | | | $ | (34,223) | | | $ | 2,563,438 | |
AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, exceptThe share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
| | | | | | | Shares | | Amount | | | | |
| Balance as of June 30, 2021 | | | | | | | 269,358,104 | | | $ | 3 | | | $ | 3,467,236 | | | $ | (898,485) | | | $ | 6,773 | | | $ | 2,575,527 | |
| Issuance of common stock upon exercise of stock options | | | | | | | 7,403,503 | | | — | | | 37,470 | | | — | | | — | | | 37,470 | |
| Issuance of common stock in acquisition | | | | | | | 183,733 | | | — | | | 10,000 | | | — | | | — | | | 10,000 | |
| Vesting of restricted stock units | | | | | | | 772,653 | | | — | | | — | | | — | | | — | | | — | |
| Repurchases of common stock | | | | | | | (821) | | | — | | | (4) | | | — | | | — | | | (4) | |
| Stock-based compensation | | | | | | | — | | | — | | | 104,879 | | | — | | | — | | | 104,879 | |
| Tax withholding on stock-based compensation | | | | | | | — | | | — | | | (39,817) | | | — | | | — | | | (39,817) | |
| Foreign currency translation adjustments | | | | | | | — | | | — | | | — | | | — | | | (3,802) | | | (3,802) | |
| Unrealized loss on securities available for sale | | | | | | | — | | | — | | | — | | | — | | | (279) | | | (279) | |
| Net loss | | | | | | | — | | | — | | | — | | | (306,615) | | | — | | | (306,615) | |
| Balance as of September 30, 2021 | | | | | | | 277,717,172 | | | $ | 3 | | | $ | 3,579,764 | | | $ | (1,205,100) | | | $ | 2,692 | | | $ | 2,377,359 | |
| Issuance of common stock upon exercise of stock options | | | | | | | 4,689,973 | | | — | | | 21,674 | | | — | | | — | | | 21,674 | |
| Vesting of restricted stock units | | | | | | | 803,263 | | | — | | | — | | | — | | | — | | | — | |
| Vesting of warrants for common stock | | | | | | | — | | | — | | | 198,383 | | | — | | | — | | | 198,383 | |
| Stock-based compensation | | | | | | | — | | | — | | | 101,920 | | | — | | | — | | | 101,920 | |
| Tax withholding on stock-based compensation | | | | | | | — | | | — | | | (72,963) | | | — | | | — | | | (72,963) | |
| Foreign currency translation adjustments | | | | | | | — | | | — | | | — | | | — | | | 2,341 | | | 2,341 | |
| Unrealized loss on securities available for sale | | | | | | | — | | | — | | | — | | | — | | | (657) | | | (657) | |
| Net loss | | | | | | | — | | | — | | | — | | | (159,735) | | | — | | | (159,735) | |
| Balance as of December 31, 2021 | | | | | | | 283,210,408 | | | $ | 3 | | | $ | 3,828,778 | | | $ | (1,364,835) | | | $ | 4,376 | | | $ | 2,468,322 | |
| Issuance of common stock upon exercise of stock options | | | | | | | 1,258,865 | | | — | | | 8,171 | | | — | | | — | | | 8,171 | |
| Repurchases of Common Stock | | | | | | | (9,472) | | | — | | | (80) | | | — | | | — | | | (80) | |
| Vesting of restricted stock units | | | | | | | 1,318,524 | | | — | | | — | | | — | | | — | | | — | |
| Vesting of warrants for common stock | | | | | | | — | | | — | | | 92,169 | | | — | | | — | | | 92,169 | |
| Stock-based compensation | | | | | | | — | | | — | | | 113,005 | | | — | | | — | | | 113,005 | |
| Tax withholding on stock-based compensation | | | | | | | — | | | — | | | (54,162) | | | — | | | — | | | (54,162) | |
| Foreign currency translation adjustments | | | | | | | — | | | — | | | — | | | — | | | 5,406 | | | 5,406 | |
| Unrealized loss on securities available for sale | | | | | | | — | | | — | | | — | | | — | | | (2,105) | | | (2,105) | |
| Net loss | | | | | | | — | | | — | | | — | | | (54,671) | | | — | | | (54,671) | |
| Balance as of March 31, 2022 | | | | | | | 285,778,325 | | | $ | 3 | | | $ | 3,987,881 | | | $ | (1,419,506) | | | $ | 7,677 | | | $ | 2,576,055 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| | | Nine Months Ended March 31, | | Three Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Cash Flows from Operating Activities | | | | | |
| Net Loss | | $ | (779,383) | | | $ | (521,021) | | |
| Cash flows from operating activities | | Cash flows from operating activities | | | | |
| Net loss | | Net loss | | $ | (171,783) | | | $ | (251,269) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
| Provision for credit losses | Provision for credit losses | | 237,377 | | | 182,581 | | Provision for credit losses | | 99,696 | | | 64,250 | |
| Amortization of premiums and discounts on loans, net | Amortization of premiums and discounts on loans, net | | (103,468) | | | (129,714) | | Amortization of premiums and discounts on loans, net | | (41,138) | | | (34,595) | |
| Gain on sales of loans | Gain on sales of loans | | (156,015) | | | (141,153) | | Gain on sales of loans | | (34,285) | | | (63,595) | |
| Gain on extinguishment of debt | | (89,841) | | | — | | |
| | Changes in fair value of assets and liabilities | Changes in fair value of assets and liabilities | | (10,017) | | | (38,821) | | Changes in fair value of assets and liabilities | | (4,110) | | | 3,906 | |
| Amortization of commercial agreement assets | Amortization of commercial agreement assets | | 64,202 | | | 72,804 | | Amortization of commercial agreement assets | | 21,557 | | | 21,557 | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | | 13,198 | | | 13,215 | | Amortization of debt issuance costs | | 5,534 | | | 1,076 | |
| Amortization of discount on securities available for sale | Amortization of discount on securities available for sale | | (23,711) | | | 968 | | Amortization of discount on securities available for sale | | (12,120) | | | (7,620) | |
| Commercial agreement warrant expense | Commercial agreement warrant expense | | 330,718 | | | 157,023 | | Commercial agreement warrant expense | | 95,910 | | | 108,743 | |
| Stock-based compensation | Stock-based compensation | | 348,372 | | | 280,113 | | Stock-based compensation | | 112,359 | | | 119,808 | |
| Depreciation and amortization | Depreciation and amortization | | 91,355 | | | 35,607 | | Depreciation and amortization | | 40,131 | | | 20,882 | |
| Impairment of right of use assets | | Impairment of right of use assets | | 752 | | | — | |
| Other | Other | | 294 | | | (5,725) | | Other | | (4,730) | | | 2,053 | |
| Change in operating assets and liabilities: | Change in operating assets and liabilities: | | Change in operating assets and liabilities: | |
| Purchases of loans held for sale | Purchases of loans held for sale | | (4,719,789) | | | (3,869,327) | | Purchases of loans held for sale | | (1,222,224) | | | (1,655,213) | |
| Proceeds from the sale of loans held for sale | Proceeds from the sale of loans held for sale | | 4,838,250 | | | 3,868,919 | | Proceeds from the sale of loans held for sale | | 1,228,110 | | | 1,707,838 | |
| Accounts receivable, net | Accounts receivable, net | | (1,784) | | | (42,467) | | Accounts receivable, net | | (42,208) | | | (6,649) | |
| Other assets | Other assets | | (3,292) | | | 28,018 | | Other assets | | (12,566) | | | (3,000) | |
| Accounts payable | Accounts payable | | (3,618) | | | (8,773) | | Accounts payable | | (1,257) | | | 1,462 | |
| Payable to third-party loan owners | Payable to third-party loan owners | | (27,196) | | | (14,117) | | Payable to third-party loan owners | | 55,646 | | | 19,428 | |
| Accrued interest payable | Accrued interest payable | | 8,028 | | | 240 | | Accrued interest payable | | 6,264 | | | (1,078) | |
| Accrued expenses and other liabilities | Accrued expenses and other liabilities | | (45,288) | | | 28,545 | | Accrued expenses and other liabilities | | (20,636) | | | 3,231 | |
| Net Cash Used in Operating Activities | | (31,608) | | | (103,085) | | |
| Cash Flows from Investing Activities | | | | | |
| Net cash provided by operating activities | | Net cash provided by operating activities | | 98,902 | | | 51,215 | |
| Cash flows from investing activities | | Cash flows from investing activities | | | | |
| Purchases and origination of loans held for investment | Purchases and origination of loans held for investment | | (9,622,289) | | | (7,529,324) | | Purchases and origination of loans held for investment | | (4,229,667) | | | (2,744,825) | |
| Proceeds from the sale of loans held for investment | Proceeds from the sale of loans held for investment | | 1,093,894 | | | 1,330,341 | | Proceeds from the sale of loans held for investment | | 899,238 | | | 326,713 | |
| Principal repayments and other loan servicing activity | Principal repayments and other loan servicing activity | | 7,199,568 | | | 5,867,583 | | Principal repayments and other loan servicing activity | | 3,184,851 | | | 2,206,725 | |
| Acquisition, net of cash and restricted cash acquired | | (16,051) | | | (5,999) | | |
| | Additions to property, equipment and software | Additions to property, equipment and software | | (95,917) | | | (59,254) | | Additions to property, equipment and software | | (35,817) | | | (31,151) | |
| Purchases of securities available for sale | Purchases of securities available for sale | | (566,261) | | | (770,047) | | Purchases of securities available for sale | | (96,813) | | | (104,629) | |
| Proceeds from maturities and repayments of securities available for sale | Proceeds from maturities and repayments of securities available for sale | | 1,127,785 | | | 191,854 | | Proceeds from maturities and repayments of securities available for sale | | 262,293 | | | 464,492 | |
| Other investing cash inflows (outflows) | | 3,375 | | | (10,775) | | |
| Other investing cash inflows/(outflows) | | Other investing cash inflows/(outflows) | | 56 | | | (52) | |
| Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | | (15,859) | | | 117,273 | |
| Cash flows from financing activities | | Cash flows from financing activities | | | | |
| | Net Cash Used in Investing Activities | | (875,896) | | | (985,621) | | |
| Cash Flows from Financing Activities | | | | | |
| Proceeds from issuance of convertible debt, net | | — | | | 1,704,300 | | |
| Extinguishment of convertible debt | | (206,567) | | | — | | |
| | Proceeds from funding debt | Proceeds from funding debt | | 5,048,803 | | | 2,776,245 | | Proceeds from funding debt | | 2,896,251 | | | 1,193,761 | |
| Payment of debt issuance costs | Payment of debt issuance costs | | (17,407) | | | (8,154) | | Payment of debt issuance costs | | (10,490) | | | (7,423) | |
| Principal repayments of funding debt | Principal repayments of funding debt | | (4,195,110) | | | (2,572,876) | | Principal repayments of funding debt | | (2,938,674) | | | (1,059,607) | |
| Proceeds from issuance of notes and residual trust certificates by securitization trusts | Proceeds from issuance of notes and residual trust certificates by securitization trusts | | 750,000 | | | 499,494 | | Proceeds from issuance of notes and residual trust certificates by securitization trusts | | 750,000 | | | 249,931 | |
| Principal repayments of notes issued by securitization trusts | Principal repayments of notes issued by securitization trusts | | (584,634) | | | (233,723) | | Principal repayments of notes issued by securitization trusts | | (515,377) | | | (150,713) | |
| | Proceeds from exercise of common stock options and warrants and contributions to ESPP | Proceeds from exercise of common stock options and warrants and contributions to ESPP | | 8,909 | | | 67,740 | | Proceeds from exercise of common stock options and warrants and contributions to ESPP | | 3,611 | | | 1,013 | |
| Repurchases of common stock | Repurchases of common stock | | (109) | | | (84) | | Repurchases of common stock | | — | | | (109) | |
| Payments of tax withholding for stock-based compensation | Payments of tax withholding for stock-based compensation | | (63,489) | | | (166,942) | | Payments of tax withholding for stock-based compensation | | (36,515) | | | (27,311) | |
| Net Cash Provided by Financing Activities | | 740,396 | | | 2,066,000 | | |
| Net cash provided by financing activities | | Net cash provided by financing activities | | 148,806 | | | 199,542 | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (2,207) | | | 5,639 | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (3,301) | | | (5,299) | |
| Net Increase in Cash, Cash Equivalents and Restricted Cash | | (169,315) | | | 982,933 | | |
| Cash, Cash equivalents and Restricted cash, Beginning of period | | 1,550,807 | | | 1,692,632 | | |
| Cash, Cash Equivalents and Restricted Cash, End of Period | | $ | 1,381,492 | | | $ | 2,675,565 | | |
| Net increase in cash, cash equivalents and restricted cash | | Net increase in cash, cash equivalents and restricted cash | | 228,548 | | | 362,731 | |
| Cash, cash equivalents and restricted cash, beginning of period | | Cash, cash equivalents and restricted cash, beginning of period | | 1,259,944 | | | 1,550,807 | |
| Cash, cash equivalents and restricted cash, end of period | | Cash, cash equivalents and restricted cash, end of period | | $ | 1,488,492 | | | $ | 1,913,538 | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT.
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2023 | | 2022 |
| Reconciliation to amounts on consolidated balance sheets (as of period end) | | | | |
| Cash and cash equivalents | | 1,079,261 | | | 1,530,132 | |
| Restricted cash | | 409,231 | | | 383,406 | |
| Total cash, cash equivalents and restricted cash | | $ | 1,488,492 | | | $ | 1,913,538 | |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2023 | | 2022 |
| Supplemental disclosures of cash flow information | | | | |
| Cash payments for interest expense | | $ | 64,868 | | | $ | 22,819 | |
| Cash paid for operating leases | | 4,104 | | | 4,167 | |
| Cash paid for income taxes | | 312 | | | 138 | |
| Supplemental disclosures of non-cash investing and financing activities | | | | |
| Stock-based compensation included in capitalized internal-use software | | 38,803 | | | 21,204 | |
| | | | |
| | | | |
| | | | |
| | | | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
AFFIRM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT.
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | |
| | Nine Months Ended March 31, |
| | 2023 | | 2022 |
| Reconciliation to amounts on consolidated balance sheets (as of period end) | | | | |
| Cash and cash equivalents | | 972,477 | | | 2,261,937 | |
| Restricted cash | | 409,015 | | | 413,628 | |
| Total Cash, Cash Equivalents and Restricted Cash | | $ | 1,381,492 | | | $ | 2,675,565 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended March 31, |
| | 2023 | | 2022 |
| Supplemental Disclosures of Cash Flow Information | | | | |
| Cash payments for interest expense | | $ | 104,923 | | | $ | 34,325 | |
| Cash paid for operating leases | | 8,328 | | | 11,989 | |
| Cash paid for income taxes | | 378 | | | 99 | |
| Supplemental Disclosures of Non-Cash Investing and Financing Activities | | | | |
| Stock-based compensation included in capitalized internal-use software | | 62,760 | | | 39,691 | |
| Issuance of common stock in connection with acquisition | | — | | | 10,000 | |
| Additions to property and equipment included in accrued expenses | | — | | | 107 | |
| Securities retained under unconsolidated securitization transactions | | — | | | 22,067 | |
| Right of use assets obtained in exchange for operating lease liabilities | | 494 | | | 3,421 | |
| | | | |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
1. Business Description
Affirm Holdings, Inc. (“Affirm,” the “Company,” “we,” “us,” or “our”), headquartered in San Francisco, California, provides consumers with a simpler, more transparent, and flexible alternative to traditional payment options. Our mission is to deliver honest financial products that improve lives. Through our next-generation commerce platform, agreements with originating banks, and capital markets partners, we enable consumers to confidently pay for a purchase over time, with terms ranging from oneup to sixty months. When a consumer applies for a loan through our platform, the loan is underwritten using our proprietary risk model, and once approved, the consumer selects their preferred repayment option. Loans are directly originated or funded and issued by our originating bank partners.
Merchants partner with us to transform the consumer shopping experience and to acquire and convert customers more effectively through our frictionless point-of-sale payment solutions. Consumers get the flexibility to buy now and make simple regular payments for their purchases and merchants see increased average order value, repeat purchase rates, and an overall more satisfied customer base. Unlike legacy payment options and our competitors’ product offerings, which charge deferred or compounding interest and unexpected costs, we disclose up-front to consumers exactly what they will owe — no hidden fees, no deferred interest, no penalties.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), disclosure requirements for interim financial information, and the requirements of Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended June 30, 2022.2023. The balance sheet as of June 30, 20222023 has been derived from the audited financial statements at that date. Management believes these interim condensed consolidated financial statements reflect all adjustments, including those of a normal and recurring nature, which are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
Our interim condensed financial statements have been prepared on a consolidated basis. Under this basis of presentation, our financial statements consolidate all wholly owned subsidiaries and variable interest entities (“VIEs”), in which we have a controlling financial interest. These include various business trust entities and limited partnerships established to enter into warehouse credit agreements with certain lenders for funding debt facilities and certain asset-backed securitization transactions. All intercompany accounts and transactions have been eliminated in consolidation.
Our variable interest arises from contractual, ownership, or other monetary interests in the entity, which changes with fluctuations in the fair value of the entity’s net assets. We consolidate a VIE when we are deemed to be the primary beneficiary. We assess whether or not we are the primary beneficiary of a VIE on an ongoing basis.
Use of Estimates
The preparation of interim condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts in the interim condensed consolidated financial statements and the accompanying notes. Material estimates that are particularly susceptible to significant change relate to determination of variable consideration for revenue, the allowance for credit losses, capitalized internal-use software development costs, valuation allowance for deferred tax assets, loss on loan purchase commitment, the fair value of
purchase commitment, the fair value of servicing assets and liabilities, discount on directly originatedself-originated loans, the fair value of assets acquired and any contingent consideration transferred in business combinations, the evaluation for impairment of intangible assets and goodwill, the fair value of available for sale debt securities including retained interests in our securitization trusts, the fair value of residual certificates issued by our securitization trusts held by third parties, and stock-based compensation, including the fair value of warrants issued to nonemployees. We base our estimates on market-based inputs, historical experience, current events, and other factors we believe to be reasonable under the circumstances. These estimates are subjective in nature and toTo the extent that there are material differences between these estimates and actual results, our financial condition or operating results in future periods maywill be materially affected.
These estimates are based on information available as of the date of the interim condensed consolidated financial statements; therefore, actual results could differ materially from those estimates.
Significant Accounting Policies
There were no material changes to our significant accounting policies as disclosed in Note 2. Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022,2023, which was filed with the SEC on August 29, 2022.
Recently Adopted Accounting Standards
Financial Instruments - Credit Losses
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments— Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosure” which addresses areas identified by the FASB as part of its post-implementation review of the current expected credit losses model or “CECL” previously issued in ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326)”. The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings by creditors while enhancing the disclosure requirements for loan refinancing and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases in the vintage disclosures. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted if an entity has adopted ASU 2016-13. Amendments in this ASU should be applied prospectively except for the transition method related to the accounting for troubled debt restructurings in which an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. We early adopted the new standard effective July 1, 2022 on a prospective basis. The adoption of the guidance did not have a material impact on our interim condensed financial statements.
Business Combinations
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which requires contract assets and contract liabilities, such as deferred revenue, acquired in a business combination to be recognized and measured in accordance with Topic 606 (Revenue from Contracts with Customers). ASU 2021-08 is expected to reduce diversity in practice and increase comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The ASU is effective for fiscal years beginning after December 15, 2022 and should be applied prospectively to acquisitions occurring on or after the effective date. Early adoption is permitted, including for interim periods, and is applicable to all business combinations for which the acquisition date occurs within the beginning of the fiscal year of adoption. We early adopted the new standard effective January 1, 2023 on a prospective basis. The adoption of the guidance did not have a material impact on our interim condensed financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Interbank Offered Rate (“LIBOR”). In January 2021, the FASB also issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope”, which provides additional optional expedients and exceptions applicable to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”, to extend the temporary accounting rules under Topic 848 from December 31, 2022 to December 31, 2024. These ASUs are effective for all entities upon their respective issuance dates through December 31, 2024. We have reviewed all our financial agreements that utilize LIBOR as the reference rate and determined there is no impact to our interim condensed consolidated financial statements as of March 31,25, 2023. Throughout the remaining effective period for ASU 2020-04, ASU 2021-01 and ASU 2022-06, we will continue to evaluate the available relief measures within each of these amendments and will determine any impact on our consolidated financial statements and disclosures, as applicable.
3. Revenue
The following table presents the company’sour revenue disaggregated by revenue source (in thousands):
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2023 | | 2022 | | | Three Months Ended September 30, |
| | | | | 2023 | | 2022 |
| Merchant network revenue | Merchant network revenue | $ | 119,013 | | | $ | 121,054 | | | $ | 366,181 | | | $ | 340,385 | | Merchant network revenue | | | $ | 145,950 | | | $ | 113,149 | |
| Virtual card network revenue | 29,469 | | | 23,169 | | | 85,294 | | | 69,122 | | |
| | Card network revenue | | Card network revenue | | | 33,476 | | | 26,708 | |
| Interest income | Interest income | 178,270 | | | 134,599 | | | 470,393 | | | 390,256 | | Interest income | | | 262,679 | | | 136,802 | |
| Gain on sales of loans | Gain on sales of loans | 32,813 | | | 52,484 | | | 156,015 | | | 141,153 | | Gain on sales of loans | | | 34,285 | | | 63,595 | |
| Servicing income | Servicing income | 21,413 | | | 23,456 | | | 64,277 | | | 44,242 | | Servicing income | | | 20,157 | | | 21,370 | |
| Total Revenue, net | $ | 380,978 | | | $ | 354,762 | | | $ | 1,142,160 | | | $ | 985,158 | | |
| Total revenue, net | | Total revenue, net | | | $ | 496,547 | | | $ | 361,624 | |
Merchant Network Revenue — Revenue from Contracts with Customers
Merchant network revenue consists of merchant fees. Merchant partners (or integrated merchants) are generally charged a fee based on gross merchandise volume (GMV)(“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 merchant successfully confirms the transaction, which is when the terms of the executed merchant agreement are fulfilled.
Our contracts with merchants are defined at the transaction level and do not extend beyond the service already provided (i.e., each transaction represents a separate contract). The fees collected from merchants for each transaction are determined as a percentage of the value of the goods purchased by the consumer from merchants and consider a number of factors including the end consumer’s credit risk and financing term. We do not have any capitalized contract costs, and do not carry any material contract balances.
Our service comprises a single performance obligation to merchants to facilitate transactions with consumers. From time to time, we offer merchants incentives to promote our platform to their customers, such as fee reductions or rebates. These amounts are recorded as a reduction to merchant network revenue.
We may originate certain loans via our wholly-owned subsidiaries, with zero or below market interest rates. In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting
in a loss on loan origination, which we record as a reduction to merchant network revenue. In certain cases, the losses incurred on loans originated for a merchant may exceed the total network revenue earned on those loans. To the extent we do not expect to recover the losses in future periods, weWe record the excess loss amounts as a sales and marketing expense.
A portion of merchant network revenue relates to affiliate network revenue, which is generated when a user makes a purchase on a merchant’s website after being directed from an advertisement on Affirm’s website or mobile application. We earn a fixed placement fee and/or commission as a percentage of the associated sale. Revenue is recognized at the point in time when the performance obligation has been fulfilled, which is when the sale occurs.
For the three and nine months ended March 31,September 30, 2023 and 2022, there were no merchants that exceeded 10% of total revenue.
Virtual Card Network Revenue — Revenue from Contracts with Customers
We have agreements with issuer processorscard-issuing partners to facilitate transactions through the issuance of physical and virtual debit cards to be used by consumers at checkout. Consumers can apply for a virtual debit card throughat Affirm.com or via the Affirm app and, upon approval, receive a single-use virtual debit card to be used for their purchaseuse digitally online or offline at a non-integrated merchant.in-store. The virtual debit card is funded at the time a transaction is authorized using cash held by the issuer processorcard-issuing partner in a reserve fund. OurEligible consumers can also use the Affirm Card, a debit card issued by a card-issuing partner to pay in full, debited from their bank account, or pay later, by using a unique post-purchase feature that allows them to instantly convert any eligible debit transaction into an installment loan. Where applicable, our originating bank partner, or wholly-owned subsidiaries, then originates a loan to the consumer onceafter the transaction is confirmed by the merchant. The non-integrated merchants aremerchant is charged interchange fees by the issuer processor for virtualeach successful debit card transactions,transaction, and the issuer processor shares a portion of this revenue is shared with us. Weus by our card-issuing partners.
Merchants may also leverage this issuer processorelect to utilize our agreement with card-issuing partners as a means of integrating certain merchants.Affirm services. Similarly, for these arrangements with integrated merchants, the merchant is charged interchange fees by the issuer processorfor each successful debit card transaction and the issuer processor shares a portion of this revenue is shared with us. From time to time, we offer certain integrated merchants promotional incentives to promote our platform to their customers, such as rebates of interchange fees incurred by the merchant. These amounts are recorded as a reduction of card network revenue.
Our contracts with our card-issuing partners are defined at the transaction level and do not extend beyond the service already provided. The revenue collected from card-issuing partners for each transaction are determined as a percentage of the interchange fees charged on transactions facilitated on the payment processor network, and revenue is recognized at the point in time the transaction is completed successfully. The amounts collected are presented in revenue, net of associated transaction-related processing fees paid to our card-issuing partners. We have concluded that the revenue collected does not give rise to a future material right because the pricing of each transaction does not depend on the volume of prior successful transactions. We do not have any capitalized contract costs, and do not carry any material contract balances.
Our service comprises a single performance obligation to the card-issuing partner to facilitate transactions with consumers.
A portion of card network revenue relates to incentive payments from card network partners, which we are eligible to receive for reaching certain cumulative volume targets on program cards issued by the issuer processors. We earn incentive revenue as a percentage of each associated transaction and estimate the applicable percentage based on observed cumulative volume on program cards. Revenue is recognized at the point in time when the performance obligation has been fulfilled, which is when the transaction is completed successfully.
Interest Income
Interest income consisted of the following components (in thousands):
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | | Three Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 | | | 2023 | | 2022 |
| Interest income on unpaid principal balance | | $ | 147,759 | | | $ | 95,253 | | | $ | 379,755 | | | $ | 266,868 | | |
| Contractual interest income on unpaid principal balance | | Contractual interest income on unpaid principal balance | | | $ | 226,158 | | | $ | 106,138 | |
| Amortization of discount on loans | Amortization of discount on loans | | 39,130 | | | 45,443 | | | 116,937 | | | 138,853 | | Amortization of discount on loans | | | 45,118 | | | 38,969 | |
| Amortization of premiums on loans | Amortization of premiums on loans | | (4,515) | | | (3,407) | | | (13,469) | | | (9,139) | | Amortization of premiums on loans | | | (3,980) | | | (4,374) | |
| Interest receivable charged-off, net of recoveries | Interest receivable charged-off, net of recoveries | | (4,104) | | | (2,690) | | | (12,830) | | | (6,326) | | Interest receivable charged-off, net of recoveries | | | (4,617) | | | (3,931) | |
| Total interest income | Total interest income | | $ | 178,270 | | | $ | 134,599 | | | $ | 470,393 | | | $ | 390,256 | | Total interest income | | | $ | 262,679 | | | $ | 136,802 | |
We accrue interest income using the effective interest method.method, which includes the amortization of any discounts or premiums on loan receivables created upon the purchase of a loan from our originating bank partners or upon the origination of a loan. Interest income on a loan is accrued daily, based on the finance charge disclosed to the consumer, over the term of the loan based upon the principal outstanding. The accrual of interest on a loan is suspended if a formal dispute with the consumer involving either Affirm or the merchant of record is opened, or a loan is 120 days past due. Upon the resolution of a dispute with the consumer, the accrual of interest is resumed, and any interest that would have been earned during the disputed period is retroactively accrued. As of March 31,September 30, 2023 and June 30, 2022,2023, the balance of loans held for investment on non-accrual status was $1.3$1.2 million and $1.7$1.8 million, respectively.
The account is charged-off in the period if the account becomes 120 days past due or meets other charge-off policy requirements. Past due status is based on the contractual terms of the loans. Previously recognized interest receivable from charged-off loans that is accrued but not collected from the consumer is reversed.
Gain on Sales of Loans
We sell certain loans we originate or purchase from our originating bank partners directly to third-party investors or to securitizations. We recognize a gain or loss on sale of loans sold to third parties or to unconsolidated securitizations as the difference between the proceeds received and the carrying value of the loan, adjusted for the initial recognition of any assets or liabilities incurred upon sale, which generally include a net servicing asset or liability in connection with our ongoing obligation to continue to service the loans and a recourse liability based on our estimate of future losses in connection with our obligation to repurchase loans that do not meet certain contractual requirements and such information about the loan was unknown at the time of sale.
Servicing Income
Servicing income includes contractual fees specified in our servicing agreements with third-party loan owners and unconsolidated securitizations that are earned from providing professional services to manage loan portfolios on their behalf. The servicing fee is calculated on a daily basis by multiplying a set fee percentage (as outlined in the executed agreements with third-party loan owners) by the outstanding loan principal balance. Servicing income also includes fair value adjustments for servicing assets and servicing liabilities.
4. Loans Held for Investment and Allowance for Credit Losses
Loans held for investment consisted of the following (in thousands):
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| Unpaid principal balance | Unpaid principal balance | | $ | 3,823,038 | | | $ | 2,516,733 | | Unpaid principal balance | | $ | 4,585,570 | | | $ | 4,451,324 | |
| Accrued interest receivable | Accrued interest receivable | | 33,997 | | | 20,697 | | Accrued interest receivable | | 46,886 | | | 41,079 | |
| Premiums on loans held for investment | Premiums on loans held for investment | | 7,896 | | | 8,911 | | Premiums on loans held for investment | | 6,828 | | | 7,135 | |
| Less: Discount due to loss on loan purchase commitment | Less: Discount due to loss on loan purchase commitment | | (45,368) | | | (20,692) | | Less: Discount due to loss on loan purchase commitment | | (49,805) | | | (51,190) | |
| Less: Discount due to loss on directly originated loans | Less: Discount due to loss on directly originated loans | | (43,486) | | | (20,443) | | Less: Discount due to loss on directly originated loans | | (40,025) | | | (45,145) | |
| Less: Fair value adjustment on loans acquired through business combination | Less: Fair value adjustment on loans acquired through business combination | | (535) | | | (1,645) | | Less: Fair value adjustment on loans acquired through business combination | | (32) | | | (241) | |
| Total loans held for investment | Total loans held for investment | | $ | 3,775,542 | | | $ | 2,503,561 | | Total loans held for investment | | $ | 4,549,422 | | | $ | 4,402,962 | |
Loans held for investment includes loans originated through our originating bank partners and directly originated loans. The majority of the loans that are underwritten using our technology platform and originated by our originating bank partners are later purchased by us. We purchased loans from our originating bank partners in the amount of $3.7$4.6 billion and $11.7$3.5 billion during the three and nine months ended March 31,September 30, 2023 respectively, and $3.0 billion and $8.6 billion during the three and nine months ended March 31, 2022, respectively.
These loans have a variety of lending terms as well as maturities ranging from one to sixty months. Given that our loan portfolio focuses on one product segment, point-of-sale unsecured installment loans, we generally evaluate the entire portfolio as a single homogeneous loan portfolio and make merchant or program specific adjustments as necessary.
We closely monitor credit quality for our loan receivables to manage and evaluate our related exposure to credit risk. Credit risk management begins with initial underwriting, where loan applications are assessed against the credit underwriting policy and procedures for our directly originated loans and originating bank partner loans, and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal historical experience, including the consumer’s prior repayment history on our platform as well as other measures. We combine these factors to establish a proprietary score as a credit quality indicator.
Our proprietary score (“ITACs”) is assigned to most loans facilitated through our technology platform, ranging from zero to 100, with 100 representing the highest credit quality and therefore the lowest likelihood of loss. The ITACs model analyzes the characteristics of a consumer’sconsumer's attributes that are shown to be predictive of both willingness and ability to repay including, but not limited to: basic features of a consumer’sconsumer's credit profile, a consumer’sconsumer's prior repayment performance with other creditors, current credit utilization, and legal and policy changes. When a consumer passes both fraud and credit policy checks, the application is assigned an ITACs score. ITACs is also used for portfolio performance monitoring. Our credit risk team closely tracks the distribution of ITACs at the portfolio level, as well as ITACs at the individual loan level to monitor for signs of a changing credit profile within the portfolio. Repayment performance within each ITACs band is also monitored to support both the integrity of the risk scoring models and to measure possible changes in consumer behavior amongst various credit tiers.
The following table presents an analysis of the credit quality, by ITACSITACs score, of the amortized cost basis excluding accrued interest receivable, by fiscal year of origination on loans held for investment and loans held for sale (in thousands) as of March 31,September 30, 2023:
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| March 31, 2023 |
| | Amortized Costs Basis by Fiscal Year of Origination | | |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
| 96+ | | $ | 2,185,767 | | | $ | 94,353 | | | $ | 33,450 | | | $ | 9,085 | | | $ | 9 | | | $ | 1 | | | $ | 2,322,665 | |
| 94-96 | | 865,503 | | | 38,625 | | | 933 | | | 189 | | | 6 | | | 2 | | | 905,258 | |
| 90-94 | | 95,252 | | | 12,391 | | | 136 | | | 2 | | | 4 | | | — | | | 107,785 | |
| <90 | | 16,786 | | | 2,795 | | | 6 | | | 2 | | | — | | | — | | | 19,589 | |
No score(1) | | 288,923 | | | 78,840 | | | 16,835 | | | 1,518 | | | 288 | | | 15 | | | 386,419 | |
| Total amortized cost basis | | $ | 3,452,231 | | | $ | 227,004 | | | $ | 51,360 | | | $ | 10,796 | | | $ | 307 | | | $ | 18 | | | $ | 3,741,716 | |
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| | September 30, 2023 |
| | Amortized Costs Basis by Fiscal Year of Origination | | |
| | 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | Total |
| 96+ | | $ | 1,293,647 | | | $ | 1,393,864 | | | $ | 28,287 | | | $ | 8,601 | | | $ | 26 | | | $ | 10 | | | $ | 2,724,435 | |
| 94 – 96 | | 565,028 | | | 614,611 | | | 3,550 | | | 211 | | | 15 | | | 8 | | | 1,183,422 | |
| 90 – 94 | | 96,511 | | | 65,347 | | | 1,562 | | | 18 | | | 2 | | | 4 | | | 163,444 | |
| <90 | | 12,675 | | | 2,300 | | | 1,032 | | | 4 | | | 2 | | | — | | | 16,013 | |
No score (1) | | 133,271 | | | 232,740 | | | 41,876 | | | 6,721 | | | 254 | | | 215 | | | 415,077 | |
| Total amortized cost basis | | $ | 2,101,132 | | | $ | 2,308,862 | | | $ | 76,307 | | | $ | 15,555 | | | $ | 299 | | | $ | 237 | | | $ | 4,502,391 | |
(1)This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology including loan receivables originated in Canada.
The following table presents net charge-offs by fiscal year of origination for the ninethree months ended (in thousands) as of March 31,September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2023 |
| | Net Charge-offs by Fiscal Year of Origination | | | Net Charge-offs by Fiscal Year of Origination | |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total | | 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | Total |
| Current period charge-offs | Current period charge-offs | | (59,228) | | | (161,934) | | | (6,115) | | | (509) | | | (74) | | | (26) | | | (227,886) | | Current period charge-offs | | (1,329) | | | (65,283) | | | (3,916) | | | (234) | | | (46) | | | (34) | | | (70,842) | |
| Current period recoveries | Current period recoveries | | 2,956 | | | 13,447 | | | 4,000 | | | 1,158 | | | 753 | | | 554 | | | 22,868 | | Current period recoveries | | 17 | | | 2,830 | | | 2,399 | | | 275 | | | 5 | | | 27 | | | 5,552 | |
| Current period net charge-offs | Current period net charge-offs | | $ | (56,272) | | | $ | (148,487) | | | $ | (2,115) | | | $ | 649 | | | $ | 679 | | | $ | 528 | | | $ | (205,018) | | Current period net charge-offs | | (1,312) | | | (62,453) | | | (1,517) | | | 41 | | | (41) | | | (7) | | | (65,290) | |
The following table presents an analysis of the credit quality, by ITACSITACs score, of the amortized cost basis excluding accrued interest receivable, by fiscal year of origination on loans held for investment and loans held for sale (in thousands) as of June 30, 2022:2023:
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| June 30, 2022 |
| | Amortized Costs Basis by Fiscal Year of Origination | | |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
| 96+ | | $ | 1,218,104 | | | $ | 122,503 | | | $ | 33,458 | | | $ | 157 | | | $ | 1 | | | $ | — | | | $ | 1,374,223 | |
| 94-96 | | 620,403 | | | 11,240 | | | 773 | | | 13 | | | 2 | | | — | | | 632,431 | |
| 90-94 | | 220,056 | | | 3,886 | | | 6 | | | 4 | | | — | | | — | | | 223,952 | |
| <90 | | 44,300 | | | 135 | | | 2 | | | — | | | — | | | — | | | 44,437 | |
No score(1) | | 186,044 | | | 20,554 | | | 3,368 | | | 444 | | | 79 | | | 2 | | | 210,491 | |
| Total amortized cost basis | | $ | 2,288,907 | | | $ | 158,318 | | | $ | 37,607 | | | $ | 618 | | | $ | 82 | | | $ | 2 | | | $ | 2,485,534 | |
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| | June 30, 2023 |
| | Amortized Costs Basis by Fiscal Year of Origination | | |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Total |
| 96+ | | $ | 2,628,060 | | | $ | 39,428 | | | $ | 18,910 | | | $ | 3,439 | | | $ | 9 | | | $ | 1 | | | $ | 2,689,847 | |
| 94 – 96 | | 1,104,553 | | | 7,755 | | | 439 | | | 77 | | | 6 | | | 2 | | | 1,112,832 | |
| 90 – 94 | | 133,940 | | | 3,116 | | | 26 | | | 2 | | | 4 | | | — | | | 137,088 | |
| <90 | | 13,363 | | | 1,623 | | | 4 | | | 2 | | | — | | | — | | | 14,992 | |
No score (1) | | 335,690 | | | 59,204 | | | 11,562 | | | 489 | | | 252 | | | 9 | | | 407,206 | |
| Total amortized cost basis | | $ | 4,215,606 | | | $ | 111,126 | | | $ | 30,941 | | | $ | 4,009 | | | $ | 271 | | | $ | 12 | | | $ | 4,361,965 | |
(1)This balance represents loan receivables in new markets without sufficient data currently available for use by the Affirm scoring methodology including loan receivables originated in Canada.
Loan receivables are defined as past due if either the principal or interest have not been received within four calendars days of when they are due in accordance with the agreed upon contractual terms. The following table presents an aging analysis of the amortized cost basis excluding accrued interest receivable of loans held for investment and loans held for sale by delinquency status (in thousands):
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| Non-delinquent loans | Non-delinquent loans | | $ | 3,587,516 | | | $ | 2,322,919 | | Non-delinquent loans | | $ | 4,270,534 | | | $ | 4,183,248 | |
| 4 – 29 calendar days past due | 4 – 29 calendar days past due | | 68,344 | | | 77,963 | | 4 – 29 calendar days past due | | 120,564 | | | 92,876 | |
| 30 – 59 calendar days past due | 30 – 59 calendar days past due | | 32,591 | | | 34,669 | | 30 – 59 calendar days past due | | 46,927 | | | 36,399 | |
| 60 – 89 calendar days past due | 60 – 89 calendar days past due | | 27,888 | | | 26,919 | | 60 – 89 calendar days past due | | 34,279 | | | 28,171 | |
90 – 119 calendar days past due (1) | 90 – 119 calendar days past due (1) | | 25,377 | | | 23,064 | | 90 – 119 calendar days past due(1) | | 30,087 | | | 21,271 | |
| Total amortized cost basis | Total amortized cost basis | | $ | 3,741,716 | | | $ | 2,485,534 | | Total amortized cost basis | | $ | 4,502,391 | | | $ | 4,361,965 | |
(1)Includes $24.6$29.7 million and $22.7$20.9 million of loan receivables as of March 31,September 30, 2023 and June 30, 2022,2023, respectively, that are 90 days or more past due, but are not on nonaccrual status.
We maintain an allowance for credit losses at a level sufficient to absorb expected credit losses based on evaluating known and inherent risks in our loan portfolio. The allowance for credit losses is determined based on our current estimate of expected credit losses over the remaining contractual term, historical credit losses, consumer payment trends, estimates of recoveries, and future expectations as of each balance sheet date. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses are recognized in earnings through the provision for credit losses presented on our interim condensed consolidated statements of operations and comprehensive loss. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. Loans are charged-offcharged off in accordance with our charge-off policy, as the contractual principal becomes 120 days past due. Subsequent recoveries of the unpaid principal balance, if any, are credited to the allowance for credit losses.
The following table details activity in the allowance for credit losses, including charge-offs, recoveries and provision for loan losses (in thousands):
| | | Three Months Ended
March 31, | | Nine Months Ended
March 31, | | Three Months Ended
September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| Balance at beginning of period | Balance at beginning of period | | $ | 182,100 | | | $ | 158,289 | | | $ | 155,392 | | | $ | 117,760 | | Balance at beginning of period | | $ | 204,531 | | | $ | 155,392 | |
| Provision for credit losses | | 61,480 | | | 62,021 | | | 225,962 | | | 172,720 | | |
| Provision for loan losses | | Provision for loan losses | | 92,827 | | | 61,869 | |
| Charge-offs | Charge-offs | | (75,820) | | | (67,280) | | | (227,886) | | | (145,307) | | Charge-offs | | (70,842) | | | (71,036) | |
| Recoveries of charged-off receivables | Recoveries of charged-off receivables | | 8,576 | | | 6,445 | | | 22,868 | | | 14,302 | | Recoveries of charged-off receivables | | 5,552 | | | 6,800 | |
| Balance at end of period | Balance at end of period | | $ | 176,336 | | | $ | 159,475 | | | $ | 176,336 | | | $ | 159,475 | | Balance at end of period | | $ | 232,068 | | | $ | 153,025 | |
5. AcquisitionsLoan Modifications for Borrowers Experiencing Financial Difficulty
DuringWe have a loan modification program for eligible borrowers facing financial difficulty if they have at least one outstanding loan with Affirm and certain other eligibility criteria are met. We consider a borrower to be experiencing financial difficulty when a loan is between 30 and 120 days past due at the ninetime of modification. The objective of the loan modification program is to offer borrowers assistance during times of financial stress, increase recovery rates, and minimize losses.
We have two primary loan modification strategies: payment deferrals and loan re-amortization. A payment deferral provides the borrower relief by extending the due date for the next payment due. While a borrower may obtain more than one deferral, the total deferral period may not exceed three months. A loan re-amortization
provides the borrower relief by lowering monthly payments through extending the term length of the loan. The total interest due from the consumer will not exceed the initial total interest due prior to modification. A loan may not be re-amortized more than once.
The following table presents the amortized cost basis of loans excluding accrued interest receivable that were modified for borrowers experiencing financial difficulty during the three months ended March 31,September 30, 2023, and 2022, thereby type of modification (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, 2023 |
| | | | | | Payment Deferral | | Loan
Re-amortization | | Total | | % of Total Loan Receivables Outstanding |
| Loans receivables | | | | | | 2,801 | | | 152 | | | 2,953 | | | 0.07 | % |
With respect to borrowers who received payment deferrals during the three months ended September 30, 2023, the length of each deferral period was one acquisition accounted for as business combination in each of the respective years, discussed further below.month.
We closely monitor the performance of loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts. We hold an allowance for credit losses for modified loans classified as held for investment. Our allowance estimate considers whether a loan has been modified due to a borrower experiencing financial difficulty and the increased likelihood that such loan may become delinquent or charge-off in the future.
The following table presents the delinquency status as of September 30, 2023 (in thousands), by amortized cost basis excluding accrued interest receivable, of loan receivables that have been modified within the last 12 months where the borrower was experiencing financial difficulty at the time of modification:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 |
| | Payment Deferral | | Loan Re-amortization | | Total |
| Non-delinquent loans | | $ | 4,515 | | | $ | 268 | | | $ | 4,783 | |
| 4 – 29 calendar days past due | | 1,304 | | | 112 | | | 1,416 | |
| 30 – 59 calendar days past due | | 139 | | | 65 | | | 204 | |
| 60 – 89 calendar days past due | | 75 | | | 6 | | | 81 | |
| 90 – 119 calendar days past due | | 65 | | | 2 | | | 67 | |
| Total amortized cost basis | | $ | 6,098 | | | $ | 453 | | | $ | 6,551 | |
With respect to modifications during the last 12 months where the borrower was experiencing financial difficulty at the time of modification, the amortized cost basis of loans which have been subsequently charged off, or are delinquent by 60 days or more as of September 30, 2023, is immaterial.
5. Acquisitions
There were no acquisitions accounted for as business combinations completed in the three months ended September 30, 2023 and 2022.
Acquisitions completed during the three and nine monthsyear ended March 31,June 30, 2023
Butter Holdings Ltd
On February 1, 2023, we completed the closing of the transaction contemplated by a share purchase agreement entered into with certain sellers to acquire the entire issued share capital of Butter Holdings Ltd., (“Butter”), a buy now, pay later company based in the United Kingdom. The purchase price was comprised of (i) $14.9 million in cash, subject to adjustments in accordance with the purchase agreement, and (ii) $1.5 million settlement of subordinated secured notes.
The acquisition date fair value of the consideration transferred for Butter was approximately $16.3 million, which consisted of the following (in thousands):
| | | | | | | | |
| Cash | | $ | 14,863 | |
| Settlement of subordinated secured notes | | 1,475 | |
| Total acquisition date fair value of the consideration transferred | | $ | 16,337 | |
The acquisition was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”). The acquired identifiable intangible assets have been recorded at their estimated fair values with the excess purchase price assigned to goodwill. The goodwill was primarily attributed to future synergies from integration. The goodwill is not expected to be deductible for income tax purposes.
The following table summarizes the allocation of the consideration paid of approximately $16.3 million to the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
| | | | | | | | |
| Cash and cash equivalents | | $ | 287 | |
| Loans held for investment, net | | 172 | |
Accounts Receivable,receivable, net | | 11 | |
| Intangible assets | | 9,243 | |
| Other assets | | 672 | |
| Total assets acquired | | 10,385 | |
| Accounts payable | | 568 | |
| Accrued expenses and other liabilities | | 2,923 | |
| Total liabilities assumed | | 3,491 | |
| Net assets acquired | | 6,894 | |
| Goodwill | | 9,443 | |
| Total purchase price | | $ | 16,337 | |
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
| | | | | | | | | | | | | | |
| | Fair Value | | Useful Life
(in years) |
| Lending license | | $ | 9,243 | | | Indefinite |
The fair value of the intangible asset was determined by applying the with-and-without method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represents Level 3 measurements.
TheThere were no transaction costs associated with the acquisition were immaterial for the three months ended March 31, 2023 and approximately $1.7 million for the nine months ended March 31, 2023, which are included in general and administrative expense in the interim consolidated statements of operations and comprehensive loss.September 30, 2023.
Acquisitions completed during the nine months ended March 31, 2022
ShopBrain
On July 1, 2021, we completed the acquisition of technology and intellectual property from Yroo, Inc. and entered into employment arrangements with certain of its employees (“the ShopBrain acquisition”). Yroo, Inc. is a data aggregation and cataloging technology company based in Canada (“ShopBrain”). The purchase price was comprised of (i) $30.0 million in cash and (ii) 151,745 shares of our Class A common stock issued to the shareholders of ShopBrain at closing.
The acquisition date fair value of the consideration transferred was approximately $40.0 million, which consisted of the following (in thousands):
| | | | | | | | |
Cash | | $ | 30,000 | |
Fair value of Class A common stock transferred | | 10,000 | |
Total acquisition date fair value of the consideration transferred | | $ | 40,000 | |
The acquisition was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805. The acquired identifiable intangible assets have been recorded at their estimated fair values with the excess purchase price assigned to goodwill. The goodwill was primarily attributed to future synergies from integration and the value of the assembled workforce. The goodwill is expected to be deductible for income tax purposes.
The following table summarizes the allocation of the consideration paid of approximately $40.0 million to the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
| | | | | | | | |
Intangible assets | | $ | 9,488 | |
Total net assets acquired | | 9,488 | |
Goodwill | | 30,512 | |
Total purchase price | | $ | 40,000 | |
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands):
| | | | | | | | | | | | | | |
| | Fair Value | | Useful Life
(in years) |
| Developed technology | | $ | 9,488 | | | 3.0 |
The fair values of the intangible assets were determined by applying the replacement cost method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represents Level 3 measurements.
The transaction costs associated with the acquisition were approximately $0.2 million for the nine months ended March 31, 2022, which are included in general and administrative expense within the interim condensed consolidated statements of operations and comprehensive loss. There were no transaction costs associated with the acquisition for the three months ended March 31, 2022.
Other acquisitions
Fast
On April 19, 2022, we completed the closing of the transaction contemplated by a Release and Waiver Agreement entered into with Fast AF, Inc., (“Fast”) relating to the hiring of certain of its employees or service providers and an option to acquire certain of its assets. The purchase price was comprised of (i) $10.0 million in cash and (ii) forgiveness of a $15.0 million senior secured note issued to Fast in April 2022 prior to the closing.
The acquisition was accounted for as an asset acquisition in accordance with ASC 805 since the assets acquired do not meet the definition of a business. The acquired identifiable intangible assets have been recorded at a total cost of $25.4 million, which includes approximately $0.4 million of transaction costs associated with the acquisition. The excess of the total cost of the assets over their total fair value was allocated between the assets on the basis of their relative fair values. The fair values of the intangible assets were determined by applying the replacement cost method. The fair value measurements are based on significant unobservable inputs, including management estimates and assumptions, and thus represent Level 3 measurements.
The following table sets forth the identifiable intangible assets acquired and the cost allocated to each asset as of the date of acquisition (in thousands):
| | | | | | | | |
Assembled workforce | | $ | 12,490 | |
Developed technology1
| | $ | 12,925 | |
Total | | $ | 25,415 | |
(1)On March 10, 2023, we completed the purchase of the developed technology intangible asset.
6. Balance Sheet Components
Accounts Receivable, net
Our accounts receivable consist primarily of amounts due from payment processors, merchant partners, affiliate network partners and servicing fees due from third-party loan owners. WeFor each of these groups, we evaluate accounts receivable to determine management’s current estimate of expected credit losses based on historical experience and future expectations and record an allowance for credit losses, as applicable.losses. Our allowance for credit losses with respect to accounts receivable was $12.3$11.0 million and $13.9$12.9 million as of March 31,September 30, 2023 and June 30, 2022,2023, respectively.
Property, Equipment and Software, net
Property, equipment and software, net consisted of the following (in thousands):
| | | | March 31, 2023 | | June 30, 2022 | | | September 30, 2023 | | June 30, 2023 |
| Internally developed software | Internally developed software | | | $ | 344,497 | | | $ | 200,621 | | Internally developed software | | | $ | 443,992 | | | $ | 377,301 | |
| Leasehold improvements | Leasehold improvements | | | 20,128 | | | 16,169 | | Leasehold improvements | | | 20,279 | | | 20,214 | |
| Computer equipment | Computer equipment | | | 10,797 | | | 10,751 | | Computer equipment | | | 10,252 | | | 10,187 | |
| Furniture and equipment | Furniture and equipment | | | 6,435 | | | 4,279 | | Furniture and equipment | | | 6,586 | | | 6,503 | |
| Total Property, equipment and software, at cost | | | $ | 381,857 | | | $ | 231,820 | | |
| Total property, equipment and software, at cost | | Total property, equipment and software, at cost | | | $ | 481,109 | | | $ | 414,205 | |
| Less: Accumulated depreciation and amortization | Less: Accumulated depreciation and amortization | | | (104,701) | | | (60,338) | | Less: Accumulated depreciation and amortization | | | (142,360) | | | (124,070) | |
| Total Property, equipment and software, net | | | $ | 277,156 | | | $ | 171,482 | | |
| Total property, equipment and software, net | | Total property, equipment and software, net | | | $ | 338,749 | | | $ | 290,135 | |
Depreciation and amortization expense on property, equipment and software was $23.9$26.0 million and $53.0$13.5 million for the three and nine months ended March 31,September 30, 2023 respectively, and $7.6 million and $19.2 million for the three and nine months ended March 31, 2022, respectively.
No impairment losses related to property, equipment and software were recorded during the three and nine months ended March 31,September 30, 2023 and 2022.
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill during the ninethree months ended March 31,September 30, 2023 were as follows (in thousands):
| | | | | | | | |
Balance as of June 30, 20222023 | | $ | 539,534542,571 | |
| | |
AdditionsAdjustments (1)
| | 9,443 | |
Effect of foreign currency translation | | (11,851)(6,152) | |
Balance as of March 31,September 30, 2023 | | $ | 537,126536,418 | |
(1)Refer to Note 5. Acquisitions for a description of additionsAdjustments to goodwill during the ninethree months ended March 31, 2023. September 30, 2023 primarily pertained to foreign currency translation adjustments.
No impairment losses related to goodwill were recorded during the three and nine months ended March 31,September 30, 2023 and 2022.
Intangible assets consisted of the following (in thousands):
| | | March 31, 2023 | | September 30, 2023 |
| | Gross | | Accumulated Amortization | | Net | | Weighted Average Remaining Useful Life
(in years) | | Gross | | Accumulated Amortization | | Net | | Weighted Average Remaining Useful Life
(in years) |
| Merchant relationships | Merchant relationships | | $ | 37,933 | | | $ | (19,887) | | | $ | 18,046 | | | 2.9 | Merchant relationships | | $ | 37,914 | | | $ | (35,129) | | | $ | 2,786 | | | 0.3 |
| Developed technology | Developed technology | | 39,500 | | | (26,159) | | | 13,340 | | | 1.2 | Developed technology | | 39,488 | | | (34,935) | | | 4,553 | | | 0.4 |
| Assembled workforce | Assembled workforce | | 12,490 | | | (7,909) | | | 4,581 | | | 0.6 | Assembled workforce | | 12,490 | | | (12,079) | | | 410 | | | 0.1 |
| Trademarks and domains, definite | Trademarks and domains, definite | | 1,460 | | | (932) | | | 528 | | | 1.9 | Trademarks and domains, definite | | 1,458 | | | (1,027) | | | 431 | | | 1.5 |
| Trademarks, licenses and domains, indefinite | Trademarks, licenses and domains, indefinite | | 11,422 | | | — | | | 11,422 | | | Indefinite | Trademarks, licenses and domains, indefinite | | 11,298 | | | — | | | 11,298 | | | Indefinite |
| Other intangibles | Other intangibles | | 350 | | | — | | | 350 | | | Indefinite | Other intangibles | | 350 | | | — | | | 350 | | | Indefinite |
| Total intangible assets | Total intangible assets | | $ | 103,155 | | | $ | (54,887) | | | $ | 48,267 | | | Total intangible assets | | $ | 102,998 | | | $ | (83,170) | | | $ | 19,828 | | |
| | | June 30, 2022 | | June 30, 2023 |
| | Gross | | Accumulated Amortization | | Net | | Weighted Average
Remaining Useful Life
(in years) | | Gross | | Accumulated Amortization | | Net | | Weighted Average
Remaining Useful Life
(in years) |
| Merchant relationships | Merchant relationships | | $ | 38,371 | | | $ | (10,281) | | | $ | 28,090 | | | 3.6 | Merchant relationships | | $ | 38,129 | | | $ | (27,637) | | | $ | 10,492 | | | 0.6 |
| Developed technology | Developed technology | | 39,782 | | | (15,882) | | | 23,900 | | | 1.9 | Developed technology | | 39,626 | | | (30,653) | | | 8,973 | | | 0.6 |
| Assembled workforce | Assembled workforce | | 12,490 | | | (1,664) | | | 10,826 | | | 1.3 | Assembled workforce | | 12,490 | | | (9,983) | | | 2,507 | | | 0.3 |
| Trademarks and domains, definite | Trademarks and domains, definite | | 1,507 | | | (802) | | | 705 | | | 2.4 | Trademarks and domains, definite | | 1,481 | | | (990) | | | 491 | | | 1.7 |
| Trademarks and domains, indefinite | | 2,146 | | | — | | | 2,146 | | | Indefinite | |
| Trademarks, licenses and domains, indefinite | | Trademarks, licenses and domains, indefinite | | 11,621 | | | — | | | 11,621 | | | Indefinite |
| Other intangibles | Other intangibles | | 350 | | | — | | | 350 | | | Indefinite | Other intangibles | | 350 | | | — | | | 350 | | | Indefinite |
| Total intangible assets | Total intangible assets | | $ | 94,646 | | | $ | (28,629) | | | $ | 66,017 | | | Total intangible assets | | $ | 103,697 | | | $ | (69,263) | | | $ | 34,434 | | |
Amortization expense for intangible assets was $23.6$14.2 million and $38.4$7.4 million for the three and nine months ended March 31,September 30, 2023 respectively, and $5.5 million and $16.4 million for the three and nine months ended March 31, 2022, respectively.respectively. No impairment losses related to intangible assets were recorded during the three and nine months ended March 31,September 30, 2023 and 2022.
The expected future amortization expense of these intangible assets as of March 31,September 30, 2023 is as follows (in thousands):
| | 2023 (remaining three months) | | $ | 25,910 | | |
| 2024 | | 10,260 | | |
| 2024 (remaining nine months) | | 2024 (remaining nine months) | | $ | 6,646 | |
| 2025 | 2025 | | 251 | | 2025 | | 1,365 | |
| 2026 | 2026 | | 59 | | 2026 | | 155 | |
| 2027 and thereafter | | 15 | | |
| 2027 | | 2027 | | 15 | |
| 2028 and thereafter | | 2028 and thereafter | | — | |
| Total amortization expense | Total amortization expense | | $ | 36,495 | | Total amortization expense | | $ | 8,180 | |
Commercial Agreement Assets
During the year ended June 30, 2022,In November 2021, we granted warrants in connection with our commercial agreements with certain subsidiaries of Amazon.com, Inc. (“Amazon”). The warrants were granted in exchange for certain performance provisions and the benefit of acquiring new users. We recognized an asset of $133.5 million associated with the portion of the warrants that were fully vested upon grant. The asset was valued based on the fair value of the warrants and represents the probable future economic benefit to be realized over the approximate 3.2three year term of the commercial agreement at the grant date. For the three and nine months ended March 31,September 30, 2023 and 2022, we recognized amortization expense of $10.2 million and $31.1 million, respectively, and $10.2 million and $16.0$10.4 million for the three and nine months ended March 31, 2022both periods in our interim condensed consolidated statements of operations and comprehensive loss as a component of sales and marketing expense. Refer to Note 15.14. Stockholders’ Equity for further discussion of the warrants.
During the year ended June 30, 2021,In July 2020, we recognized an asset in connection with a commercial agreement with Shopify Inc. (“Shopify”), in which we granted warrants in exchange for the opportunity to acquire new merchant partners. This asset represents the probable future economic benefit to be realized over the expected benefit period and is valued based on the fair value of the warrants on the grant date. We recognized an asset of $270.6 million associated with the fair value of the warrants, which were fully vested as of March 31,September 30, 2023. The expected benefit period of the asset was initially estimated to be four years, and the remaining useful life of the asset is reevaluated each reporting period. During fiscal year 2022, the remaining expected benefit period was extended by two years upon the execution of an amendment to the commercial agreement with Shopify which extended the term of the agreement. During the three and nine months ended March 31,September 30, 2023 and 2022, we recorded amortization expense related to the commercial agreement asset of $8.8 million and $26.9 million, respectively, and $16.7 million and $50.7$9.0 million for the three and nine months ended March 31, 2022, respectively,both periods in our interim condensed consolidated statements of operations and comprehensive loss as a component of sales and marketing expense.
During the year ended June 30,In January 2021, we recognized an asset in connection with a commercial agreement with an enterprise partner, in which we granted stock appreciation rights in exchange for the benefit of acquiring access to the partner's consumers. This asset represents the probable future economic benefit to be realized over the three-year expected benefit period and is valued based on the fair value of the stock appreciation rights on the grant date. We initially recognized an asset of $25.9 million associated with the fair value of the stock appreciation rights. During the three and nine months ended March 31,September 30, 2023 and 2022, we recorded amortization expense related to the asset of $2.0 million and $6.2 million, respectively, and $2.0 million and $6.0$2.1 million for the three and nine months ended March 31, 2022, respectively,both periods in our interim condensed consolidated statements of operations and comprehensive loss as a component of sales and marketing expense.
Other Assets
Other assets consisted of the following (in thousands):
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| Processing reserves | Processing reserves | | $ | 53,728 | | | $ | 26,483 | | Processing reserves | | $ | 65,421 | | | $ | 60,039 | |
| Equity securities, at cost | | Equity securities, at cost | | 51,870 | | | 43,172 | |
| Derivative instruments | Derivative instruments | | 49,459 | | | 49,983 | | Derivative instruments | | 41,216 | | | 50,545 | |
| Equity securities, at cost | | 43,172 | | | 43,172 | | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 34,054 | | | 50,671 | | Operating lease right-of-use assets | | 27,227 | | | 30,171 | |
| Prepaid payroll taxes for stock-based compensation | | Prepaid payroll taxes for stock-based compensation | | 29,508 | | | 14,336 | |
| Prepaid expenses | Prepaid expenses | | 29,878 | | | 37,497 | | Prepaid expenses | | 25,544 | | | 35,626 | |
| | Other assets | Other assets | | 60,348 | | | 73,761 | | Other assets | | 51,398 | | | 44,725 | |
| Total other assets | Total other assets | | $ | 270,639 | | | $ | 281,567 | | Total other assets | | $ | 292,184 | | | $ | 278,614 | |
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands)
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| Operating lease liability | Operating lease liability | | $ | 55,977 | | | $ | 65,713 | | Operating lease liability | | $ | 49,071 | | | $ | 52,557 | |
| Accrued expenses | | Accrued expenses | | 42,173 | | | 50,704 | |
| Collateral held for derivative instruments | Collateral held for derivative instruments | | 52,219 | | | 55,779 | | Collateral held for derivative instruments | | 41,401 | | | 53,267 | |
| Accrued expenses | | 39,967 | | | 67,343 | | |
| | Other liabilities | Other liabilities | | 44,197 | | | 48,763 | | Other liabilities | | 27,683 | | | 24,355 | |
| Total accrued expenses and other liabilities | Total accrued expenses and other liabilities | | $ | 192,360 | | | $ | 237,598 | | Total accrued expenses and other liabilities | | $ | 160,328 | | | $ | 180,883 | |
7. Leases
We lease facilities under operating leases with various expiration dates through 2030. We have the option to renew or extend our leases. Certain lease agreements include the option to terminate the lease with prior written notice ranging from nine months to one year. As of March 31,September 30, 2023, we have not considered such provisions in the determination of the lease term, as it is not reasonably certain these options will be exercised. Leases have remaining terms that range from less than one year to eightseven years.
Several leases require us to obtain standby letters of credit, naming the lessor as a beneficiary. These letters of credit act as security for the faithful performance by us of all terms, covenants and conditions of the lease agreement. The cash collateral and deposits for the letters of credit have been recognized as restricted cash in the interim condensed consolidated balance sheets and totaled $8.9 million and $9.7 million as of both March 31,September 30, 2023 and June 30, 2022.2023, respectively.
During the three months ended September 30, 2023, we decided to sublease a portion of our leased office space in San Francisco. As a result, we recorded a lease impairment charge of $0.8 million related to several of our operating lease ROU assets, included in general and administrativeexpense on our interim consolidated statements of operations and comprehensive loss. There was no impairment expense incurred related to leases during the three and nine months ended March 31, 2023. For the three and nine months ended March 31, 2022 the impairment expense related to leases was not material to our interim consolidated statement of operations.September 30, 2022.
Operating lease expense is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | | | 2023 | | 2022 | | 2023 | | 2022 |
Operating lease expense (1) | | | | $8,325 | | $3,900 | | $15,841 | | $11,400 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, |
| | | | 2023 | | 2022 |
Operating lease expense (1) | | | | $2,986 | | $3,800 |
| | | | | | |
(1)During the three and nine months ended March 31, 2023, we incurred charges of $4.7 million, within restructuring charges, net, on our interim consolidated statements of operations, related to a reduction to our ROU lease assets which were attributed to certain leased space we are no longer utilizingLease expenses for our business operations.short-term leases were immaterial for the periods presented.
We have subleased a portion of our leased facilities. Sublease income totaled $0.9 million and $2.6 million during the three and nine months ended March 31,September 30, 2023 respectively, and $0.9 million and $2.3 million during the three and nine months ended March 31, 2022, respectively.2022.
Lease term and discount rate information are summarized as follows: | | | | | | | | | | |
| | | | March 31,September 30, 2023 |
| Weighted average remaining lease term (in years) | | | | 4.03.7 |
| Weighted average discount rate | | | | 4.8% |
Maturities ofSeptember 30, 2023, future minimum lease liabilities as of March 31, 2023payments are as follows (in thousands) for the years ended::
| | 2023 (remaining three months) | | $ | 4,095 | | |
| 2024 | | 16,504 | | |
| 2024 (remaining nine months) | | 2024 (remaining nine months) | | $ | 12,380 | |
| 2025 | 2025 | | 16,317 | | 2025 | | 16,317 | |
| 2026 | 2026 | | 15,371 | | 2026 | | 15,371 | |
| 2027 and thereafter | | 10,354 | | |
| 2027 | | 2027 | | 2,680 | |
| 2028 | | 2028 | | 2,185 | |
| Thereafter | | Thereafter | | 5,503 | |
| Total lease payments | Total lease payments | | 62,641 | | Total lease payments | | 54,436 | |
| Less imputed interest | Less imputed interest | | (6,664) | | Less imputed interest | | (5,365) | |
| Present value of lease liabilities | | $ | 55,977 | | |
| Present value of total lease liabilities | | Present value of total lease liabilities | | $ | 49,071 | |
8. Commitments and Contingencies
Repurchase Obligation
Under the normal terms of our whole loans sales to third-party investors, we may become obligated to repurchase loans from investors in certain instances where a breach in representationrepresentations and warranties is identified. Generally, a breach in representationrepresentations and warranties wouldcould occur where a loan has been identified as subject to verified or suspected fraud, or in cases where a loan was serviced or originated in violation of Affirm’s guidelines. We would only experience a loss if the contractual repurchase price of the loan exceeds the fair value on the repurchase date. This amount was not material as of March 31,September 30, 2023.
Legal Proceedings
From time to time, we are subject to legal proceedings and claims in the ordinary course of business. The results of such matters often cannot be predicted with certainty. In accordance with applicable accounting guidance, we establish an accrued liability for legal proceedings and claims when those matters present loss contingencies which are both probable and reasonably estimable.
Toole v. Affirm Holdings, Inc.
On February 28, 2022, plaintiff Jeffrey Toole filed a putative class action against Affirm and Max Levchin in the U.S. District Court for the Northern District of California (the “Toole action”). The Toole action alleged that Affirm violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder by issuing and then subsequently deleting a tweet from its official Twitter account on February 10, 2022, which omitted full details of Affirm’s second quarter fiscal 2022 financial results. Plaintiff sought class certification, unspecified compensatory and punitive damages, and costs and expenses. On September 28, 2022, the Court granted Affirm’s motion to dismiss for failure to state a claim with leave to amend within 21 days. No amended complaint was filed by the deadline. On October 20, 2022, the Court dismissed the putative class action and entered judgment in Affirm’s favor.
Vallieres v Levchin, et al.
On April 25, 2022, plaintiff Michael Vallieres filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of California (the “Vallieres action”) against Affirm, as a nominal defendant, and certain of Affirm’s current officers and directors as defendants based on allegations substantially similar to those in the Toole action. The Vallieres complaint purported to assert claims on Affirm's behalf for breach of fiduciary duty, gross mismanagement, abuse of control, unjust enrichment, and contribution under the federal securities laws, and sought corporate reforms, unspecified damages and restitution, and fees and costs. On January 12, 2023, the Court dismissed the derivative action without prejudice.
Williams v. Levchin, et al.
On September 16, 2022, plaintiff Ron Williams filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of California (the “Williams action”) against Affirm, as a nominal defendant, and certain of Affirm’s current and former officers and directors as defendants based on allegations substantially similar to those in the Toole action and Vallieres action. The Williams complaint purported to assert six causes of action on Affirm's behalf—violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The plaintiff in the Williams action also alleged a cause of action against defendant Levchin for contribution under 10(b) and 21D of the Exchange Act. The Williams complaint sought corporate reforms, unspecified damages and restitution, and fees and costs. On December 22, 2022, the Court dismissed the derivative action without prejudice.
Kusnier v. Affirm Holdings, Inc.
On December 8, 2022, plaintiff Mark Kusnier filed a putative class action lawsuit against Affirm, Max Levchin, and Michael Linford in the U.S. District Court for the Northern District of California (the “Kusnier action”). Plaintiff’s amended complaint filed on May 5, 2023 alleges that defendants: (i) caused Affirm to make materially false and/or misleading statements and/or failed to disclose that Affirm’s BNPL service facilitated excessive consumer debt (including with respect to certain for-profit educational institutions), regulatory arbitrage, and data harvesting; (ii) made false and/or misleading statements about certain public regulatory actions; and (iii) made false and/or misleading statements about whether Affirm’s business model was vulnerable to interest rate changes. In light of the above, plaintiff asserts that Affirm violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and that Levchin and Linford violated Section 20(a) of the Exchange Act. Plaintiff seeks class certification, unspecified compensatory and punitive damages, and costs and expenses.
Quiroga v. Levchin, et al.
On March 29, 2023, plaintiff John Quiroga filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of California (the “Quiroga action”) against Affirm, as a nominal defendant, and certain of Affirm'sAffirm’s current officers and directors as defendants based on allegations substantially similar to those in the Kusnier action. The Quiroga complaint purports to assert claims on Affirm'sAffirm’s behalf for contribution under the federal securities laws, breaches of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks corporate reforms, unspecified damages and restitution, and fees and costs. On May 1, 2023, the action was stayed by agreement of the parties. The stay can be lifted at the request of either party or upon certain conditions relating to the resolution of the Kusnier action.
Jeffries v. Levchin, et al.
On May 24, 2023, plaintiff Sabrina Jeffries filed a shareholder derivative lawsuit in the U.S. District Court for the Northern District of California against Affirm, as a nominal defendant, and certain of Affirm's current officers and directors as defendants based on allegations substantially similar to those in the Kusnier and Quiroga actions. The Jeffries complaint purports to assert claims on Affirm's behalf for breach of fiduciary duties, making false statements under federal securities law, unjust enrichment, waste of corporate assets, and aiding and abetting breach of fiduciary duties, and seeks unspecified damages, equitable relief, and fees and costs. On August 15, 2023, the action was stayed by agreement of the parties. The stay can be lifted at the request of either party or upon certain conditions relating to the resolution of the Kusnier action.
Vallieres v. Levchin, et al.
On September 14, 2023, plaintiff Michael Vallieres filed a shareholder derivative lawsuit in the U.S. District Court for the District of Delaware against Affirm, as a nominal defendant, and certain of Affirm’s current officers and directors as defendants based on allegations substantially similar to those in the Kusnier, Quiroga, and Jeffries actions. The Vallieres complaint purports to assert claims on Affirm's behalf for breach of fiduciary duties, gross management, abuse of control, unjust enrichment, and contribution, and seeks unspecified damages, equitable relief, and fees and costs.
We have determined, based on current knowledge, that the aggregate amount or range of losses that are estimable with respect to our legal proceedings, including the matters described above, would not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Amounts accrued as of March 31,September 30, 2023 were not material. The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties, and cannot be predicted with certainty.
9. Transactions with Related Parties
In the ordinary course of business, we may enter into transactions with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties). Some of our directors, principal officers, and their immediate families have received loans facilitated by us, in accordance with our regular consumer loan offerings. As of March 31, 2023, the outstanding balance and interest earned on such accounts is immaterial.
10.9. Debt
Debt encompasses funding debt, convertible senior notes and our revolving credit facility.
Funding Debt
Funding debt and its aggregate future maturities consists of the following (in thousands):
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 |
| 2023 | | $ | 17,503 | | | $ | 158,547 | | |
| 2024 | 2024 | | 598,318 | | | 421,484 | | 2024 | | $ | 183,530 | |
| 2025 | 2025 | | 419,580 | | | — | | 2025 | | 390,881 | |
| 2026 | 2026 | | 231,308 | | | — | | 2026 | | 633,452 | |
| 2027 and thereafter | | 261,210 | | | 103,364 | | |
| 2027 | | 2027 | | — | |
| 2028 | | 2028 | | 26,660 | |
| Thereafter | | Thereafter | | 490,488 | |
| Total | Total | | $ | 1,527,919 | | | $ | 683,395 | | Total | | $ | 1,725,011 | |
| Deferred debt issuance costs | Deferred debt issuance costs | | (13,799) | | | (10,818) | | Deferred debt issuance costs | | (15,260) | |
| Total funding debt, net of deferred debt issuance costs | Total funding debt, net of deferred debt issuance costs | | $ | 1,514,120 | | | $ | 672,577 | | Total funding debt, net of deferred debt issuance costs | | $ | 1,709,751 | |
Warehouse CreditSecured Borrowing Facilities
U.S.
Through subsidiaries,trusts, we entered into warehouse credit facilities with certain lenders to finance the purchase and origination of our loans. Each trust entered into a credit agreement and security agreement with a third-party as administrative agent and a national banking association as collateral trustee and paying agent. Borrowings under these agreements are referred to as funding debt and proceeds from the borrowings can only be used for the purposes of facilitating loan funding and origination, with advance rates ranging from 82% to 88%86% of the total collateralized balance. These warehouse credit facility trusts, which have been classified as VIEs, are bankruptcy-remote special-purpose vehicles in which creditors do not have recourse against the general credit of Affirm. These revolving facilities mature between fiscal years 2024 and 2029,2031 and subject to covenant compliance, generally permit borrowings up to 12 months prior to the final maturity date of each respective facility. As of March 31,September 30, 2023, the aggregate commitment amount of these facilities was $4.0 billion on a revolving basis, of which $1.5$1.4 billion was drawn, with $2.5$2.6 billion remaining available. Some of the loans originated by us or purchased from the originating bank partners are pledged as collateral for borrowings in our facilities. The unpaid principal balance of these loans totaled $1.8$1.6 billion and $0.8$1.7 billion as of March 31,September 30, 2023 and June 30, 2022, respectively. Our U.S. based warehouse credit facilities and certain lending facilities funding the origination of loans outside of the U.S., have been classified as VIEs and are bankruptcy-remote special-purpose vehicles in which creditors do not have recourse against the general credit of Affirm. Funding debt, net of deferred issuance costs, primarily held within our VIEs represents $1.5 billion and $0.7 billion, as of March 31, 2023, and June 30, 2022, respectively.
We accrue monthlyBorrowings under these warehouse credit facilities bear interest expense on each warehouse based on the contractual terms set forth in the applicable credit agreement. Interest expense also includes capitalized transaction fees which are amortized on a straight-line basis over the termat an annual benchmark rate of the warehouse agreement. The contractual interest rate varies across each warehouse facility and is either based on a benchmark interest rate (such as LIBOR, SOFR, Canadian PrimeSecured Overnight Financing Rate CDOR, or the Government of Canada Central Bank Rate),(“SOFR”) or an alternative commercial paper rate (which is 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), plus a spread ranging from 1.25%1.75% to 4.25%2.20%. Interest is payable monthly. In addition, these agreements require payment of a monthly unused commitment fee ranging from 0.00% to 0.75% per annum on the undrawn portion available.
These agreements contain certain customary negative covenants and financial covenants including maintaining certain levels of minimum liquidity, maximum leverage, and minimum tangible net worth. As of March 31,September 30, 2023, we were in compliance with all applicable covenants in the agreements.
debt, and proceeds from the borrowings may only be used for the purposes of facilitating loan funding and origination. These facilities are secured by Canadian loan receivables pledged to the respective facility as collateral, mature between fiscal years 2025 and 2029, and bear interest based on benchmark rates plus a spread ranging from 1.25% to 4.25%.
As of September 30, 2023, the aggregate commitment amount of these facilities was $505.5 million on a revolving basis, of which $360.4 million was drawn, with $145.1 million remaining available. The unpaid principal balance of loans pledged to these facilities totaled $429.0 million and $412.8 million as of September 30, 2023 and June 30, 2023, respectively.
These agreements contain certain customary negative covenants and financial covenants including maintaining certain levels of minimum liquidity, maximum leverage, and minimum tangible net worth at the Affirm Canada subsidiary level or the Affirm Holdings level. As of September 30, 2023, we were in compliance with all applicable covenants in the agreements.
Sales and Repurchase Agreements
We entered into certain sale and repurchase agreements pursuant to our retained interests in our off-balance sheet securitizations where we have sold these securities to a counterparty with an obligation to repurchase at a future date and price. The repurchase agreements each have an initial term of three months and subject to mutual agreement by Affirm and the counterparty, we may enter into aone or more repurchase date extensionextensions, each for an additional three monththree-month term at market interest rates on such extension date. As of March 31,September 30, 2023, the interest rates were 6.68%7.52% for both the senior pledged securities and the residual certificate pledged securities. We had $17.5$5.9 million and $27.0$11.0 million in debt outstanding under our repurchase agreements disclosed within funding debt on the interim condensed consolidated balance sheets as of March 31,September 30, 2023 and June 30, 2022,2023, respectively. The debt will be amortized through regular principal and interest payments on the pledged securities. The outstanding debt relates to $25.2$14.0 million and $32.4$18.9 million in pledged securities disclosed within securities available for sale at fair value on the interim condensed consolidated balance sheets as of March 31,September 30, 2023 and June 30, 2022,2023, respectively.
Convertible Senior Notes
On November 23, 2021, we issued $1,725 million in aggregate principal amount of 0% convertible senior notes due 2026 (the “2026 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The total net proceeds from this offering, after deducting debt issuance costs, were approximately $1,704 million. The 2026 Notes represent our senior unsecured obligations of the Company. The 2026 Notes do not bear interest except in special circumstances described below, and the principal amount of the 2026 Notes does not accrete. The 2026 Notes mature on November 15, 2026.
Each $1,000 of principal of the 2026 Notes will initially be convertible into 4.6371 shares of our common stock, which is equivalent to an initial conversion price of approximately $215.65 per share, subject to adjustment upon the occurrence of certain specified events set forth in the indenture governing the 2026 Notes (the “Indenture”). Holders of the 2026 Notes may convert their 2026 Notes at their option at any time on or after August 15, 2026 until close of business on the second scheduled trading day immediately preceding the maturity date of November 15, 2026. Further, holders of the 2026 Notes may convert all or any portion of their 2026 Notes at their option prior to the close of business on the business day immediately preceding August 15, 2026, only under the following circumstances:
1) during any calendar quarter commencing after March 31, 2022 (and only during such calendar quarter), if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the indenture governing the 2026 Notes) per $1,000 principal amount of the 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day;
3) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
4) upon the occurrence of certain specified corporate events.
Upon conversion of the 2026 Notes, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election. If we satisfy our conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of our common stock, the amount of cash and shares of common stock, if any, due
upon conversion will be based on a daily conversion value (as set forth in the Indenture) calculated on a proportionate basis for each trading day in a 40 trading day observation period.
No sinking fund is provided for the 2026 Notes. We may not redeem the notes prior to November 20, 2024. We may redeem for cash all or part of the notes on or after November 20, 2024 if the last reported sale price of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid special interest, if any.
If a fundamental change (as defined in the Indenture) occurs prior to the maturity date, holders of the 2026 Notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the 2026 Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date. In addition, if specific corporate events occur prior to the maturity date of the 2026 Notes, we will be required to increase the conversion rate for holders who elect to convert their 2026 Notes in connection with such corporate events.
DuringOn June 7, 2023, the three and nine months ended March 31, 2023, we entered into a seriesBoard of privately negotiated transactions with certain holders of our 2026 Notes, pursuant to which we paid an aggregate amount of $206.6 million in cash forDirectors authorized the repurchase of $299.1up to $800 million in aggregate principal amount of ourthe 2026 Notes. Note repurchases may be made from time to time through December 31, 2023 in privately negotiated transactions. Repurchases are subject to available liquidity, general market and economic conditions, alternate uses for the capital, and other factors, and there is no minimum principal amount of 2026 Notes (the “2026 Note Repurchases”). The carrying amount ofthat the extinguished 2026 Notes was approximately $296.4 million resulting in a $89.8 million gain on early extinguishment of debt, whichCompany is reported as a component of other income, net within our interim consolidated statements of operations and comprehensive income. In exchange for paying cash pursuantobligated to the 2026 Note Repurchases, we received and canceled the repurchased 2026 Notes.repurchase. We have not executed any repurchases under this authorization to date.
The convertible senior notes outstanding as of March 31,September 30, 2023 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Principal Amount | | Unamortized Discount and Issuance Cost | | Net Carrying Amount |
| Convertible Senior Notes | $ | 1,425,900 | | | $ | (12,555) | | | $ | 1,413,345 | |
| | | | | | | | | | | | | | | | | |
| Principal Amount | | Unamortized Discount and Issuance Cost | | Net Carrying Amount |
| Convertible senior notes | $ | 1,425,900 | | | $ | (10,820) | | | $ | 1,415,080 | |
The 2026 Notes do not bear interest. We recognized $1.0$0.9 million and $3.1$1.1 million during the three and nine months ended March 31,September 30, 2023 respectively, and $1.0 million and $1.4 million during the three and nine months ended March 31, 2022, respectively, of interest expense related to the amortization of debt discount and issuance costs in the interim condensed consolidated statement of operations and comprehensive loss within other income, net. As of March 31,September 30, 2023, the remaining life of the 2026 Notes is approximately 4438 months.
Revolving Credit Facility
On February 4, 2022, we entered into a revolving credit agreement with a syndicate of commercial banks for a $165.0 million unsecured revolving credit facility. On May 16, 2022, we increased unsecured revolving commitments under the facility to $205.0 million. This facility bears interest at a rate equal to, at our option, either (a) a Secured Overnight Financing Rate (“SOFR”) rate determined by reference to the forward-looking term SOFR rate for the interest period, plus an applicable margin of 1.85% per annum or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate last quoted by the Wall Street Journal as the U.S. prime rate and (iii) the one-month forward-looking term SOFR rate plus 1.00% per annum, in each case, plus an applicable margin of 0.85% per annum. The revolving credit agreement has a final maturity date of February 4, 2025. The facility contains certain covenants and restrictions, including certain financial maintenance covenants, and requires payment of a monthly unused commitment fee of 0.20% per annum on the undrawn balance available. There are no borrowings outstanding under the facility as of March 31,September 30, 2023.
11.10. Securitization and Variable Interest Entities
Consolidated VIEs
Warehouse Credit FacilitiesFacilities
We established certain entities, deemed to be VIEs, to enter into warehouse credit facilities for the purpose of purchasing loans from our originating bank partners and funding directly originated loans. Refer to Note 10.9. Debt for additional information. The creditors of the VIEs have no recourse to the general credit of Affirm and the liabilities of the VIEs can only be settled by the respective VIEs’ assets; however, as the servicer of the loans pledged to our warehouse funding facilities, we have the power to direct the activities that most significantly impact the VIEs' economic performance. In addition, we retain significant economic exposure to the pledged loans and therefore, we are the primary beneficiary.
Securitizations
In connection with our asset-backed securitization program, we sponsor and establish trusts (deemed to be VIEs) to ultimately purchase loans facilitated by our platform. Securities issued from our asset-backed securitizations are senior or subordinated, based on the waterfall criteria of loan payments to each security class. The subordinated residual interests issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria. For these VIEs, the creditors have no recourse to the general credit of Affirm and the liabilities of the VIEs can only be settled by the respective VIEs’ assets. Additionally, the assets of the VIEs can be used only to settle obligations of the VIEs.
We consolidate securitization VIEs when we are deemed to be the primary beneficiary and therefore have the power to direct the activities that most significantly affect the VIEs’ economic performance and a variable interest that could potentially be significant to the VIE. Through our role as the servicer, we have the power to direct the activities that most significantly affect the VIEs’ economic performance. In evaluating whether we have a variable interest that could potentially be significant to the VIE, we consider our retained interests. We also earn a servicing fee which has a senior distribution priority in the payment waterfall.
In evaluating whether we are the primary beneficiary, management considers both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIEs. Management assesses whether we are the primary beneficiary of the VIEs on an ongoing basis.
Where we consolidate the securitization trusts, the loans held in the securitization trusts are included in loans held for investment, and the notes sold to third-party investors are recorded in notes issued by securitization trusts in the interim condensed consolidated balance sheets.
For each securitization, the residual trust certificates represent the right to receive excess cash on the loans each collection period after all fees and required distributions have been made to the note holders on the related payment date. For the majority of consolidated securitization VIEs, we retain 100% of the residual trust certificates issued by the securitization trust. Any portion of the residual trust certificates sold to third-party investors are measured at fair value, using a discounted cash flow model, and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets. In addition to the retained residual trust certificates, our continued involvement includes loan servicing responsibilities over the life of the underlying loans.
We defer and amortize debt issuance costs for consolidated securitization trusts on a straight-line basis over the expected life of the notes.
The following tables present the aggregate carrying value of financial assets and liabilities withinfrom our involvement with consolidated VIEs (in thousands):
| | | March 31, 2023 | | September 30, 2023 |
| | Assets | | Liabilities | | Net Assets | | Assets | | Liabilities | | Net Assets |
| Warehouse credit facilities | Warehouse credit facilities | | $ | 1,585,168 | | | $ | 1,386,167 | | | $ | 199,001 | | Warehouse credit facilities | | $ | 1,915,257 | | | $ | 1,684,638 | | | $ | 230,619 | |
| Securitizations | Securitizations | | 1,922,876 | | | 1,792,114 | | | 130,762 | | Securitizations | | 2,457,025 | | | 2,404,437 | | | 52,588 | |
| Total consolidated VIEs | Total consolidated VIEs | | $ | 3,508,044 | | | $ | 3,178,281 | | | $ | 329,763 | | Total consolidated VIEs | | $ | 4,372,282 | | | $ | 4,089,075 | | | $ | 283,207 | |
| | | June 30, 2022 | | June 30, 2023 |
| | Assets | | Liabilities | | Net Assets | | Assets | | Liabilities | | Net Assets |
| Warehouse credit facilities | Warehouse credit facilities | | $ | 563,207 | | | $ | 534,422 | | | $ | 28,785 | | Warehouse credit facilities | | $ | 1,930,641 | | | $ | 1,686,359 | | | $ | 244,282 | |
| Securitizations | Securitizations | | 1,679,062 | | | 1,632,107 | | | 46,955 | | Securitizations | | 2,272,991 | | | 2,169,835 | | | 103,156 | |
| Total consolidated VIEs | Total consolidated VIEs | | $ | 2,242,269 | | | $ | 2,166,529 | | | $ | 75,740 | | Total consolidated VIEs | | $ | 4,203,632 | | | $ | 3,856,194 | | | $ | 347,438 | |
Unconsolidated VIEs
Our transactions with unconsolidated VIEs include securitization trusts where we did not retain significant economic exposure through our variable interests and therefore we determined that we are not the primary beneficiary as of March 31,September 30, 2023.
The following information pertains to unconsolidated VIEs where we hold a variable interest but are not the primary beneficiary (in thousands):
| | | March 31, 2023 | | September 30, 2023 |
| | Assets | | Liabilities | | Net Assets | | Maximum Exposure to Losses | | Assets | | Liabilities | | Net Assets | | Maximum Exposure to Losses |
| Securitizations | Securitizations | | $ | 505,301 | | | $ | 489,938 | | | $ | 15,363 | | | $ | 25,252 | | Securitizations | | $ | 281,516 | | | $ | 271,049 | | | $ | 10,467 | | | $ | 14,160 | |
| Total unconsolidated VIEs | Total unconsolidated VIEs | | $ | 505,301 | | | $ | 489,938 | | | $ | 15,363 | | | $ | 25,252 | | Total unconsolidated VIEs | | $ | 281,516 | | | $ | 271,049 | | | $ | 10,467 | | | $ | 14,160 | |
| | | June 30, 2022 | | June 30, 2023 |
| | Assets | | Liabilities | | Net Assets | | Maximum Exposure to Losses | | Assets | | Liabilities | | Net Assets | | Maximum Exposure to Losses |
| Securitizations | Securitizations | | $ | 996,242 | | | $ | 965,909 | | | $ | 30,333 | | | $ | 51,248 | | Securitizations | | $ | 380,547 | | | $ | 367,788 | | | $ | 12,759 | | | $ | 19,149 | |
| Total unconsolidated VIEs | Total unconsolidated VIEs | | $ | 996,242 | | | $ | 965,909 | | | $ | 30,333 | | | $ | 51,248 | | Total unconsolidated VIEs | | $ | 380,547 | | | $ | 367,788 | | | $ | 12,759 | | | $ | 19,149 | |
Maximum exposure to losses represents our exposure through our continuing involvement as servicer and through our retained interests. For unconsolidated VIEs, this includes $25.214.0 million in retained notes and residual trust certificates disclosed within securities available for sale at fair value in our interim condensed consolidated balance sheets and an immaterial amount$0.2 million related to our servicing assets disclosed within other assets in our interim condensed consolidated balance sheets as of March 31,September 30, 2023.
Additionally, we may experience a loss due to future repurchase obligations resulting from breaches in representations and warranties in our securitization and third-party sale agreements. This amount was not material as of March 31,September 30, 2023.
Retained Beneficial Interests in Unconsolidated VIEs
The investors of the securitizations have no direct recourse to the assets of Affirm, and the timing and amount of beneficial interest payments is dependent on the performance of the underlying loan assets held within each trust. We have classified our retained beneficial interests in unconsolidated securitization trusts as “available for sale” and as such they are disclosed at fair value in our interim condensed consolidated balance sheets.
See Note 14.13. Fair Value of Financial Assets and Liabilities for additional information on the fair value sensitivity of the notes receivable and residual trust certificates. Additionally, as of March 31,September 30, 2023, we have pledged each of our retained beneficial interests as collateral in a sale and repurchase agreement as described in Note 10.9. Debt.
12.11. Investments
Marketable Securities
Marketable securities include certain investments classified as cash and cash equivalents and securities available for sale, at fair value, and consist of the following as of each date presented within the interim condensed consolidated balance sheets (in thousands):
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| Cash and cash equivalents: | Cash and cash equivalents: | | | | | Cash and cash equivalents: | | | | |
| Money market funds | Money market funds | | $ | 204,449 | | | $ | 162,483 | | Money market funds | | $ | 354,274 | | | $ | 97,129 | |
| Certificates of deposit | | — | | | 16,026 | | |
| Commercial paper | Commercial paper | | 156,887 | | | 229,272 | | Commercial paper | | 31,015 | | | 54,402 | |
| Government bonds | | |
| US | | 193,175 | | | 58,541 | | |
| Agency bonds | | Agency bonds | | — | | | 60,865 | |
| Securities available for sale: | Securities available for sale: | | Securities available for sale: | |
| Certificates of deposit | Certificates of deposit | | 145,528 | | | 300,390 | | Certificates of deposit | | 86,503 | | | 97,224 | |
| Corporate bonds | Corporate bonds | | 292,726 | | | 368,671 | | Corporate bonds | | 248,394 | | | 256,772 | |
| Commercial paper | Commercial paper | | 186,143 | | | 478,293 | | Commercial paper | | 163,160 | | | 266,193 | |
| Agency bonds | Agency bonds | | 35,194 | | | — | | Agency bonds | | 50,552 | | | 84,276 | |
| Municipal bonds | | Municipal bonds | | 3,213 | | | — | |
| Government bonds | Government bonds | | Government bonds | |
| Non-US | Non-US | | 6,108 | | | 17,955 | | Non-US | | 9,199 | | | 9,151 | |
| US | US | | 367,081 | | | 378,386 | | US | | 446,626 | | | 441,096 | |
Securitization notes receivable and certificates (1) | Securitization notes receivable and certificates (1) | | 25,235 | | | 51,678 | | Securitization notes receivable and certificates (1) | | 13,983 | | | 18,913 | |
| Other | Other | | 1,016 | | | — | | Other | | — | | | 1,028 | |
| Total marketable securities: | Total marketable securities: | | $ | 1,613,542 | | | $ | 2,061,695 | | Total marketable securities: | | $ | 1,406,919 | | | $ | 1,387,049 | |
(1)These securities have been pledged as collateral in connection with sale and repurchase agreements as discussed within Note 10.9. Debt.
Securities Available for Sale, at Fair Value
The amortized cost, gross unrealized gains and losses, allowance for credit losses, and fair value of securities available for sale as of March 31,September 30, 2023 and June 30, 20222023 were as follows (in thousands):
| | | March 31, 2023 | | September 30, 2023 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
| Certificates of deposit | Certificates of deposit | | $ | 145,813 | | | $ | 21 | | | $ | (306) | | | $ | — | | | $ | 145,528 | | Certificates of deposit | | $ | 86,580 | | | $ | 20 | | | $ | (97) | | | $ | — | | | $ | 86,503 | |
| Corporate bonds | Corporate bonds | | 296,186 | | | 225 | | | (3,685) | | | — | | | 292,726 | | Corporate bonds | | 251,642 | | | 24 | | | (3,272) | | | — | | | 248,394 | |
Commercial paper (1) | Commercial paper (1) | | 343,077 | | | 62 | | | (109) | | | — | | | 343,030 | | Commercial paper (1) | | 194,294 | | | 5 | | | (124) | | | — | | | 194,175 | |
| Agency bonds | Agency bonds | | 35,092 | | | 102 | | | — | | | — | | | 35,194 | | Agency bonds | | 50,816 | | | 1 | | | (265) | | | — | | | 50,552 | |
| Municipal bonds | | Municipal bonds | | 3,210 | | | 3 | | | — | | | — | | | 3,213 | |
| Government bonds | Government bonds | | Government bonds | |
| Non-US | Non-US | | 6,258 | | | — | | | (150) | | | — | | | 6,108 | | Non-US | | 9,325 | | | — | | | (126) | | | — | | | 9,199 | |
US (1) | | 561,761 | | | 366 | | | (1,871) | | | — | | | 560,256 | | |
| US | | US | | 450,056 | | | 11 | | | (3,441) | | | — | | | 446,626 | |
Securitization notes receivable and certificates (2) | Securitization notes receivable and certificates (2) | | 26,330 | | | — | | | (616) | | | (479) | | | 25,235 | | Securitization notes receivable and certificates (2) | | 14,753 | | | — | | | (290) | | | (480) | | | 13,983 | |
| Other | | 1,016 | | | — | | | — | | | — | | | 1,016 | | |
| Total securities available for sale | Total securities available for sale | | $ | 1,415,533 | | | $ | 776 | | | $ | (6,737) | | | $ | (479) | | | $ | 1,409,093 | | Total securities available for sale | | $ | 1,060,676 | | | $ | 64 | | | $ | (7,615) | | | $ | (480) | | | $ | 1,052,645 | |
| | | June 30, 2022 | | June 30, 2023 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Certificates of deposit (1) | Certificates of deposit (1) | | $ | 317,331 | | | $ | 6 | | | $ | (921) | | | $ | — | | | $ | 316,416 | | Certificates of deposit (1) | | $ | 97,399 | | | $ | 11 | | | $ | (186) | | | $ | — | | | $ | 97,224 | |
Corporate bonds (1) | Corporate bonds (1) | | 371,907 | | | 7 | | | (3,243) | | | — | | | 368,671 | | Corporate bonds (1) | | 260,627 | | | 55 | | | (3,910) | | | — | | | 256,772 | |
Commercial paper (1) | Commercial paper (1) | | 708,694 | | | 16 | | | (1,145) | | | — | | | 707,565 | | Commercial paper (1) | | 320,882 | | | 34 | | | (321) | | | — | | | 320,595 | |
Agency bonds (1) | | Agency bonds (1) | | 145,312 | | | 62 | | | (233) | | | — | | | 145,141 | |
| Government bonds | Government bonds | | Government bonds | |
| Non-US | Non-US | | 18,196 | | | — | | | (241) | | | — | | | 17,955 | | Non-US | | 9,330 | | | — | | | (179) | | | — | | | 9,151 | |
US (1) | | 438,947 | | | — | | | (2,020) | | | — | | | 436,927 | | |
| US | | US | | 444,858 | | | 28 | | | (3,790) | | | — | | | 441,096 | |
Securitization notes receivable and certificates (2) | Securitization notes receivable and certificates (2) | | 52,180 | | | 178 | | | (659) | | | (21) | | | 51,678 | | Securitization notes receivable and certificates (2) | | 19,841 | | | — | | | (475) | | | (453) | | | 18,913 | |
| Other | | Other | | 1,028 | | | — | | | — | | | — | | | 1,028 | |
| Total securities available for sale | Total securities available for sale | | $ | 1,907,255 | | | $ | 207 | | | $ | (8,229) | | | $ | (21) | | | $ | 1,899,212 | | Total securities available for sale | | $ | 1,299,277 | | | $ | 190 | | | $ | (9,094) | | | $ | (453) | | | $ | 1,289,920 | |
(1)Certificates of deposit, corporate bonds, commercialCommercial paper and US governmentagency bonds include $350.1$31.0 million and $303.8$115.3 million as of March 31,September 30, 2023 and June 30, 2022,2023, respectively, classified as cash and cash equivalents within the interim condensed consolidated balance sheets.
(2)These securities have been pledged as collateral in connection with sale and repurchase agreements as discussed within Note 10.9. Debt.
As of March 31,September 30, 2023 and June 30, 2022,2023, there were no material reversals of prior period allowance for credit losses recognized for available for sale securities.
A summary of securities available for sale with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and the length of time that individual securities have been in a continuous loss position as of March 31,September 30, 2023 and June 30, 2022,2023, are as follows (in thousands):
| | | March 31, 2023 | | September 30, 2023 |
| | Less than or equal to 1 year | | Greater than 1 year | | Total | | Less than or equal to 1 year | | Greater than 1 year | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| Certificates of deposit | Certificates of deposit | | $ | 123,816 | | | $ | (306) | | | $ | — | | | $ | — | | | $ | 123,816 | | | $ | (306) | | Certificates of deposit | | $ | 59,252 | | | $ | (97) | | | $ | — | | | $ | — | | | $ | 59,252 | | | $ | (97) | |
| Corporate bonds | Corporate bonds | | 243,747 | | | (3,364) | | | 29,672 | | | (321) | | | 273,419 | | | (3,685) | | Corporate bonds | | 76,635 | | | (456) | | | 133,377 | | | (2,816) | | | 210,012 | | | (3,272) | |
| Commercial paper | Commercial paper | | 151,058 | | | (109) | | | — | | | — | | | 151,058 | | | (109) | | Commercial paper | | 138,099 | | | (124) | | | — | | | — | | | 138,099 | | | (124) | |
| Agency bonds | | Agency bonds | | 47,615 | | | (265) | | | — | | | — | | | 47,615 | | | (265) | |
| Government bonds | Government bonds | | Government bonds | |
| Non-US | Non-US | | 2,089 | | | (43) | | | 4,018 | | | (107) | | | 6,107 | | | (150) | | Non-US | | 3,060 | | | (66) | | | 6,138 | | | (60) | | | 9,198 | | | (126) | |
| US | US | | 201,831 | | | (1,871) | | | — | | | — | | | 201,831 | | | (1,871) | | US | | 298,383 | | | (2,095) | | | 74,151 | | | (1,346) | | | 372,534 | | | (3,441) | |
| Total securities available for sale (1) | Total securities available for sale (1) | | $ | 722,541 | | | $ | (5,693) | | | $ | 33,690 | | | $ | (428) | | | $ | 756,231 | | | $ | (6,121) | | Total securities available for sale (1) | | $ | 623,044 | | | $ | (3,103) | | | $ | 213,666 | | | $ | (4,222) | | | $ | 836,710 | | | $ | (7,325) | |
| | | June 30, 2022 | | June 30, 2023 |
| | Less than or equal to 1 year | | Greater than 1 year | | Total | | Less than or equal to 1 year | | Greater than 1 year | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| Certificates of deposit | Certificates of deposit | | $ | 290,169 | | | $ | (921) | | | $ | — | | | $ | — | | | $ | 290,169 | | | $ | (921) | | Certificates of deposit | | $ | 63,489 | | | $ | (186) | | | $ | — | | | $ | — | | | $ | 63,489 | | | $ | (186) | |
| Corporate bonds | Corporate bonds | | 351,088 | | | (3,243) | | | — | | | — | | | 351,088 | | | (3,243) | | Corporate bonds | | 92,171 | | | (834) | | | 131,762 | | | (3,076) | | | 223,933 | | | (3,910) | |
| Commercial paper | Commercial paper | | 679,272 | | | (1,145) | | | — | | | — | | | 679,272 | | | (1,145) | | Commercial paper | | 164,037 | | | (321) | | | — | | | — | | | 164,037 | | | (321) | |
| Agency bonds | | Agency bonds | | 44,214 | | | (233) | | | — | | | — | | | 44,214 | | | (233) | |
| Government bonds | Government bonds | | Government bonds | |
| Non-US | Non-US | | 17,955 | | | (241) | | | — | | | — | | | 17,955 | | | (241) | | Non-US | | 3,061 | | | (58) | | | 6,089 | | | (121) | | | 9,150 | | | (179) | |
| US | US | | 431,903 | | | (2,020) | | | — | | | — | | | 431,903 | | | (2,020) | | US | | 292,333 | | | (2,395) | | | 67,606 | | | (1,395) | | | 359,939 | | | (3,790) | |
| Securitization notes receivable and certificates | | 722 | | | (45) | | | — | | | — | | | 722 | | | (45) | | |
Total securities available for sale (1) | Total securities available for sale (1) | | $ | 1,771,109 | | | $ | (7,615) | | | $ | — | | | $ | — | | | $ | 1,771,109 | | | $ | (7,615) | | Total securities available for sale (1) | | $ | 659,305 | | | $ | (4,027) | | | $ | 205,457 | | | $ | (4,592) | | | $ | 864,762 | | | $ | (8,619) | |
(1)The number of positions with unrealized losses for which an allowance for credit losses has not been recorded totaled 133121 and 270142 as of March 31,September 30, 2023 and June 30, 2022,2023, respectively.
The length of time to contractual maturities of securities available for sale as of March 31,September 30, 2023 and June 30, 20222023 were as follows (in thousands):
| | | March 31, 2023 | | September 30, 2023 |
| | Within 1 year | | Greater than 1 year, less than or equal to 5 years | | Total | | Within 1 year | | Greater than 1 year, less than or equal to 5 years | | Total |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Certificates of deposit (2) | Certificates of deposit (2) | | $ | 145,813 | | | $ | 145,528 | | | $ | — | | | $ | — | | | $ | 145,813 | | | $ | 145,528 | | Certificates of deposit (2) | | $ | 86,580 | | | $ | 86,503 | | | $ | — | | | $ | — | | | $ | 86,580 | | | $ | 86,503 | |
Corporate bonds (2) | Corporate bonds (2) | | 161,736 | | | 160,486 | | | 134,450 | | | 132,240 | | | 296,186 | | | 292,726 | | Corporate bonds (2) | | 159,282 | | | 158,000 | | | 92,360 | | | 90,394 | | | 251,642 | | | 248,394 | |
Commercial paper (2)(1) | Commercial paper (2)(1) | | 343,077 | | | 343,030 | | | — | | | — | | | 343,077 | | | 343,030 | | Commercial paper (2)(1) | | 194,294 | | | 194,175 | | | — | | | — | | | 194,294 | | | 194,175 | |
| Agency bonds | Agency bonds | | 31,411 | | | 31,511 | | | 3,681 | | | 3,683 | | | 35,092 | | | 35,194 | | Agency bonds | | 37,596 | | | 37,534 | | | 13,220 | | | 13,018 | | | 50,816 | | | 50,552 | |
| Municipal bonds | | Municipal bonds | | — | | | — | | | 3,210 | | | 3,213 | | | 3,210 | | | 3,213 | |
| Government bonds | Government bonds | | Government bonds | |
| Non-US | Non-US | | 4,126 | | | 4,019 | | | 2,132 | | | 2,089 | | | 6,258 | | | 6,108 | | Non-US | | 6,199 | | | 6,139 | | | 3,126 | | | 3,060 | | | 9,325 | | | 9,199 | |
US (2) | | 491,446 | | | 490,718 | | | 70,315 | | | 69,538 | | | 561,761 | | | 560,256 | | |
Securitization notes receivable and certificates (1) | | — | | | — | | | 26,330 | | | 25,235 | | | 26,330 | | | 25,235 | | |
| US | | US | | 332,026 | | | 330,869 | | | 118,030 | | | 115,757 | | | 450,056 | | | 446,626 | |
Securitization notes receivable and certificates (2) | | Securitization notes receivable and certificates (2) | | — | | | — | | | 14,753 | | | 13,983 | | | 14,753 | | | 13,983 | |
| Other | Other | | 1,016 | | | 1,016 | | | — | | | — | | | 1,016 | | | 1,016 | | Other | | — | | | — | | | — | | | — | | | — | | | — | |
| Total securities available for sale | Total securities available for sale | | $ | 1,178,625 | | | $ | 1,176,308 | | | $ | 236,908 | | | $ | 232,785 | | | $ | 1,415,533 | | | $ | 1,409,093 | | Total securities available for sale | | $ | 815,977 | | | $ | 813,220 | | | $ | 244,699 | | | $ | 239,425 | | | $ | 1,060,676 | | | $ | 1,052,645 | |
| | | June 30, 2022 | | June 30, 2023 |
| | Within 1 year | | Greater than 1 year, less than or equal to 5 years | | Total | | Within 1 year | | Greater than 1 year, less than or equal to 5 years | | Total |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Certificates of deposit (2) | Certificates of deposit (2) | | $ | 317,331 | | | $ | 316,416 | | | $ | — | | | $ | — | | | $ | 317,331 | | | $ | 316,416 | | Certificates of deposit (2) | | $ | 97,399 | | | $ | 97,224 | | | $ | — | | | $ | — | | | $ | 97,399 | | | $ | 97,224 | |
Corporate bonds (2) | Corporate bonds (2) | | 206,208 | | | 204,614 | | | 165,699 | | | 164,057 | | | 371,907 | | | 368,671 | | Corporate bonds (2) | | 173,523 | | | 171,634 | | | 87,104 | | | 85,138 | | | 260,627 | | | 256,772 | |
Commercial paper (2)(1) | Commercial paper (2)(1) | | 708,694 | | | 707,565 | | | — | | | — | | | 708,694 | | | 707,565 | | Commercial paper (2)(1) | | 320,882 | | | 320,595 | | | — | | | — | | | 320,882 | | | 320,595 | |
Agency bonds (1) | | Agency bonds (1) | | 130,176 | | | 130,165 | | | 15,136 | | | 14,976 | | | 145,312 | | | 145,141 | |
| Government bonds | Government bonds | | Government bonds | |
| Non-US | Non-US | | 11,895 | | | 11,813 | | | 6,301 | | | 6,142 | | | 18,196 | | | 17,955 | | Non-US | | 4,063 | | | 3,996 | | | 5,267 | | | 5,155 | | | 9,330 | | | 9,151 | |
US (2) | | 360,757 | | | 359,242 | | | 78,190 | | | 77,685 | | | 438,947 | | | 436,927 | | |
Securitization notes receivable and certificates (1) | | — | | | — | | | 52,180 | | | 51,678 | | | 52,180 | | | 51,678 | | |
| US | | US | | 308,179 | | | 306,656 | | | 136,679 | | | 134,440 | | | 444,858 | | | 441,096 | |
Securitization notes receivable and certificates (2) | | Securitization notes receivable and certificates (2) | | — | | | — | | | 19,841 | | | 18,913 | | | 19,841 | | | 18,913 | |
| Other | | Other | | — | | | — | | | 1,028 | | | 1,028 | | | 1,028 | | | 1,028 | |
| Total securities available for sale | Total securities available for sale | | $ | 1,604,885 | | | $ | 1,599,650 | | | $ | 302,370 | | | $ | 299,562 | | | $ | 1,907,255 | | | $ | 1,899,212 | | Total securities available for sale | | $ | 1,034,222 | | | $ | 1,030,270 | | | $ | 265,055 | | | $ | 259,650 | | | $ | 1,299,277 | | | $ | 1,289,920 | |
(1)Based on weighted average life of expected cash flowsCommercial paper and agency bonds include $31.0 million and $115.3 million as of March 31,September 30, 2023 and June 30, 2022.
(2)Certificates of deposit, corporate bonds, commercial paper, and US government bonds include $350.1 million and $303.8 million as of March 31, 2023, and June 30, 2022, respectively, classified as cash and cash equivalents within the interim condensed consolidated balance sheets.
(2)Based on weighted average life of expected cash flows as of September 30, 2023 and June 30, 2023.
Gross proceeds from matured or redeemed securities were $709.5$381.8 million and $2,863.9 million$1.7 billion for the three and nine months ended March 31,September 30, 2023 and 2022, respectively, and $949.3 million and $1,584.8 million for the three and nine months ended March 31, 2022, respectively.respectively.
For available for sale securities realized gains and losses from portfolio sales were not material for the three and nine months ended March 31, 2023. There were no portfolio sales or associated realized gains or losses for the threeSeptember 30, 2023 and nine months ended March 31, 2022,. respectively.
Non-marketable Equity Securities
Equity investments without a readily determinable fair value held at cost were $51.9 million and $43.2 million as of both March 31,September 30, 2023 and June 30, 20222023, respectively, and are included in other assets within the interim condensed consolidated balance sheets.
There have been no unrealized or realized gains and losses due to observable changes in orderly transactions and we did not record any impairment ffor tor thehe three and nine months ended March 31,September 30, 2023 and 2022.
13.12. Derivative Financial Instruments
We use derivative financial instruments (“derivatives”) to manage exposure to variable interest rates. Our primary objective in holding derivatives is to reduce the volatility in cash flows associated with our funding activities, arising from changes in interest rates. We do not employ derivatives for trading or speculative purposes.
As of March 31, 2023, we used a combination of interest rate cap agreements and interest rate swaps to manage interest costs and the risk associated with variable interest rates. FASB ASC 815-10 requires that an entity recognize all derivative instruments as either assets or liabilities in the statement of financial position. In accordance with that Subtopic, we designate certain derivative instruments as cash flow hedges, while others are not designated as hedges. Certain of our derivative agreements provide for netting arrangements for contracts that settle with the same counterparty, however, we do not offset assets and liabilities under these arrangements for financial statement presentation purposes. As such, the fair values are presented gross within other assets and accrued expenses and other liabilities. Offsetting collateral received by or paid to the counterparty is presented gross within accrued expenses and other liabilities or other assets, as applicable, on the interim condensed consolidated balance sheets.
Cash Flow Hedges
We have interest rate swaps designated as cash flow hedges in order to mitigate our exposure to changes in interest rates on our variable rate warehouse funding debt. The interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. These swaps that qualify as cash flow hedges are documented and designated as such when we enter into the contracts. In accordance with our risk management policies, we structure our hedges with terms similar to that of the item being hedged. We formally assess, at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives designated as cash flow hedges are highly effective in offsetting changes to the forecasted cash flows of the hedged items.
The gain or loss on the derivatives is recorded in other comprehensive income (loss) (“OCI”) and reclassified into earnings when the hedged cash flows are recognized in funding costs within the interim consolidated statements of operations and comprehensive income. The amount that is reclassified into earnings is presented in the interim consolidated statements of income in funding costs, the same line item in which the hedged transaction is recognized.
Derivatives Not Designated as Hedges
We have interest rate caps and interest rate swaps that are not designated as hedging instruments. We enter into these contracts to manage interest rate risk. Any changes in the fair value of these financial instruments are reflected in other income, net, on the interim condensed consolidated statements of operations and comprehensive loss.
Derivative Activity
The following table summarizes the total fair value, including interest accruals, and outstanding notional amounts of derivative instruments as of March 31,September 30, 2023 and June 30, 20222023 (in thousands):
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| | Notional Amount | | Derivative Assets | | Derivative Liabilities | | Notional Amount | | Derivative Assets | | Derivative Liabilities | | Notional Amount | | Derivative Assets | | Derivative Liabilities | | Notional Amount | | Derivative Assets | | Derivative Liabilities |
| Derivatives designated as cash flow hedges | Derivatives designated as cash flow hedges | Derivatives designated as cash flow hedges |
| Interest rate contracts - cash flow hedges | Interest rate contracts - cash flow hedges | $ | 1,100,000 | | | $ | 27 | | | $ | (284) | | | $ | — | | | $ | — | | | $ | — | | Interest rate contracts - cash flow hedges | $ | 500,000 | | | $ | 573 | | | $ | — | | | $ | 800,000 | | | $ | 751 | | | $ | — | |
| Derivatives not designated as hedges | Derivatives not designated as hedges | Derivatives not designated as hedges |
| Interest rate contracts | Interest rate contracts | 2,066,660 | | | 49,432 | | | — | | | 1,690,000 | | | 49,983 | | | — | | Interest rate contracts | 1,894,613 | | | 40,643 | | | — | | | 2,102,944 | | | 49,794 | | | — | |
| Total gross derivative assets/liabilities | Total gross derivative assets/liabilities | $ | 3,166,660 | | | $ | 49,459 | | | $ | (284) | | | $ | 1,690,000 | | | $ | 49,983 | | | $ | — | | Total gross derivative assets/liabilities | $ | 2,394,613 | | | $ | 41,216 | | | $ | — | | | $ | 2,902,944 | | | $ | 50,545 | | | $ | — | |
The following table summarizes the impact of the cash flow hedges on Accumulated Other Comprehensive Income (“AOCI”)AOCI (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, | Nine Months Ended March 31, |
| 2023 | | 2023 |
| Balance at beginning of period | | $ | — | | | $ | — | |
| Changes in fair value | | (303) | | | (303) | |
Amounts reclassified into earnings (1) | | (46) | | | (46) | |
Balance at end of period (2) | | $ | (257) | | | $ | (257) | |
| | | | | | | | |
| | Three Months Ended September 30, 2023 |
| Balance at beginning of period | | 751 | |
| Changes in fair value | | 1,014 | |
Amounts reclassified into earnings (1) | | (251) | |
Balance at end of period (2) | | $ | 1,514 | |
(1)The amounts reclassified into earnings is presented in the interim consolidated statements of income within funding costs.
(2)Over the next 12 months, we expect to reclassify $0.3$1.1 million of net pre-tax losses fromderivative gains included in AOCI into funding costs within our interim consolidated statements of operations and comprehensive income.loss.
The following table summarizes the impact of the derivative instruments on income and indicates where within the interim consolidated statements of operations and comprehensive incomeloss such impact is reported (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gains (Losses) where the Effects of Derivatives are recorded | | Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
| The effects of cash flow hedging |
| Funding Costs | | (46) | | | | | (46) | | | |
| The effects of derivatives not designated in hedging relationships |
| Other Income, net | | (3,691) | | | 35,145 | | | 33,819 | | | 38,416 | |
| | | | | | | | | | | | | | |
| Location of gains (losses) where the effects of derivatives are recorded | | Three Months Ended September 30, |
| 2023 | | 2022 |
| The effects of cash flow hedging |
| Funding costs | | 251 | | | — | |
| The effects of derivatives not designated in hedging relationships |
| Other income, net | | 3,979 | | | 30,666 | |
14.13. Fair Value of Financial Assets and Liabilities
ASC Topic 820, “Fair Value Measurement” (“ASC 820”) establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
•Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
•Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Financial Assets and Liabilities Recorded at Fair Value
The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of March 31,September 30, 2023 and June 30, 20222023 (in thousands):
| | | March 31, 2023 | | September 30, 2023 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
| Cash and cash equivalents: | Cash and cash equivalents: | | Cash and cash equivalents: | |
| Money market funds | Money market funds | | $ | 204,449 | | | $ | — | | | $ | — | | | $ | 204,449 | | Money market funds | | $ | 354,274 | | | $ | — | | | $ | — | | | $ | 354,274 | |
| | Commercial paper | Commercial paper | | — | | | 156,887 | | | — | | | 156,887 | | Commercial paper | | — | | | 31,015 | | | — | | | 31,015 | |
| | Government bonds - U.S. | | — | | | 193,175 | | | — | | | 193,175 | | |
| | Securities available for sale: | | |
| Certificate of deposit | | — | | | 145,528 | | | — | | | 145,528 | | |
| Securities, available for sale: | | Securities, available for sale: | |
| Certificates of deposit | | Certificates of deposit | | — | | | 86,503 | | | — | | | 86,503 | |
| Corporate bonds | Corporate bonds | | — | | | 292,726 | | | — | | | 292,726 | | Corporate bonds | | — | | | 248,394 | | | — | | | 248,394 | |
| Commercial paper | Commercial paper | | — | | | 186,143 | | | — | | | 186,143 | | Commercial paper | | — | | | 163,160 | | | — | | | 163,160 | |
| Agency bonds | Agency bonds | | — | | | 35,194 | | | — | | | 35,194 | | Agency bonds | | — | | | 50,552 | | | — | | | 50,552 | |
| Municipal bonds | | Municipal bonds | | — | | | 3,213 | | | — | | | 3,213 | |
| Government bonds: | Government bonds: | | Government bonds: | |
| Non-U.S. | Non-U.S. | | — | | | 6,108 | | | — | | | 6,108 | | Non-U.S. | | — | | | 9,199 | | | — | | | 9,199 | |
| U.S. | U.S. | | — | | | 367,081 | | | — | | | 367,081 | | U.S. | | — | | | 446,626 | | | — | | | 446,626 | |
| Securitization notes receivable and residual trust certificates | Securitization notes receivable and residual trust certificates | | — | | | — | | | 25,235 | | | 25,235 | | Securitization notes receivable and residual trust certificates | | — | | | — | | | 13,983 | | | 13,983 | |
| Other | | — | | | — | | | 1,016 | | | 1,016 | | |
| Servicing assets | Servicing assets | | — | | | — | | | 771 | | | 771 | | Servicing assets | | — | | | — | | | 569 | | | 569 | |
| Derivative instruments | Derivative instruments | | — | | | 49,459 | | | — | | | 49,459 | | Derivative instruments | | — | | | 41,216 | | | — | | | 41,216 | |
| Risk sharing asset | | Risk sharing asset | | — | | | — | | | 3,814 | | | 3,814 | |
| Total assets | Total assets | | $ | 204,449 | | | $ | 1,432,301 | | | $ | 27,022 | | | $ | 1,663,772 | | Total assets | | $ | 354,274 | | | $ | 1,079,878 | | | $ | 18,366 | | | $ | 1,452,518 | |
| Liabilities: | Liabilities: | | | | | | | | | Liabilities: | | | | | | | | |
| Servicing liabilities | Servicing liabilities | | $ | — | | | $ | — | | | $ | 3,674 | | | $ | 3,674 | | Servicing liabilities | | $ | — | | | $ | — | | | $ | 1,851 | | | $ | 1,851 | |
| Performance fee liability | Performance fee liability | | — | | | — | | | 1,697 | | | 1,697 | | Performance fee liability | | — | | | — | | | 1,427 | | | 1,427 | |
| Residual trust certificates, held by third-parties | Residual trust certificates, held by third-parties | | — | | | — | | | 178 | | | 178 | | Residual trust certificates, held by third-parties | | — | | | — | | | 93 | | | 93 | |
| Contingent consideration | | — | | | — | | | 14,580 | | | 14,580 | | |
| Profit share liability | Profit share liability | | — | | | — | | | 2,190 | | | 2,190 | | Profit share liability | | — | | | — | | | 1,079 | | | 1,079 | |
| Derivative instruments | | — | | | 284 | | | — | | | 284 | | |
| Risk sharing liability | | Risk sharing liability | | — | | | — | | | 471 | | | 471 | |
| Total liabilities | Total liabilities | | $ | — | | | $ | 284 | | | $ | 22,319 | | | $ | 22,603 | | Total liabilities | | $ | — | | | $ | — | | | $ | 4,921 | | | $ | 4,921 | |
| | | June 30, 2022 | | June 30, 2023 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
| Cash and cash equivalents: | Cash and cash equivalents: | | Cash and cash equivalents: | |
| Money market funds | Money market funds | | $ | 162,483 | | | $ | — | | | $ | — | | | $ | 162,483 | | Money market funds | | $ | 97,129 | | | $ | — | | | $ | — | | | $ | 97,129 | |
| Commercial paper | | Commercial paper | | — | | | 54,402 | | | — | | | 54,402 | |
| Agency bonds | | Agency bonds | | — | | | 60,865 | | | — | | | 60,865 | |
| Securities, available for sale: | | Securities, available for sale: | |
| Certificates of deposit | Certificates of deposit | | — | | | 16,026 | | | — | | | 16,026 | | Certificates of deposit | | — | | | 97,224 | | | — | | | 97,224 | |
| Commercial paper | | — | | | 229,272 | | | — | | | 229,272 | | |
| Government bonds - U.S. | | — | | | 58,541 | | | — | | | 58,541 | | |
| | Securities available for sale: | | |
| Certificate of deposit | | — | | | 300,390 | | | — | | | 300,390 | | |
| Corporate bonds | Corporate bonds | | — | | | 368,671 | | | — | | | 368,671 | | Corporate bonds | | — | | | 256,772 | | | — | | | 256,772 | |
| Commercial paper | Commercial paper | | — | | | 478,293 | | | — | | | 478,293 | | Commercial paper | | — | | | 266,193 | | | — | | | 266,193 | |
| Agency bonds | | Agency bonds | | — | | | 84,276 | | | — | | | 84,276 | |
| Government bonds: | Government bonds: | | Government bonds: | |
| Non-U.S. | Non-U.S. | | — | | | 17,955 | | | — | | | 17,955 | | Non-U.S. | | — | | | 9,151 | | | — | | | 9,151 | |
| U.S. | U.S. | | — | | | 378,386 | | | — | | | 378,386 | | U.S. | | — | | | 441,096 | | | — | | | 441,096 | |
| Securitization notes receivable and residual trust certificates | Securitization notes receivable and residual trust certificates | | — | | | — | | | 51,678 | | | 51,678 | | Securitization notes receivable and residual trust certificates | | — | | | — | | | 18,913 | | | 18,913 | |
| Other | | Other | | — | | | — | | | 1,028 | | | 1,028 | |
| Servicing assets | Servicing assets | | — | | | — | | | 1,192 | | | 1,192 | | Servicing assets | | — | | | — | | | 880 | | | 880 | |
| Derivative instruments | Derivative instruments | | — | | | 49,983 | | | — | | | 49,983 | | Derivative instruments | | — | | | 50,545 | | | — | | | 50,545 | |
| Total assets | Total assets | | $ | 162,483 | | | $ | 1,897,517 | | | $ | 52,870 | | | $ | 2,112,870 | | Total assets | | $ | 97,129 | | | $ | 1,320,524 | | | $ | 20,821 | | | $ | 1,438,474 | |
| Liabilities: | Liabilities: | | | | | | | | | Liabilities: | | | | | | | | |
| Servicing liabilities | Servicing liabilities | | $ | — | | | $ | — | | | $ | 2,673 | | | $ | 2,673 | | Servicing liabilities | | $ | — | | | $ | — | | | $ | 1,392 | | | $ | 1,392 | |
| Performance fee liability | Performance fee liability | | — | | | — | | | 1,710 | | | 1,710 | | Performance fee liability | | — | | | — | | | 1,581 | | | 1,581 | |
| Residual trust certificates, held by third-parties | Residual trust certificates, held by third-parties | | — | | | — | | | 377 | | | 377 | | Residual trust certificates, held by third-parties | | — | | | — | | | 125 | | | 125 | |
| Contingent consideration | | — | | | — | | | 23,348 | | | 23,348 | | |
| Profit share liability | Profit share liability | | — | | | — | | | 1,987 | | | 1,987 | | Profit share liability | | — | | | — | | | 1,832 | | | 1,832 | |
| Total liabilities | Total liabilities | | $ | — | | | $ | — | | | $ | 30,095 | | | $ | 30,095 | | Total liabilities | | $ | — | | | $ | — | | | $ | 4,930 | | | $ | 4,930 | |
ThereAs of September 30, 2023 and June 30, 2023, there were no transfers between levels during the periods ended March 31, 2023 and June 30, 2022.levels.
Assets and Liabilities Measured at Fair Value on a Recurring Basis (Level 2)
Marketable Securities Available for Sale
As of March 31,September 30, 2023, we held marketable securities classified as cash and cash equivalents and available for sale. Management obtains pricing from one or more third-party pricing services for the purpose of determining fair value. Whenever available, the fair value is based on quoted bid prices as of the end of the trading day. When quoted prices are not available, other methods may be utilized including evaluated prices provided by third-party pricing services.
Derivative Instruments
As of March 31,September 30, 2023 and June 30, 2022, our2023, we used a combination of interest rate cap agreements and interest rate swaps to manage interest costs and the risks associated with variable interest rates. These derivative instruments are classified as Level 2 within the fair value hierarchy, and the fair value is estimated by using third-party pricing models, which contain certain assumptions based on prices quoted for similar financial instruments in markets that are not active.readily observable market-based inputs. We validate the valuation output on a monthly basis. Refer to Note 13.12. Derivative Financial Instruments in the notes to the interim condensed consolidated financial statements for further details on our derivative instruments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis using Significant Unobservable Inputs (Level 3)
We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. Since our servicing assets and liabilities, performance fee liability, securitization notes and residual trust certificates, contingent consideration, and profit share liability, and risk sharing arrangements do not trade in an active market with readily observable prices, we use significant unobservable inputs to measure fair value.value and have classified as level 3 within the fair value hierarchy. This determination requires significant judgments to be made.
Servicing Assets and Liabilities
We sold loans with an unpaid principal balance of $1.7$2.2 billion and $5.8$2.0 billion for the three and nine months ended March 31,September 30, 2023 respectively, and $2.0 billion and $5.6 billion for the three and nine months ended March 31, 2022, respectively, for which we retained servicing rights.
As of March 31,September 30, 2023 and June 30, 2022,2023, we serviced loans which we sold with a remaining unpaid principal balance of $4.2$4.3 billion and $4.5$4.1 billion, respectively.
We use discounted cash flow models to arrive at an estimate of fair value. Significant assumptions used in the valuation of our servicing rights are as follows:
Adequate Compensation
We estimate adequate compensation as the rate a willing market participant would require for servicing loans with similar characteristics as those in the serviced portfolio.
Discount Rate
Estimated future payments to be received under servicing agreements are discounted as a part of determining the fair value of the servicing rights. For servicing rights on loans, the discount rate reflects the time value of money and a risk premium intended to reflect the amount of compensation market participants would require.
NetGross Default Rate
We estimate the timing and probability of early loan payoffs, loan defaults and write-offs, thus affecting the projected unpaid principal balance and expected term of the loan, which are used to project future servicing revenue and expenses.
We earned $21.4$20.2 million and $64.3$21.4 million of servicing income for the three and nine months ended March 31,September 30, 2023 respectively, and $23.5 million and $44.2 million for the three and nine months ended March 31, 2022, respectively.
As of March 31,September 30, 2023 and June 30, 2022,2023, the aggregate fair value of the servicing assets was measured at $0.8$0.6 million and $1.2$0.9 million, respectively, and presented within other assets on the interim condensed consolidated balance sheets. As of March 31,September 30, 2023 and June 30, 2022,2023, the aggregate fair value of the servicing liabilities was measured at $3.7$1.9 million and $2.7$1.4 million, respectively, and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets.
The following table summarizes the activity related to the aggregate fair value of our servicing assets (in thousands): | | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, | |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | |
| Fair value at beginning of period | Fair value at beginning of period | | $ | 1,093 | | | $ | 2,178 | | | $ | 1,192 | | | $ | 2,349 | | Fair value at beginning of period | | $ | 880 | | | $ | 1,192 | | |
| Initial transfers of financial assets | Initial transfers of financial assets | | — | | | 1,991 | | | 433 | | | 3,105 | | Initial transfers of financial assets | | — | | | 29 | | |
| Subsequent changes in fair value | Subsequent changes in fair value | | (322) | | | 451 | | | (854) | | | (834) | | Subsequent changes in fair value | | (311) | | | (79) | | |
| Fair value at end of period | Fair value at end of period | | $ | 771 | | | $ | 4,620 | | | $ | 771 | | | $ | 4,620 | | Fair value at end of period | | $ | 569 | | | $ | 1,142 | | |
The following table summarizes the activity related to the aggregate fair value of our servicing liabilities (in thousands): | | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, | |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | |
| Fair value at beginning of period | Fair value at beginning of period | | $ | 3,680 | | | $ | 8,626 | | | $ | 2,673 | | | $ | 3,961 | | Fair value at beginning of period | | $ | 1,392 | | | $ | 2,673 | | |
| Initial transfers of financial assets | Initial transfers of financial assets | | 1,954 | | | 2,940 | | | 6,149 | | | 13,826 | | Initial transfers of financial assets | | 1,389 | | | 1,988 | | |
| Subsequent changes in fair value | Subsequent changes in fair value | | (1,960) | | | (5,960) | | | (5,148) | | | (12,181) | | Subsequent changes in fair value | | (930) | | | (1,509) | | |
| Fair value at end of period | Fair value at end of period | | $ | 3,674 | | | $ | 5,606 | | | $ | 3,674 | | | $ | 5,606 | | Fair value at end of period | | $ | 1,851 | | | $ | 3,152 | | |
The following tables presentspresent quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of servicing assets and liabilities as of March 31,September 30, 2023 and June 30, 2022:2023:
| | | March 31, 2023 | | September 30, 2023 |
| | Unobservable Input | | Minimum | | Maximum | | Weighted Average | | Unobservable Input | | Minimum | | Maximum | | Weighted Average (3) |
| Servicing assets | Servicing assets | | Discount rate | | 30.00 | % | | 30.00 | % | | 30.00 | % | Servicing assets | | Discount rate | | 30.00 | % | | 30.00 | % | | 30.00 | % |
| | Adequate compensation (1) | | 0.75 | % | | 3.00 | % | | 0.97 | % | | Adequate compensation (1) | | 0.92 | % | | 2.31 | % | | 0.92 | % |
| | Gross default rate (2) | | 1.90 | % | | 10.64 | % | | 3.73 | % | | Gross default rate (2) | | 2.44 | % | | 12.59 | % | | 3.81 | % |
| Servicing liabilities | Servicing liabilities | | Discount rate | | 30.00 | % | | 30.00 | % | | 30.00 | % | Servicing liabilities | | Discount rate | | 30.00 | % | | 30.00 | % | | 30.00 | % |
| | Adequate compensation (1) | | 0.75 | % | | 3.00 | % | | 2.23 | % | | Adequate compensation (1) | | 0.92 | % | | 2.31 | % | | 2.29 | % |
| | Gross default rate (2) | | 10.25 | % | | 27.14 | % | | 13.35 | % | | Gross default rate (2) | | 6.02 | % | | 19.32 | % | | 13.00 | % |
| | | June 30, 2022 | | June 30, 2023 |
| | Unobservable Input | | Minimum | | Maximum | | Weighted Average | | Unobservable Input | | Minimum | | Maximum | | Weighted Average (3) |
| Servicing assets | Servicing assets | | Discount rate | | 30.00 | % | | 30.00 | % | | 30.00 | % | Servicing assets | | Discount rate | | 30.00 | % | | 30.00 | % | | 30.00 | % |
| | Adequate compensation(1) | | 0.78 | % | | 1.85 | % | | 1.10 | % | | Adequate compensation (1) | | 0.92 | % | | 2.31 | % | | 0.93 | % |
| | Gross default rate (2) | | 0.59 | % | | 50.59 | % | | 1.59 | % | | Gross default rate (2) | | 2.15 | % | | 11.20 | % | | 3.36 | % |
| Servicing liabilities | Servicing liabilities | | Discount rate | | 30.00 | % | | 30.00 | % | | 30.00 | % | Servicing liabilities | | Discount rate | | 30.00 | % | | 30.00 | % | | 30.00 | % |
| | Adequate compensation(1) | | 2.13 | % | | 2.34 | % | | 2.21 | % | | Adequate compensation (1) | | 0.92 | % | | 2.31 | % | | 2.27 | % |
| | Gross default rate (2) | | 9.03 | % | | 24.44 | % | | 13.81 | % | | Gross default rate (2) | | 9.50 | % | | 21.54 | % | | 13.64 | % |
(1)Estimated annual cost of servicing a loan as a percentage of unpaid principal balance
(2)Annualized estimated gross charge-offs as a percentage of unpaid principal balance
(3)Unobservable inputs were weighted by relative fair value
The following table summarizes the effect that adverse changes in estimates would have on the fair value of the servicing assets and liabilities given hypothetical changes in significant unobservable inputs (in thousands):
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
| Servicing assets | Servicing assets | | | | | Servicing assets | | | | |
| Gross default rate assumption: | Gross default rate assumption: | | Gross default rate assumption: | |
| Gross default rate increase of 25% | Gross default rate increase of 25% | | $ | — | | | $ | 11 | | Gross default rate increase of 25% | | $ | — | | | $ | — | |
| Gross default rate increase of 50% | Gross default rate increase of 50% | | $ | (1) | | | $ | 22 | | Gross default rate increase of 50% | | $ | — | | | $ | (1) | |
| Adequate compensation assumption: | Adequate compensation assumption: | | Adequate compensation assumption: | |
| Adequate compensation increase of 10% | Adequate compensation increase of 10% | | $ | (578) | | | $ | — | | Adequate compensation increase of 10% | | $ | (266) | | | $ | (382) | |
| Adequate compensation increase of 20% | Adequate compensation increase of 20% | | $ | (1,156) | | | $ | — | | Adequate compensation increase of 20% | | $ | (531) | | | $ | (764) | |
| Adequate compensation increase of 25% | | $ | — | | | $ | (3,513) | | |
| Adequate compensation increase of 50% | | $ | — | | | $ | (7,026) | | |
| Discount rate assumption: | Discount rate assumption: | | Discount rate assumption: | |
| Discount rate increase of 25% | Discount rate increase of 25% | | $ | (26) | | | $ | (57) | | Discount rate increase of 25% | | $ | (18) | | | $ | (29) | |
| Discount rate increase of 50% | Discount rate increase of 50% | | $ | (51) | | | $ | (109) | | Discount rate increase of 50% | | $ | (34) | | | $ | (55) | |
| Servicing liabilities | Servicing liabilities | | Servicing liabilities | |
| Gross default rate assumption: | Gross default rate assumption: | | Gross default rate assumption: | |
| Gross default rate increase of 25% | Gross default rate increase of 25% | | $ | (14) | | | $ | (10) | | Gross default rate increase of 25% | | $ | 6 | | | $ | (9) | |
| Gross default rate increase of 50% | Gross default rate increase of 50% | | $ | (28) | | | $ | (21) | | Gross default rate increase of 50% | | $ | (5) | | | $ | (19) | |
| Adequate compensation assumption: | Adequate compensation assumption: | | Adequate compensation assumption: | |
| Adequate compensation increase of 10% | Adequate compensation increase of 10% | | $ | 3,104 | | | $ | — | | Adequate compensation increase of 10% | | $ | 3,313 | | | $ | 2,798 | |
| Adequate compensation increase of 20% | Adequate compensation increase of 20% | | $ | 6,207 | | | $ | — | | Adequate compensation increase of 20% | | $ | 6,608 | | | $ | 5,597 | |
| Adequate compensation increase of 25% | | $ | — | | | $ | 6,139 | | |
| Adequate compensation increase of 50% | | $ | — | | | $ | 12,278 | | |
| Discount rate assumption: | Discount rate assumption: | | Discount rate assumption: | |
| Discount rate increase of 25% | Discount rate increase of 25% | | $ | (77) | | | $ | (50) | | Discount rate increase of 25% | | $ | (15) | | | $ | (19) | |
| Discount rate increase of 50% | Discount rate increase of 50% | | $ | (149) | | | $ | (98) | | Discount rate increase of 50% | | $ | (45) | | | $ | (38) | |
Performance Fee Liability
In accordance with our agreements with our originating bank partners, we pay a fee for each loan that is fully repaid by the consumer, due at the end of the period in which the loan is fully repaid. We recognize a liability upon the purchase of a loan for the expected future payment of the performance fee. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets. Any changes in the fair value of the liability are reflected in other income, net, on the interim condensed consolidated statements of operations and comprehensive loss.
The following table summarizes the activity related to the fair value of the performance fee liability (in thousands): | | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, | |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | |
| Fair value at beginning of period | Fair value at beginning of period | | $ | 1,876 | | | $ | 1,530 | | | $ | 1,710 | | | $ | 1,290 | | Fair value at beginning of period | | $ | 1,581 | | | $ | 1,710 | | |
| Purchases of loans | Purchases of loans | | 337 | | | 432 | | | 1,388 | | | 1,265 | | Purchases of loans | | 376 | | | 479 | | |
| Settlements Paid | | (997) | | | (418) | | | (1,498) | | | (418) | | |
| Settlements paid | | Settlements paid | | (484) | | | — | | |
| Subsequent changes in fair value | Subsequent changes in fair value | | 481 | | | 40 | | | 97 | | | (553) | | Subsequent changes in fair value | | (46) | | | (426) | | |
| Fair value at end of period | Fair value at end of period | | $ | 1,697 | | | $ | 1,584 | | | $ | 1,697 | | | $ | 1,584 | | Fair value at end of period | | $ | 1,427 | | | $ | 1,763 | | |
Significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability are the discount rate, refund rate, and default rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.
The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the performance fee liability as of March 31,September 30, 2023 and June 30, 2022:2023:
| | | March 31, 2023 | | September 30, 2023 |
| Unobservable Input | Unobservable Input | | Minimum | | Maximum | | Weighted Average | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Discount rate | Discount rate | | 10.00% | | 10.00% | | 10.00% | Discount rate | | 10.00% | | 10.00% | | 10.00% |
| Refund rate | Refund rate | | 1.50% | | 1.50% | | 1.50% | Refund rate | | 4.50% | | 4.50% | | 4.50% |
| Default rate | Default rate | | 1.78% | | 3.34% | | 2.77% | Default rate | | 1.79% | | 3.71% | | 2.89% |
| | | June 30, 2022 | | June 30, 2023 |
| Unobservable Input | Unobservable Input | | Minimum | | Maximum | | Weighted Average | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Discount rate | Discount rate | | 10.00% | | 10.00% | | 10.00% | Discount rate | | 10.00% | | 10.00% | | 10.00% |
| Refund rate | Refund rate | | 4.50% | | 4.50% | | 4.50% | Refund rate | | 4.50% | | 4.50% | | 4.50% |
| Default rate | Default rate | | 1.78% | | 3.10% | | 2.42% | Default rate | | 1.79% | | 3.34% | | 2.86% |
(1)Unobservable inputs were weighted by remaining principal balances
Residual Trust Certificates Held by Third-Parties in Consolidated VIEs
Residual trust certificates held by third-party investor(s) are measured at fair value, using a discounted cash flow model, and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets. Any changes in the fair value of the liability are reflected in other income, net, on the interim condensed consolidated statements of operations and comprehensive loss.
The following table summarizes the activity related to the fair value of the residual trust certificates held by third-parties (in thousands): | | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, | |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | |
| Fair value at beginning of period | Fair value at beginning of period | | $ | 242 | | | $ | 619 | | | $ | 377 | | | $ | 914 | | Fair value at beginning of period | | $ | 125 | | | $ | 377 | | |
| Repayments | Repayments | | (71) | | | (146) | | | (248) | | | (549) | | Repayments | | (38) | | | (99) | | |
| Subsequent changes in fair value | Subsequent changes in fair value | | 7 | | | 16 | | | 49 | | | 124 | | Subsequent changes in fair value | | 6 | | | 30 | | |
| Fair value at end of period | Fair value at end of period | | $ | 178 | | | $ | 489 | | | $ | 178 | | | $ | 489 | | Fair value at end of period | | $ | 93 | | | $ | 308 | | |
Significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties are the discount rate, loss rate, and prepayment rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.
The following table present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates held by third-parties as of March 31,September 30, 2023 and June 30, 2022:2023:
| | | March 31, 2023 | | September 30, 2023 |
| Unobservable Input | Unobservable Input | | Minimum | | Maximum | | Weighted Average | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Discount rate | Discount rate | | 10.00% | | 15.00% | | 10.00% | Discount rate | | 10.00% | | 10.00% | | 10.00% |
| Loss rate | Loss rate | | 0.75% | | 1.13% | | 0.75% | Loss rate | | 0.77% | | 0.77% | | 0.77% |
| Prepayment rate | Prepayment rate | | 4.00% | | 8.00% | | 8.00% | Prepayment rate | | 18.90% | | 18.90% | | 18.90% |
| | | June 30, 2022 | | June 30, 2023 |
| Unobservable Input | Unobservable Input | | Minimum | | Maximum | | Weighted Average | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Discount rate | Discount rate | | 10.00% | | 10.00% | | 10.00% | Discount rate | | 10.00% | | 10.00% | | 10.00% |
| Loss rate | Loss rate | | 0.75% | | 0.75% | | 0.75% | Loss rate | | 0.92% | | 0.92% | | 0.92% |
| Prepayment rate | Prepayment rate | | 8.00% | | 8.00% | | 8.00% | Prepayment rate | | 7.70% | | 7.70% | | 7.70% |
(1)Unobservable inputs were weighted by relative fair value
Retained Beneficial Interests in Unconsolidated VIEs
As of March 31,September 30, 2023, the Companywe held notes receivable and residual trust certificates with an aggregate fair value of $25.214.0 million in connection with unconsolidated securitizations. The balances correspond to the 5% economic risk retention the Company iswe are required to maintain as the securitization sponsor.
These assets are measured at fair value using a discounted cash flow model, and presented within securities available for sale at fair value on the interim condensed consolidated balance sheets. Changes in the fair value, other than declines in fair value due to credit recognized as an allowance, are reflected in other comprehensive income (loss) on the interim condensed consolidated statements of operations and comprehensive loss. Declines in fair value due to credit are reflected in other income, net on the interim condensed consolidated statements of operations and comprehensive loss.
The following table summarizes the activity related to the fair value of the notes and residual trust certificates (in thousands): | | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, | |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | |
| Fair value at beginning of period | Fair value at beginning of period | | $ | 32,766 | | | $ | 25,319 | | | $ | 51,678 | | | $ | 16,170 | | Fair value at beginning of period | | $ | 18,913 | | | $ | 51,678 | | |
| Additions | | — | | | 22,067 | | | — | | | 35,762 | | |
| Cash received (due to payments or sales) | Cash received (due to payments or sales) | | (8,012) | | | (4,414) | | | (26,847) | | | (8,798) | | Cash received (due to payments or sales) | | (5,261) | | | (9,772) | | |
| Change in unrealized gain (loss) | Change in unrealized gain (loss) | | 374 | | | (402) | | | (136) | | | (586) | | Change in unrealized gain (loss) | | 185 | | | (648) | | |
| Accrued interest | Accrued interest | | 249 | | | 215 | | | 997 | | | 285 | | Accrued interest | | 172 | | | 453 | | |
| Reversal of (impairment on) securities available for sale | Reversal of (impairment on) securities available for sale | | (143) | | | (78) | | | (458) | | | (126) | | Reversal of (impairment on) securities available for sale | | (26) | | | (208) | | |
| Fair value at end of period | Fair value at end of period | | $ | 25,235 | | | $ | 42,707 | | | $ | 25,235 | | | $ | 42,707 | | Fair value at end of period | | $ | 13,983 | | | $ | 41,503 | | |
Significant unobservable inputs used for our Level 3 fair value measurement of the notes and residual trust certificates are the discount rate, loss rate, and prepayment rate. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.
The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the residual trust certificates as of March 31,September 30, 2023 and June 30, 20222023:
| | | March 31, 2023 | | September 30, 2023 |
| Unobservable Input | Unobservable Input | | Minimum | | Maximum | | Weighted Average | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Discount rate | Discount rate | | 4.45% | | 29.84% | | 6.96% | Discount rate | | 6.21% | | 29.84% | | 7.34% |
| Loss rate | Loss rate | | 1.16% | | 17.39% | | 3.58% | Loss rate | | 0.91% | | 14.61% | | 2.63% |
| Prepayment rate | Prepayment rate | | 7.00% | | 30.30% | | 19.72% | Prepayment rate | | 6.70% | | 28.60% | | 17.59% |
| | | June 30, 2022 | | June 30, 2023 |
| Unobservable Input | Unobservable Input | | Minimum | | Maximum | | Weighted Average | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Discount rate | Discount rate | | 3.68% | | 22.50% | | 5.37% | Discount rate | | 5.72% | | 29.84% | | 7.30% |
| Loss rate | Loss rate | | 0.61% | | 10.95% | | 2.65% | Loss rate | | 1.25% | | 14.96% | | 3.02% |
| Prepayment rate | Prepayment rate | | 5.25% | | 35.00% | | 18.48% | Prepayment rate | | 5.90% | | 29.90% | | 18.10% |
(1)Unobservable inputs were weighted by relative fair value
The following table summarizes the effect that adverse changes in estimates would have on the fair value of the securitization residual trust certificates given hypothetical changes in significant unobservable inputs (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | June 30, 2022 |
| Discount rate assumption: | | | | |
| Discount rate increase of 25% | | $ | (288) | | | $ | (1,410) | |
| Discount rate increase of 50% | | $ | (566) | | | $ | (2,295) | |
| Loss rate assumption: | | | | |
| Loss rate increase of 25% | | $ | (243) | | | $ | (729) | |
| Loss rate increase of 50% | | $ | (368) | | | $ | (964) | |
| Prepayment rate assumption: | | | | |
| Prepayment rate decrease of 25% | | $ | (45) | | | $ | (545) | |
| Prepayment rate decrease of 50% | | $ | (91) | | | $ | (519) | |
Contingent Consideration
Our acquisition of PayBright, Inc. (“PayBright”) on January 1, 2021 included consideration transferred and 2,587,362 shares of our common stock held in escrow, contingent upon the achievement of future milestones. At the acquisition date, we classified the contingent consideration as a liability and estimated its fair value using a Monte Carlo simulation utilizing assumptions of simulated revenue, equity volatility, and a discount rate. The liability is remeasured to its fair value at each reporting date, utilizing a Monte Carlo simulation for periods in which actual revenues are unknown, until the contingency is resolved. During the year ended June 30, 2022, one of these milestones was achieved and 1,293,681 shares of our Class A common stock were released from escrow, resulting in a reduction to the contingent liability. During the nine months ended March 31, 2023, an additional milestone was achieved and the fair value was estimated based on the shares expected to be released from escrow multiplied by the estimated share price. The fair value estimate represents a Level 3 measurement, as the revenue milestone represents a significant unobservable input. The change in fair value of the contingent consideration at each reporting date is recognized as a component of other income, net in the interim condensed consolidated statements of operations and comprehensive loss for the respective period.
The following table summarizes the activity related to the fair value of the PayBright contingent consideration (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Fair value at beginning of period | | $ | 12,510 | | | $ | 253,750 | | | $ | 23,348 | | | $ | 153,447 | |
| Subsequent changes in fair value | | 2,109 | | | (136,248) | | | (7,193) | | | (28,682) | |
| Effect of foreign currency translation | | (39) | | | 1,506 | | | (1,575) | | | (5,757) | |
| Fair value at end of period | | $ | 14,580 | | | $ | 119,008 | | | $ | 14,580 | | | $ | 119,008 | |
| | | | | | | | | | | | | | |
| | September 30, 2023 | | June 30, 2023 |
| Discount rate assumption: | | | | |
| Discount rate increase of 25% | | $ | (156) | | | $ | (218) | |
| Discount rate increase of 50% | | $ | (306) | | | $ | (429) | |
| Loss rate assumption: | | | | |
| Loss rate increase of 25% | | $ | (108) | | | $ | (165) | |
| Loss rate increase of 50% | | $ | (157) | | | $ | (243) | |
| Prepayment rate assumption: | | | | |
| Prepayment rate decrease of 25% | | $ | (20) | | | $ | (30) | |
| Prepayment rate decrease of 50% | | $ | (40) | | | $ | (59) | |
Profit Share Liability
On January 1, 2021, we entered into a commercial agreement with an enterprise partner, in which we are obligated to share in the profitability of transactions facilitated by our platform. Upon capture of a loan under this program, we record a liability associated with the estimated future profit to be shared over the life of the loan based on estimated program profitability levels. This liability is measured using a discounted cash flow model and recorded at fair value and presented within accrued expenses and other liabilities on the interim condensed consolidated balance sheets.
The following table summarizes the activity related to the fair value of the profit share liability (in thousands):
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, | |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | |
| Fair value at beginning of period | Fair value at beginning of period | | $ | 3,697 | | | $ | 2,053 | | | $ | 1,987 | | | $ | 2,465 | | Fair value at beginning of period | | $ | 1,832 | | | $ | 1,987 | | |
| Facilitation of loans | Facilitation of loans | | 1,045 | | | 1,098 | | | 4,520 | | | 4,672 | | Facilitation of loans | | 928 | | | 1,133 | | |
| Actual performance | Actual performance | | (3,890) | | | (2,918) | | | (6,154) | | | (3,929) | | Actual performance | | 1,672 | | | (2,876) | | |
| Subsequent changes in fair value | Subsequent changes in fair value | | 1,338 | | | 1,645 | | | 1,837 | | | (1,330) | | Subsequent changes in fair value | | (3,353) | | | 1,632 | | |
| Fair value at end of period | Fair value at end of period | | $ | 2,190 | | | $ | 1,878 | | | $ | 2,190 | | | $ | 1,878 | | Fair value at end of period | | $ | 1,079 | | | $ | 1,876 | | |
Significant unobservable inputs used for our Level 3 fair value measurement of the profit share liability are the discount rate and estimated program profitability. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.
The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the profit sharing liability as of March 31,September 30, 2023 and June 30, 20222023:
| | | March 31, 2023 | | September 30, 2023 |
| Unobservable Input | Unobservable Input | | Minimum | | Maximum | | Weighted Average | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Discount rate | Discount rate | | 30.00% | | 30.00% | | 30.00% | Discount rate | | 30.00% | | 30.00% | | 30.00% |
| Program profitability | Program profitability | | 0.07% | | 1.81% | | 1.30% | Program profitability | | 0.73% | | 0.73% | | 0.73% |
| | | June 30, 2022 | | June 30, 2023 |
| Unobservable Input | Unobservable Input | | Minimum | | Maximum | | Weighted Average | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Discount rate | Discount rate | | 30.00% | | 30.00% | | 30.00% | Discount rate | | 30.00% | | 30.00% | | 30.00% |
| Program profitability | Program profitability | | 1.25% | | 3.54% | | 1.28% | Program profitability | | 1.13% | | 1.13% | | 1.13% |
(1)Unobservable inputs were weighted by relative fair value
Risk Sharing Arrangements
In connection with certain capital funding arrangements with third party loan buyers, we have entered into risk sharing agreements where we may be required to make a payment to the loan buyer or are entitled to receive a payment from the loan buyer, depending on the actual versus expected loan performance as contractually agreed to with the counterparty, and subject to a cap based on a percentage of the principal balance of loans sold. Loan performance is evaluated at a cohort level based on the month loans were sold. Through September 30, 2023 we have sold $1.3 billion unpaid principal balance of loans under these risk sharing arrangements, of which our maximum exposure to losses is $27.1 million.This amount includes our maximum potential loss with respect to risk sharing liabilities and the fair value of risk sharing assets of $3.8 million, as of September 30, 2023.
We account for these arrangements as derivatives measured at fair value with gains and losses recognized in Gain on sale of loans in our interim condensed consolidated statements of operations and comprehensive loss. For each counterparty, we have recognized a net asset or net liability based on the estimated fair value of future payments we expect to receive from or make to the counterparty. As of September 30, 2023, we held assets and liabilities related to these arrangements of $3.8 million and $0.5 million, respectively. As of June 30, 2023, we estimated that the fair value of risk sharing liabilities was $0 based on the limited time passed and available loan performance since entering into these agreements. We did not have any risk sharing arrangements where we had recognized an asset as of June 30, 2023.
As of September 30, 2023, we estimated the fair value of future settlements using a discounted cash flow model. Significant assumptions used in the valuation of our risk sharing assets and liabilities include the discount rate, loss rate and the prepayment rate.
The following table summarizes the activity related to the fair value of the risk sharing assets (in thousands): | | | | | | | | | | | | |
| | Three Months Ended September 30, 2023 | | |
| Fair value at beginning of period | | $ | — | | | | | |
| Initial transfers of financial assets | | 3,814 | | | | | |
| Subsequent changes in fair value | | — | | | | | |
| Fair value at end of period | | $ | 3,814 | | | | | |
The following table summarizes the activity related to the fair value of the risk sharing liabilities (in thousands): | | | | | | | | | | | | |
| | Three Months Ended September 30, 2023 | | |
| Fair value at beginning of period | | $ | — | | | | | |
| Initial transfers of financial liabilities | | — | | | | | |
| Subsequent changes in fair value | | 471 | | | | | |
| Fair value at end of period | | $ | 471 | | | | | |
The following tables present quantitative information about the significant unobservable inputs used for our Level 3 fair value measurement of the risk sharing arrangements as of September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2023 |
| | Unobservable Input | | Minimum | | Maximum | | Weighted Average (1) |
| Risk sharing assets | | Discount rate | | 20.00% | | 20.00% | | 20.00% |
| | Loss rate | | 9.36% | | 9.36% | | 9.36% |
| | Prepayment rate | | 31.90% | | 31.90% | | 31.90% |
| Risk sharing liabilities | | Discount rate | | 20.00% | | 20.00% | | 20.00% |
| | Loss rate | | 4.00% | | 5.16% | | 4.35% |
(1)Unobservable inputs were weighted by principal balance of loans sold under each cohort
The following table summarizes the effect that adverse changes in estimates would have on the fair value of the risk sharing assets and liabilities given hypothetical changes in significant unobservable inputs (in thousands):
| | | | | | | | |
| | September 30, 2023 |
| Risk sharing assets | | |
| Prepayment rate assumption: | | |
| Prepayment rate increase of 25% | | $ | (243,524) | |
| Prepayment rate increase of 50% | | $ | (477,053) | |
| Loss rate assumption: | | |
| Loss rate increase of 25% | | $ | (1,330,723) | |
| Loss rate increase of 50% | | $ | (2,642,491) | |
| Discount rate assumption: | | |
| Discount rate increase of 25% | | $ | (273,602) | |
| Discount rate increase of 50% | | $ | (516,753) | |
| Risk sharing liabilities | | |
| Loss rate assumption: | | |
| Loss rate increase of 25% | | $ | 9,908,013 | |
| Loss rate increase of 50% | | $ | 16,992,497 | |
| Discount rate assumption: | | |
| Discount rate increase of 25% | | $ | (23,519) | |
| Discount rate increase of 50% | | $ | (45,008) | |
Financial Assets and Liabilities Not Recorded at Fair Value
The following tables present the fair value hierarchy for financial assets and liabilities not recorded at fair value as of March 31,September 30, 2023 and June 30, 20222023 (in thousands):
| | | March 31, 2023 | | September 30, 2023 |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
| Assets: | Assets: | | | | | | | | | | | Assets: | | | | | | | | | | |
| Loans held for sale | Loans held for sale | | $ | 122 | | | $ | — | | | $ | 122 | | | $ | — | | | $ | 122 | | Loans held for sale | | $ | 145 | | | $ | — | | | $ | 145 | | | $ | — | | | $ | 145 | |
| Loans held for investment, net | Loans held for investment, net | | 3,599,206 | | | — | | | — | | | 3,816,941 | | | 3,816,941 | | Loans held for investment, net | | 4,317,354 | | | — | | | — | | | 4,482,857 | | | 4,482,857 | |
| Other assets | Other assets | | 9,637 | | | — | | | 9,637 | | | — | | | 9,637 | | Other assets | | 8,995 | | | — | | | 8,995 | | | — | | | 8,995 | |
| Total assets | Total assets | | $ | 3,608,965 | | | $ | — | | | $ | 9,759 | | | $ | 3,816,941 | | | $ | 3,826,700 | | Total assets | | $ | 4,326,494 | | | $ | — | | | $ | 9,140 | | | $ | 4,482,857 | | | $ | 4,491,996 | |
| Liabilities: | Liabilities: | | | | | | | | | | | Liabilities: | | | | | | | | | | |
Convertible senior notes, net (1) | Convertible senior notes, net (1) | | $ | 1,413,345 | | | $ | — | | | $ | 923,270 | | | $ | — | | | $ | 923,270 | | Convertible senior notes, net (1) | | $ | 1,415,080 | | | $ | — | | | $ | 1,074,772 | | | $ | — | | | $ | 1,074,772 | |
| Notes issued by securitization trusts | Notes issued by securitization trusts | | 1,788,853 | | | — | | | — | | | 1,743,862 | | | 1,743,862 | | Notes issued by securitization trusts | | 2,398,758 | | | — | | | — | | | 2,383,850 | | | 2,383,850 | |
Funding debt (2) | Funding debt (2) | | 1,527,919 | | | — | | | — | | | 1,527,869 | | | 1,527,869 | | Funding debt (2) | | 1,725,011 | | | — | | | — | | | 1,725,027 | | | 1,725,027 | |
| Total liabilities | Total liabilities | | $ | 4,730,117 | | | $ | — | | | $ | 923,270 | | | $ | 3,271,731 | | | $ | 4,195,001 | | Total liabilities | | $ | 5,538,849 | | | $ | — | | | $ | 1,074,772 | | | $ | 4,108,877 | | | $ | 5,183,649 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
| Assets: | | | | | | | | | | |
| Loans held for sale | | $ | 2,670 | | | $ | — | | | $ | 2,670 | | | $ | — | | | $ | 2,670 | |
| Loans held for investment, net | | 2,348,169 | | | — | | | — | | | 2,412,871 | | | 2,412,871 | |
| Other assets | | 12,661 | | | — | | | 12,661 | | | — | | | 12,661 | |
| Total assets | | $ | 2,363,500 | | | $ | — | | | $ | 15,331 | | | $ | 2,412,871 | | | $ | 2,428,202 | |
| Liabilities: | | | | | | | | | | |
Convertible senior notes, net (1) | | $ | 1,706,668 | | | $ | — | | | $ | 984,285 | | | $ | — | | | $ | 984,285 | |
| Notes issued by securitization trusts | | 1,627,580 | | | — | | | — | | | 1,529,401 | | | 1,529,401 | |
Funding debt (2) | | 683,395 | | | — | | | — | | | 683,388 | | | 683,388 | |
| Total liabilities | | $ | 4,017,643 | | | $ | — | | | $ | 984,285 | | | $ | 2,212,789 | | | $ | 3,197,074 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
| Assets: | | | | | | | | | | |
| Loans held for sale | | $ | 76 | | | $ | — | | | $ | 76 | | | $ | — | | | $ | 76 | |
| Loans held for investment, net | | 4,198,431 | | | — | | | — | | | 4,397,931 | | | 4,397,931 | |
| Other assets | | 9,325 | | | — | | | 9,325 | | | — | | | 9,325 | |
| Total assets | | $ | 4,207,832 | | | $ | — | | | $ | 9,401 | | | $ | 4,397,931 | | | $ | 4,407,332 | |
| Liabilities: | | | | | | | | | | |
Convertible senior notes, net (1) | | $ | 1,414,208 | | | $ | — | | | $ | 1,053,866 | | | $ | — | | | $ | 1,053,866 | |
| Notes issued by securitization trusts | | 2,165,577 | | | — | | | — | | | 1,748,772 | | | 1,748,772 | |
Funding debt (2) | | 1,775,698 | | | — | | | — | | | 1,777,635 | | | 1,777,635 | |
| Total liabilities | | $ | 5,355,483 | | | $ | — | | | $ | 1,053,866 | | | $ | 3,526,407 | | | $ | 4,580,273 | |
(1)The estimated fair value of the convertible senior notes is determined based on a market approach, using the estimated or actual bids and offers of the notes in an over-the-counter market on the last business day of the period.
(2)As of March 31,September 30, 2023 and June 30, 2022,2023, debt issuance costs in the amount of $13.8$15.3 million and $10.8$10.9 million, respectively, was included within funding debt.
15.14. Stockholders’ Equity
Common Stock
The CompanyWe had shares of common stock reserved for issuance as follows:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | June 30, 2022 |
| | | | |
| | | | |
| Available outstanding under stock option plan | | 54,341,564 | | | 53,158,233 | |
| Available for future grant under stock option plan | | 37,230,979 | | | 31,156,746 | |
| Total | | 91,572,543 | | | 84,314,979 | |
| | | | | | | | | | | | | | |
| | September 30, 2023 | | June 30, 2023 |
| | | | |
| | | | |
| Available outstanding under equity compensation plans | | 53,347,042 | | | 52,572,230 | |
| Available for future grant under equity compensation plans | | 47,162,302 | | | 37,245,232 | |
| Total | | 100,509,344 | | | 89,817,462 | |
The common stock is not redeemable. We have two classes of common stock: Class A common stock and Class B common stock. Each holder of Class A common stock has the right to one vote per share of common stock. Each holder of Class B common stock has the right to 15 votes and can be converted at any time into one share of Class A common stock. Holders of Class A and Class B common stock are entitled to notice of any stockholders’ meeting in accordance with the bylaws of the corporation, and are entitled to vote upon such matters and in such manner as may be provided by law. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the common stock are entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefore, such dividends as may be declared from time to time by the Board of Directors.
Common Stock Warrants
Common stock warrants are included as a component of additional paid in capital within the interim condensed consolidated balance sheets.
In November 2021,During the year ended June 30, 2022, we granted warrants to purchase 22,000,000 shares of common stock in connection with our commercial agreements with Amazon. 7,000,000 of the warrant shares have an exercise price of $0.01 per share and a term of 3.5 years, while the remaining 15,000,000 warrant shares have an exercise price of $100 per share and a term of 7.5 years. We valued the warrants at the grant date using the Black-Scholes-Merton option pricing model with the following assumptions: a dividend yield of zero; years to maturity of 3.5 and 7.5
years, respectively; volatility of 45%; and a risk-free rate of 0.93% and 1.47%, respectively. We recognized an asset of $133.5 million associated with the portion of the warrants that were fully vested at the grant date. Refer to Note 6. Balance Sheet Components for more information on the asset and related amortization during the period. The remaining grant-date fair value of the warrants will be recognized within our interim condensed consolidated statements of operations and comprehensive loss as a component of sales and marketing expense as the warrants vest, based upon Amazon’s satisfaction of the vesting conditions. During the three and nine months ended March 31,September 30, 2023 and 2022, a total of $104.1$106.3 million and $361.8$119.1 million, respectively, was recognized within sales and marketing expense which included $10.2$10.4 million and $31.1 million, respectively, in amortization expense of the commercial agreement asset for both periods and $93.9$95.9 million and $330.7 million, respectively, in expense based upon the grant-date fair value of the warrant shares that vested. During the three and nine months ended March 31, 2022, a total of $102.4 million and $173.0 million, respectively, was recognized within sales and marketing expense which included $10.2 million and $16.0 million, respectively, in amortization expense of the commercial agreement asset and $92.2 million and $157.0$108.7 million, respectively, in expense based upon the grant-date fair value of the warrant shares that vested.
16.15. Equity Incentive Plans
2012 Stock Plan
Under our Amended and Restated 2012 Stock Plan (the “Plan”), we may grant incentive and nonqualified stock options, restricted stock, and restricted stock units (“RSUs”) to employees, officers, directors, and consultants. As of March 31,September 30, 2023, the maximum number of shares of common stock which may be issued under the Plan is
146,209,197 161,051,508 Class A shares. As of March 31,September 30, 2023 and June 30, 2022,2023, there were 37,230,97947,162,302 and 31,156,74637,245,232 shares of Class A common stock, respectively, available for future grants under the Plan.
Stock Options
For stock options granted before our IPO in January 2021, the minimum expiration period is seven years after termination of employment or 10 years from the date of grant. For stock options granted after our IPO, the minimum expiration period is three months after termination of employment or 10 years from the date of grant. Stock options generally vest over a period of four years or with 25% vesting on the 12 month anniversary of the vesting commencement date, and the remainder vesting on a pro-rata basis each month over the next three years.
The following table summarizes our stock option activity for the ninethree months ended March 31,September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in thousands) |
| Balance as of June 30, 2022 | | 19,310,706 | | | $ | 15.22 | | | 6.94 | | |
| Granted | | 1,991,427 | | | 19.10 | | | | | |
| Exercised | | (726,425) | | | 4.39 | | | | | |
| Forfeited, expired or cancelled | | (993,984) | | | 37.14 | | | | | |
| Balance as of March 31, 2023 | | 19,581,724 | | | 14.92 | | | 6.27 | | |
| Vested and exercisable, March 31, 2023 | | 14,385,171 | | | $ | 10.14 | | | 5.61 | | $ | 62,657 | |
Vested and exercisable, and expected to vest thereafter(1) March 31, 2023 | | 19,341,889 | | | $ | 14.66 | | | 6.25 | | $ | 64,261 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in thousands) |
| Balance as of June 30, 2023 | | 18,505,138 | | | $ | 14.34 | | | 6.07 | | |
| Granted | | 1,743,514 | | | 23.35 | | | | | |
| Exercised | | (496,213) | | | 7.45 | | | | | |
| Forfeited, expired or cancelled | | (637,348) | | | 30.13 | | | | | |
| Balance as of September 30, 2023 | | 19,115,091 | | | 14.81 | | | 6.12 | | |
| Vested and exercisable, September 30, 2023 | | 14,503,031 | | | $ | 11.31 | | | 5.33 | | $ | 182,338 | |
Vested and exercisable, and expected to vest thereafter(1) September 30, 2023 | | 18,565,399 | | | $ | 14.11 | | | 6.05 | | $ | 187,952 | |
(1)Options expected to vest reflect the application of an estimated forfeiture rate.
The weighted-average grant date fair value of options granted during the ninethree months ended March 31,September 30, 2023 was $10.92.$16.10. As of March 31,September 30, 2023, unrecognized compensation expense related to unvested stock options was approximately $50.2$56.1 million, which is expected to be recognized over a remaining weighted-average period of 2.32.7 years.
When an employee exercises stock options, we collect and remit taxes on the employee’s behalf to applicable taxing authorities. As of March 31,September 30, 2023 and June 30, 2022,2023, the balance of equity exercise taxes payable was $3.2$5.8 million and $10.9$3.4 million, respectively, which is included in accounts payable on the interim condensed consolidated balance sheets.
Value Creation Award
In November 2020, in connection with an overall review of the compensation of Max Levchin, our Chief Executive Officer, in advance of the IPO, and taking into account Mr. Levchin’s leadership since the inception of the Company, the comparatively modest level of cash compensation he had received from the Company during his many years of service, and that he did not hold any unvested equity awards, the Company’s Board of Directors approved a long-term, multi-year performance-based stock option grant providing Mr. Levchin with the opportunity to earn the right to purchase up to 12,500,000 shares of the Company’s Class A common stock (the “Value Creation Award”). We recognize stock-based compensation on these awards based on the grant date fair value using an accelerated attribution method over the requisite service period, and only if performance-based conditions are considered probable of being satisfied. During the three and nine months ended March 31,September 30, 2023 and 2022, we incurred stock-based compensation expense of $20.3$19.6 million and $75.2$27.5 million, respectively, associated with the Value Creation Award as a component of general and administrative expense within the interim condensed consolidated statements
of operations and comprehensive loss. For the three and nine months ended March 31, 2022, we incurred stock-based compensation expense of $29.0 million and $113.5 million, respectively.
As of March 31,September 30, 2023, unrecognized compensation expense related to the Value Creation Award was approximately $132.2$93.3 million, which is expected to be recognized over a remaining weighted-average period of 2.82.3 years.
Restricted Stock Units
RSUs granted prior to the IPO were subject to two vesting conditions: a service-based vesting condition (i.e., employment over a period of time) and a performance-based vesting condition (i.e., a liquidity event in the form of either a change of control or an initial public offering, each as defined in the Plan), both of which must be met in order to vest. The performance-based condition was met upon the IPO. We record stock-based compensation expense for those RSUs on an accelerated attribution method over the requisite service period, which is generally four years. RSUs granted after IPO are subject to a service-based vesting condition. We record stock-based compensation expense for service-based RSUs on a straight-line basis over the requisite service period, which is generally one to four years.
During the three months ended September 30, 2023, we modified the vesting terms of approximately 5,300 RSU grants that vested on a monthly basis. Pursuant to the modified vesting schedule, these RSU grants will now vest on a quarterly basis. During the three months ended September 30, 2023, we recorded a one-time expense of $28.1 million in connection with the transition to a quarterly vesting schedule.
The following table summarizes our RSU activity during the ninethree months ended March 31,September 30, 2023:
| | | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
| Non-vested as of June 30, 2022 | | 21,387,592 | | | $ | 38.41 | | |
| Non-vested at June 30, 2023 | | Non-vested at June 30, 2023 | | 21,653,196 | | | $ | 26.99 | |
| Granted | Granted | | 15,977,301 | | | 23.18 | | Granted | | 6,626,710 | | | 18.25 | |
| Vested | Vested | | (10,118,647) | | | 34.01 | | Vested | | (5,719,367) | | | 27.65 | |
| Forfeited, expired or cancelled | Forfeited, expired or cancelled | | (4,911,072) | | | 37.43 | | Forfeited, expired or cancelled | | (828,588) | | | 26.23 | |
| Non-vested as of March 31, 2023 | | 22,335,174 | | | $ | 29.72 | | |
| Non-vested at September 30, 2023 | | Non-vested at September 30, 2023 | | 21,731,951 | | | $ | 24.18 | |
As of March 31,September 30, 2023, unrecognized compensation expense related to unvested RSUs was approximately $574.3$447.7 million, which is expected to be recognized over a remaining weighted-average period of 1.81.9 years.
2020 Employee Stock Purchase Plan
On November 18, 2020, our Board of Directors adopted and approved the 2020 Employee Stock Purchase Plan (“ESPP”). The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum effort towards the success of the Company and that of its affiliates. A total of 11.313.8 million shares of Class A common stock are reserved and available for issuance under the ESPP and 649,5801.1 million shares have been issued as of March 31,September 30, 2023. The ESPP provides for six-month offering periods beginning December 1 and June 1 of each year, with the initial six-month offering period beginning December 1, 2021.year. At the end of each offering period, shares of our Class A common stock are purchased on behalf of each ESPP participant at a price per share equal to 85% of the lesser of (1) the fair market value of the Class A common stock on first day of the offering period (the grant date) or (2) the fair market value of the Class A common stock on the last day of the offering period (the purchase date). We use the Black-Scholes-Merton option pricing model to measure the fair value of the purchase rights issued under the ESPP at the first day of the offering period, which represents the grant date. We record stock-based compensation expense on a straight-line basis over each six-month offering period, the requisite service period of the award.
Stock-Based Compensation Expense
The following table presents the components and classification of stock-based compensation (in thousands):
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | | Three Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 | | | 2023 | | 2022 |
| General and administrative | General and administrative | | $ | 54,789 | | | $ | 58,100 | | | $ | 188,788 | | | $ | 187,789 | | General and administrative | | | $ | 70,184 | | | $ | 67,340 | |
| Technology and data analytics | Technology and data analytics | | 45,040 | | | 33,639 | | | 137,002 | | | 75,133 | | Technology and data analytics | | | 35,135 | | | 43,428 | |
| Sales and marketing | Sales and marketing | | 5,840 | | | 5,998 | | | 19,517 | | | 15,655 | | Sales and marketing | | | 5,465 | | | 8,128 | |
| Processing and servicing | Processing and servicing | | 1,120 | | | 650 | | | 3,065 | | | 1,536 | | Processing and servicing | | | 1,575 | | | 912 | |
| Total stock-based compensation in operating expenses | Total stock-based compensation in operating expenses | | 106,789 | | | 98,387 | | | 348,372 | | | 280,113 | | Total stock-based compensation in operating expenses | | | 112,359 | | | 119,808 | |
| Capitalized into property, equipment and software, net | Capitalized into property, equipment and software, net | | 19,113 | | | 14,618 | | | 62,760 | | | 39,691 | | Capitalized into property, equipment and software, net | | | 38,803 | | | 21,204 | |
| Total stock-based compensation expense | | $ | 125,902 | | | $ | 113,005 | | | $ | 411,132 | | | $ | 319,804 | | |
| Total stock-based compensation | | Total stock-based compensation | | | $ | 151,162 | | | $ | 141,012 | |
In connection with the acquisition of Returnly on May 1, 2021, we issued 304,364 shares of our Class A common stock, which are held in escrow. Because the future payment of the escrowed shares is contingent on continued employment of certain employees, the arrangement represents stock-based compensation in the post combination period. The grant-date fair value was estimated based on the value of the shares at the date of closing. The escrowed shares have a requisite service period of two years and contain a performance-based vesting condition (i.e., the achievement of certain revenue targets). We record stock-based compensation expense on a straight-line basis for each tranche over the requisite service period, as long as the performance-based conditions are considered probable of being satisfied. During the nine months ended March 31, 2023, the arrangement was modified, resulting in the release of 45,459 shares from escrow and the remittance of 243,384 shares back to the Company. The modification resulted in the recognition of $2.0 million of incremental compensation cost within general and administrative expenses in our interim condensed statement of operations. As of March 31, 2023, 15,521 shares remain in escrow.
17.
16. Restructuring charges, netand other
On February 8, 2023, we committed to a restructuring plan (the “Plan”) designed to manage our operating expenses in response to current macroeconomic conditions and ongoing business prioritization efforts. As part of the plan,Plan, we reduced our workforce by approximately 500 employees, representing approximately 19% of our employees and incurred lease exit
costs related to vacating a portion of our San Francisco office.
Restructuring charges, net consistsand other consisted of $1.7 million of employee severance pay and related costs and accelerations of amortization expense for the lease asset associated with the exit of certain of our office space.three months ended September 30, 2023.
ForOur restructuring accrual activity for the three and nine months ended March 31,September 30, 2023 restructuring charges, net was comprised of the followingis summarized as follows (in thousands):
| | | | | | | | | | |
| | | | March 31, 2023 |
| | | | |
Employee severance pay and related costs | | | | $ | 28,753 | |
| | | | |
Non-cash accelerations of depreciation and amortization expense (1)
| | | | 6,181 | |
| | | | |
Restructuring charges, net | | | | $ | 34,934 | |
| | | | | | | | | | | | | | |
| | 2023
Restructuring Plan | | Other Exit and Disposal Activities (1) |
| Accrued restructuring costs, June 30, 2023 | | $ | 308 | | | $ | 2,116 | |
| Additions | | 200 | | | 1,633 | |
| Cash paid | | (168) | | | — | |
| Adjustments | | (90) | | | — | |
| | | | |
| Accrued restructuring costs, September 30, 2023 | | $ | 250 | | | $ | 3,749 | |
(1)At March 31, 2023, we had a remaining right-of-use asset of $5.2 millionIncludes employee severance pay and related costs, contract cancellation charges, among other items, related to the office closure that we expect to be fully amortized in the fourth quarter of fiscal 2023 upon fully vacating this space. For further information, refer to Note 7. Leases.
The Company’s restructuring accrual activity for the nine months ended March 31, 2023 is summarized as follows (in thousands):
| | | | | | | | |
| | |
Accrued restructuring costs, June 30, 2022 | | $ | — | |
Additions | | 26,297 | |
Cash paid | | (25,642) | |
Adjustment | | 2,548 | |
Foreign currency translation and other adjustments | | (5) | |
Accrued restructuring costs, March 31, 2023 | | $ | 3,198 | |
18.17. Income Taxes
The quarterly provision for income taxes is based on the current estimate of the annual effective income tax rate and the tax effect of discrete items occurring during the quarter. The Company’sOur quarterly provision and the estimate of the annual effective tax rate are subject to significant variation due to several factors, including variability in the pre-tax jurisdictional mix of earnings and the impact of discrete items.
For the three and nine months ended March 31,September 30, 2023, we recorded income tax expense (benefit) of $(0.8)$1.0 million and $(2.6) million, respectively, which was primarily attributable to the effects ofdeferred tax expense recognized by our Canadian subsidiary, various U.S state and other foreign income taxes, onand the tax amortization of certain intangibles. For the three months ended September 30, 2022, we recorded income tax expense (benefit) of $(0.2) million which was primarily attributable to deferred tax benefits recognized by our Canadian subsidiary and partially offset by various U.S state and other foreign income taxes, as well as the tax amortization of certain intangibles. For the three and nine months ended March 31, 2022, we recorded income tax expense (benefit) of $0.3 million and $0.7 million, respectively, which was primarily attributable to various U.S. state and foreign income taxes and the tax amortization of certain intangibles.
As of March 31,September 30, 2023, we continue to recognize a full valuation allowance against our U.S. federal and state and certain foreign net deferred tax assets. This determination was based on the assessment of the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Companyus for the prior three fiscal years. The presence of a three-year cumulative loss limits the ability to consider other subjective evidence, such as our expectations of future taxable income and projections for growth.
As a result of the integration and consolidation of our PayBright business into and with Affirm’s Canadian business, and the expansion of our overall business in Canada, as well asand other objectively verifiable positive evidence available, all of which we have concluded is sufficient to outweigh the existing negative evidence – including the presence of a three-year cumulative loss attributable to the related foreignCanadian jurisdiction, we have determined that it is more likely than not that our Canadian deferred tax assets will be realized and a valuation allowance is not required.
On August 16, 2022, the Inflation Reduction Act was enacted into U.S. federal law. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes.
19.18. Net Loss per Share Attributable to Common Stockholders
The following table presents basic and diluted net loss per share attributable to common stockholders for Class A and Class B common stock (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | 2023 | | 2023 |
| | Class A | | Class B | | Class A | | Class B |
| Numerator: | | | | | | | | |
| Net loss | | $ | (164,093) | | | $ | (41,584) | | | $ | (620,015) | | | $ | (159,368) | |
| Net loss attributable to common stockholders - basic and diluted | | $ | (164,093) | | | $ | (41,584) | | | $ | (620,015) | | | $ | (159,368) | |
| Denominator: | | | | | | | | |
| | | | | | | | |
| Weighted average shares of common stock - basic | | 237,116,053 | | | 60,088,662 | | | 233,815,676 | | | 60,099,592 | |
| | | | | | | | |
| | | | | | | | |
| Weighted average shares of common stock - diluted | | 237,116,053 | | | 60,088,662 | | | 233,815,676 | | | 60,099,592 | |
| | | | | | | | |
| | | | | | | | |
| Net loss per share: | | | | | | | | |
| Basic | | $ | (0.69) | | | $ | (0.69) | | | $ | (2.65) | | | $ | (2.65) | |
| Diluted | | $ | (0.69) | | | $ | (0.69) | | | $ | (2.65) | | | $ | (2.65) | |
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, |
| | 2022 | | 2022 | | 2023 | | 2022 |
| | Class A | | Class B | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
| Numerator: | Numerator: | | | | | | | | | Numerator: | | | | | | | | |
| Net loss | Net loss | | $ | (43,061) | | | $ | (11,610) | | | $ | (389,424) | | | $ | (131,597) | | Net loss | | $ | (138,078) | | | $ | (33,705) | | | $ | (199,355) | | | $ | (51,914) | |
| Net loss attributable to common stockholders - basic and diluted | Net loss attributable to common stockholders - basic and diluted | | $ | (43,061) | | | $ | (11,610) | | | $ | (389,424) | | | $ | (131,597) | | Net loss attributable to common stockholders - basic and diluted | | $ | (138,078) | | | $ | (33,705) | | | $ | (199,355) | | | $ | (51,914) | |
| Denominator: | Denominator: | | | | | | | | | Denominator: | | | | | | | | |
| | Weighted average shares of common stock - basic | Weighted average shares of common stock - basic | | 224,980,598 | | | 60,661,222 | | | 208,957,734 | | | 70,612,281 | | Weighted average shares of common stock - basic | | 244,224,777 | | | 59,614,893 | | | 230,821,045 | | | 60,108,225 | |
| | Weighted average shares of common stock - diluted | Weighted average shares of common stock - diluted | | 224,980,598 | | | 60,661,222 | | | 208,957,734 | | | 70,612,281 | | Weighted average shares of common stock - diluted | | 244,224,777 | | | 59,614,893 | | | 230,821,045 | | | 60,108,225 | |
| | Net loss per share: | Net loss per share: | | Net loss per share: | |
| Basic | Basic | | $ | (0.19) | | | $ | (0.19) | | | $ | (1.86) | | | $ | (1.86) | | Basic | | $ | (0.57) | | | $ | (0.57) | | | $ | (0.86) | | | $ | (0.86) | |
| Diluted | Diluted | | $ | (0.19) | | | $ | (0.19) | | | $ | (1.86) | | | $ | (1.86) | | Diluted | | $ | (0.57) | | | $ | (0.57) | | | $ | (0.86) | | | $ | (0.86) | |
The following common stock equivalents, presented based on amounts outstanding, were excluded from the calculation of diluted net loss per share attributable to common stockholders because their inclusion would have been anti-dilutive:
| | | As of March 31, | | As of September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Restricted stock units | Restricted stock units | | 22,335,174 | | | 16,351,621 | | Restricted stock units | | 21,731,951 | | | 23,341,125 | |
| Stock options, including early exercise of options | Stock options, including early exercise of options | | 19,581,724 | | | 17,195,165 | | Stock options, including early exercise of options | | 19,115,091 | | | 20,235,040 | |
| Common stock warrants | Common stock warrants | | 6,036,813 | | | 5,909,896 | | Common stock warrants | | 5,743,523 | | | 5,870,677 | |
| Employee stock purchase plan shares | Employee stock purchase plan shares | | 640,075 | | | 161,300 | | Employee stock purchase plan shares | | 476,156 | | | 524,596 | |
| Total | Total | | 48,593,786 | | | 39,617,982 | | Total | | 47,066,721 | | | 49,971,438 | |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 20222023 included in our Annual Report on Form 10-K. 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 bestsuperior 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, late 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 apply for installment loans, and upon approval, they can use the Affirm Card digitally online or in-stores to complete a purchase. Additionally, consumers can manage the pre- and post purchase split of Affirm Card transactions into loan, manage payments, open a high-yield savings account, and access a personalized marketplace.
Our companyCompany 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| (in thousands, except percentages) |
| Total Revenue, net | $ | 380,978 | | | $ | 354,762 | | | $ | 26,216 | | | 7 | % | | $ | 1,142,160 | | | $ | 985,158 | | | $ | 157,002 | | | 16 | % |
| Total Operating Expenses | 691,013 | | | 581,313 | | | 109,700 | | | 19 | % | | 2,099,194 | | | 1,573,980 | | | 525,214 | | | 33 | % |
| Operating Loss | $ | (310,035) | | | $ | (226,551) | | | $ | (83,484) | | | 37 | % | | $ | (957,034) | | | $ | (588,822) | | | $ | (368,212) | | | 63 | % |
| Other income, net | 103,522 | | | 172,139 | | | (68,617) | | | (40) | % | | 175,067 | | | 68,507 | | | 106,560 | | | 156 | % |
| Loss Before Income Taxes | $ | (206,513) | | | $ | (54,412) | | | $ | (152,101) | | | 280 | % | | $ | (781,967) | | | $ | (520,315) | | | $ | (261,652) | | | 50 | % |
| Income tax (benefit) expense | (836) | | | 259 | | | (1,095) | | | (423) | % | | (2,584) | | | 706 | | | (3,290) | | | (466) | % |
| Net Loss | $ | (205,677) | | | $ | (54,671) | | | $ | (151,006) | | | 276 | % | | $ | (779,383) | | | $ | (521,021) | | | $ | (258,362) | | | 50 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | | | | | | | 2023 | | 2022 | | $ | | % |
| | | | | | | | (in thousands, except percentages) |
| Total revenue, net | | | | | | | | | $ | 496,547 | | | $ | 361,624 | | | $ | 134,923 | | | 37 | % |
| Total operating expenses | | | | | | | | | 705,994 | | | 649,091 | | | 56,903 | | | 9 | % |
| Operating loss | | | | | | | | | $ | (209,447) | | | $ | (287,467) | | | $ | 78,020 | | | (27) | % |
| Other income, net | | | | | | | | | 38,707 | | | 36,018 | | | 2,689 | | | 7 | % |
| Loss before income taxes | | | | | | | | | $ | (170,740) | | | $ | (251,449) | | | $ | 80,709 | | | (32) | % |
| Income tax (benefit) expense | | | | | | | | | 1,043 | | | (180) | | | 1,223 | | | (679) | % |
| Net loss | | | | | | | | | $ | (171,783) | | | $ | (251,269) | | | $ | 79,486 | | | (32) | % |
Our Financial Model
Our Revenue Model
From merchants, we earn a fee when we help them convert a sale and facilitate a transaction.We have two loan product offerings: Pay-in-4 and Core loans. Pay-in-4 is a short-term payment plan with four biweekly 0% APR installments, while Core loans include all interest bearing installment loans and 0% APR monthly installment loans. 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 our 0% APR financing products. For the three and nine months ended March 31,September 30, 2023 and 2022, Pay-in-4 represented 16%15% and 19%18% of total GMV facilitated through our platform, respectively, while 0% APR Core loans represented 15%11% and 14%19%, respectively. For the three and nine months ended March 31, 2022, Pay-in-4 represented 18% and 17% of total GMV facilitated through our platform, respectively, while 0% APR Core loans represented 24% and 26%, respectively.
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. For the three months ended September 30, 2023 and 2022, interest bearing loans represented 74% and 64% of total GMV facilitated through our platform, respectively.
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. Similarly, we also facilitate the issuance of the Affirm Card, a debit card that can be used physically or virtually and which allows consumers to link a bank account to pay in full, or pay later by accessing credit through the Affirm App. 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 their preferred repayment option. A portion of these loans are funded and issued by our originating bank partners:partners, which include Cross River Bank, an FDIC-insured New Jersey state-chartered bank, and Celtic Bank, an FDIC-insured Utah state-chartered industrial bank, and Lead Bank, an FDIC-insured Missouri state-chartered 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 such 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 14.13. Fair Value of Financial Assets and Liabilities for more information on the performance fee liability.
We are also able to originate loans directly under our lending, servicing, and brokering licenses in Canada and across variousseveral states in the U.S. through our consolidated subsidiaries. We directly originated approximatelFor the three and nine months ended March 31, 2023, we originated approximately $187.9y $938.3 million, or 4%17%, and $618.3$874.5 million, or 4%, respectively, of loans in Canada compared to approximately $216.0 million, or 6%, and $645.7 million, or 6%20%, of loans for the three and nine months ended March 31, 2022, respectively. For the threeSeptember 30, 2023 and nine months ended March 31, 2023, we directly originated $690.8 million, or 15%, and $2,203.1 million, or 15%, respectively, of loans in the U.S. pursuant to our state licenses, compared to approximately $659.7 million, or 17%, and $1,774.4 million, or 16%, of loans for the three and nine months ended March 31, 2022, respectively.
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. In the normal course of business, we do not sell the servicing rights on any of the loans. 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.
Factors Affecting Our Performance
Our performance has been and may continue to be affected by many factors, including those identified below, as well as the factors discussed in the section titled “Risk Factors” in this Form 10-Q our Form 10-Q for the fiscal quarter ended December 31, 2022, and in our most recently filed Annual Report on Form 10-K for the fiscal year ended June 30, 2022.2023.
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. While we have continued to improve our equity capital efficiency, the percentage of our equity capital required as a percent of the last twelve months’ GMV increased from approximately 1% as of June 30, 2022, to approximately 2% as of March 31, 2023. The increase is due to an increase in on-balance sheet loans, and a lower percentage of our on balance sheet loans funded through securitizations, which generally require a lower percentagetotal platform portfolio has remained relatively unchanged at 5% as of equity capital compared to our warehouse credit facilities. We have elected this shift in our funding mix in response to the current market environment given our ability to allocate loans to warehouse facilities with better economic terms at a given time to support the growth of our business while optimizing cost of funds.September 30, 2023 and June 30, 2023. The mix of on-balance sheet and off-balance sheet funding is a function of how we choose to allocate loan volume, which is determined by the economic arrangements and supply of capital available to us, both of which may also impact our results in any given period.
Mix of Business on Our Platform
The shifts in volume among merchants and the mix of products that our merchants offer and our consumers purchase in any period affects our operating results. TheseThis mix impacts affect GMV, revenue, our financial results, and our key operating metric performance for that period. Differences in loan product mix relate to differentresult in varying loan durations, APR, mix, and varying proportionmix of 0% APR versusand interest-bearing financings.
Product and economic terms of commercial agreements vary 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 or not 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 willmay vary. In addition, our commercial agreement with Shopify to offer Shop Pay Installments powered by Affirm and our Pay-in-4 offering willmay continue to impact the mix of our shorter duration, low AOV products. Differences in the mix of high versus low AOV willmay 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 Pay-in-4 and other low-AOV offerings.
Seasonality
We experience seasonal fluctuations in our revenuebusiness as a result of consumer spending patterns. Historically, our revenueGMV has been the strongest during the second quarter of our fiscal year due to increases in retail commerce during the holiday season. AdverseDespite these higher GMV levels, in fiscal 2023 and 2022, we generated less in period revenue as a percentage of GMV during our second fiscal quarter due to the comparatively higher proportion of interest bearing loans originated in the latter half of the period, which typically results in lower merchant network revenue, which is recognized in period, and higher levels of interest income, which is recognized over a longer time horizon. We expect these seasonal patterns to continue in future periods, and any adverse events that occur during these monthsour second fiscal quarter could have a disproportionate effect on our financial results for the fiscal year.
Macroeconomic Environment
We regularly monitor the direct and indirect impacts of the current macroeconomic conditions on our business, financial condition, and results of operations. DuringSince fiscal 2023, the macroeconomic environment has presented a number of challenges to our business. In response to continued inflationary pressure, the U.S. Federal Reserve has raised, and may continue to raise, the federal funds interest rate. Simultaneously, economic uncertainty and the prospect of economic recession has impacted consumer spending. These developments have affected, and may continue to affect, our business and results of operations in the following ways:
•Deceleration in consumer demand: We have experienced a deceleration in consumer demand for discretionary items, which has adversely impacted GMV growth.
•Increased borrowing costs: Our costs of borrowing have increased, resulting in higher transaction costs.
•Volatile capital markets: In response to volatile capital markets conditions, we have retained more loans on our balance sheet funded through our consolidated securitizations and warehouse lines in recent fiscal quarters. Retaining loans on our balance sheet effectively delaysleads to the recognition of interest income over the life of the loan, effectively delaying the revenue associated with those loans.that would have been realized upon the loan’s sale.
•Managing delinquency rates: We are continuously optimizingcontinue to optimize our underwriting to manage delinquency rates. While these actions have adversely affected our GMV growth rates during fiscal 2023, for the quarter ended March 31,As of September 30, 2023, our 30-day delinquency rates for monthly installment loans were comparable to, and our allowance rates for loan losses improved over, those experienced during the quarter ended March 31,as of September 30, 2022.
Macroeconomic factors can also cause fluctuations of available capital in our lending marketplace due to shifts in the risk preferences of our lending partners and institutional investors or for other reasons. For example, since the beginning of March 2023, there have been public reports of instability at certain financial institutions. Despite the steps taken to date by U.S. and foreign agencies and institutions, the follow-on effects of this instability are unknown and may lead to disruptions to the businesses and operations of our funding sources.
Restructuring Plan
On February 8, 2023, we committed to a restructuring plan designed to manage our operating expenses in response to macroeconomic conditions and ongoing business prioritization efforts. As part of the plan, we reduced our workforce by approximately 500 employees, representing approximately 19% of our employees at that time, and vacated a portion of our leased San Francisco office. The implementation of the restructuring plan is now substantially complete. For further information, refer to Note 17. Restructuring charges, net to the interim condensed consolidated financial statements in this Form 10-Q.
Pricing Initiatives
We have begun implementingsubstantially implemented certain pricing initiatives that have the dual purpose of offsetting our increased funding costs while also enabling us to responsibly extend access to credit to a larger number of consumers. These pricing initiatives include the following:
•increasing the maximum APR for loans facilitated on our platform from 30% to 36%;
•increasing the merchant fees payable by some merchants on 0% APR financing products;
•expanding the use of down payments and fine-tuning the requested loan amounts;
•offering merchant-subsidized low APR loans (4-9.99%(4% to 9.99%) as an alternative to monthly 0% APR programs; and
•shortening loan lengths and minimum order sizes for monthly 0% APR programs.
Regulatory Developments
We are subject to the regulatory and enforcement authority of the Consumer Financial Protection Board (the “CFPB”) as a facilitator, servicer, acquirer or originator of consumer credit. In December 2021,As such, the CFPB issued a Request for Informationhas in the past requested reports concerning our organization, business conduct, markets, and activities, and we expect that the CFPB will continue to five of the largest BNPL providers, including us, requesting information by March 1, 2022. We timely complied with that request but expect to receive additional CFPB requests for informationdo so from time to time in the future.
In September 2022,addition, we are subject to supervision by the CFPB, published a report on the “buy now, pay later” (“BNPL”) industry. At the time that report was published, the CFPB indicated thatwhich enables it, may seekamong other things, to subject BNPL companiesconduct comprehensive and rigorous examinations to supervisory examinations. In March 2023, certain members of the U.S. Senate wroteassess our compliance with consumer financial protection laws, which in turn could result in matters requiring attention, investigations, enforcement actions, regulatory fines and mandated changes to the director of the CFPB encouraging the CFPB to “move quickly towards bringing the largest [BNPL] lenders under Federal Supervision….” In addition, based on our own communications with the CFPB, we expect the CFPB to begin to supervise companies in the BNPL industry, including, in the foreseeable future, us.business products, policies and procedures.
Key Operating Metrics
We focus on several key operating metrics to measure the performance of our business and help determine our strategic direction. In addition to revenue, net loss, and other results under U.S. GAAP, the following tables set forth key operating metrics we use to evaluate our business.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change |
| | (in thousands, except per consumer data) |
| Gross Merchandise Volume (GMV) | | $ | 4,638,580 | | | $ | 3,916,253 | | | 18 | % | | $ | 14,686,275 | | | $ | 11,086,766 | | | 32 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2023 | | 2022 | | % Change | | | | | | |
| | (in billions) |
| Gross merchandise volume (GMV) | | $ | 5.6 | | | $ | 4.4 | | | 28 | % | | | | | | |
GMV
We measure GMV to assess the volume of transactions that take place on our platform. We define GMV as the total dollar amount of all transactions on ourthe Affirm platform during the applicable period, net of refunds. GMV does not represent revenue earned by us,us; however, it is an indicator of the success of our merchants and the strength of our platform.
For the three and nine months ended March 31,September 30, 2023, GMV was $4.6$5.6 billion, and $14.7 billion, respectively, which representsrepresented an increase of approximately 18% and 32%, respectively,28% as compared to the same periodsperiod in fiscal 2022. Overall, the increase in GMV in both periods was primarily driven by the expansion of our active merchant base and increases in active consumers and average transactions per consumer. The increase in GMV for the three months ended March 31,September 30, 2023 also reflectsreflected increased consumer demand at our largest merchant partnerpartners by GMV Amazon, and increased consumer demand in our travel and ticketing category. The increase in GMV for the nine months ended March 31, 2023 was positively impacted by Affirm being an available payment option to Amazon consumers throughout fiscal 2023, while Affirm was a payment option to Amazon consumers only during a portion of fiscal 2022.and general merchandise categories.
For the three and nine months ended March 31,September 30, 2023, our top five merchants and platform partners represented approximately 40% and 42%, respectively, of total GMV, as compared to 34% and 33%, respectively,38% for the three and nine months ended March 31,September 30, 2022. GMV attributable to Amazon increased during both the three and nine months ended March 31,September 30, 2023 as compared to the same periodsperiod in fiscal 2022 but represented less than 20% of total GMV for all such periods.
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | March 31, 2022 | | % Change |
| | (in thousands, except per consumer data) |
| Active Consumers | | 16,006 | | | 12,733 | | | 26 | % |
| Transactions per Active Consumer (x) | | 3.6 | | | 2.7 | | 34 | % |
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | | September 30, 2022 | | % Change |
| | (in thousands, except per consumer data) |
| Active consumers | | 16,933 | | | 14,722 | | | 15 | % |
| Transactions per active consumer | | 4.1 | | | 3.3 | | 25 | % |
Active Consumers
We assess consumer adoption and engagement by the number of active consumers across our platform. Active consumers are the primary measure of the size of our network. We define an active consumer as a consumer who engages in at least one transaction on our platform during the 12 months prior to the measurement date.
As of March 31,September 30, 2023, we had 16.0approximately 16.9 million active consumers representinginclusive of 0.8 million active consumers who only transacted on Returnly, which represented an increase of approximately 26%15% compared to 12.7approximately 14.7 million active consumers as of March 31, 2022 reflectingSeptember 30, 2022. The increase was primarily due to a high retention rate of existing consumers and the continued growthacquisition of our network.new consumers through an expanding active merchant base.
Transactions per Active Consumer
We believe the value of our network is amplified with greater consumer engagement and repeat usage, highlighted by increased transactions per active consumer. Transactions per active consumer is defined as the average number of transactions that an active consumer has conducted on our platform during the 12 months prior to the measurement date.
As of March 31,September 30, 2023, we had approximately 3.64.1 transactions per active consumer, an increase of approximately 34%25% compared to March 31, 2022,September 30, 2022. This was primarily as a result ofdue to platform growth and a higher frequency of repeat users driven by consumer engagement.
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:presented:
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | | | Three Months Ended September 30, |
| | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % | | | | 2023 | | 2022 | | $ | | % |
| | (in thousands, except percentages) | | | (in thousands, except percentages) |
| Revenue | Revenue | | Revenue | | |
| Merchant network revenue | Merchant network revenue | $ | 119,013 | | | $ | 121,054 | | | $ | (2,041) | | | (2) | % | | $ | 366,181 | | | $ | 340,385 | | | $ | 25,796 | | | 8 | % | Merchant network revenue | | | $ | 145,950 | | | $ | 113,149 | | | $ | 32,801 | | | 29 | % |
| Virtual card network revenue | 29,469 | | | 23,169 | | | 6,300 | | | 27 | % | | 85,294 | | | 69,122 | | | 16,172 | | | 23 | % | |
| Card network revenue | | Card network revenue | | | 33,476 | | | 26,708 | | | 6,768 | | | 25 | % |
| Total network revenue | Total network revenue | 148,482 | | | 144,223 | | | 4,259 | | | 3 | % | | 451,475 | | | 409,507 | | | 41,968 | | | 10 | % | Total network revenue | | | 179,426 | | | 139,857 | | | 39,569 | | | 28 | % |
Interest income (1) | Interest income (1) | 178,270 | | | 134,599 | | | 43,671 | | | 32 | % | | 470,393 | | | 390,256 | | | 80,137 | | | 21 | % | Interest income (1) | | | 262,679 | | | 136,802 | | | 125,877 | | | 92 | % |
Gain on sales of loans (1) | Gain on sales of loans (1) | 32,813 | | | 52,484 | | | (19,671) | | | (37) | % | | 156,015 | | | 141,153 | | | 14,862 | | | 11 | % | Gain on sales of loans (1) | | | 34,285 | | | 63,595 | | | (29,310) | | | (46) | % |
| Servicing income | Servicing income | 21,413 | | | 23,456 | | | (2,043) | | | (9) | % | | 64,277 | | | 44,242 | | | 20,035 | | | 45 | % | Servicing income | | | 20,157 | | | 21,370 | | | (1,213) | | | (6) | % |
| Total Revenue, net | $ | 380,978 | | | $ | 354,762 | | | $ | 26,216 | | | 7 | % | | $ | 1,142,160 | | | $ | 985,158 | | | $ | 157,002 | | | 16 | % | |
Operating Expenses (2) | | | | | | | | | | | | | | | | |
| Total revenue, net | | Total revenue, net | | | $ | 496,547 | | | $ | 361,624 | | | $ | 134,923 | | | 37 | % |
Operating expenses (2) | | Operating expenses (2) | | | | | | | | | |
| Loss on loan purchase commitment | Loss on loan purchase commitment | $ | 31,224 | | | $ | 46,853 | | | $ | (15,629) | | | (33) | % | | $ | 105,256 | | | $ | 163,796 | | | $ | (58,540) | | | (36) | % | Loss on loan purchase commitment | | | $ | 34,866 | | | $ | 35,610 | | | $ | (744) | | | (2) | % |
| Provision for credit losses | Provision for credit losses | 66,438 | | | 66,294 | | | 144 | | | — | % | | 237,377 | | | 182,581 | | | 54,796 | | | 30 | % | Provision for credit losses | | | 99,696 | | | 64,250 | | | 35,446 | | | 55 | % |
| Funding costs | Funding costs | 51,188 | | | 15,824 | | | 35,364 | | | 223 | % | | 120,005 | | | 50,277 | | | 69,728 | | | 139 | % | Funding costs | | | 73,931 | | | 25,066 | | | 48,865 | | | 195 | % |
| Processing and servicing | Processing and servicing | 65,229 | | | 43,371 | | | 21,858 | | | 50 | % | | 186,096 | | | 110,421 | | | 75,675 | | | 69 | % | Processing and servicing | | | 75,671 | | | 54,359 | | | 21,312 | | | 39 | % |
| Technology and data analytics | Technology and data analytics | 161,792 | | | 110,291 | | | 51,501 | | | 47 | % | | 463,500 | | | 283,293 | | | 180,207 | | | 64 | % | Technology and data analytics | | | 132,965 | | | 144,961 | | | (11,996) | | | (8) | % |
| Sales and marketing | Sales and marketing | 140,942 | | | 156,214 | | | (15,272) | | | (10) | % | | 493,149 | | | 363,650 | | | 129,499 | | | 36 | % | Sales and marketing | | | 146,866 | | | 163,873 | | | (17,007) | | | (10) | % |
| General and administrative | General and administrative | 139,266 | | | 142,466 | | | (3,200) | | | (2) | % | | 458,877 | | | 419,962 | | | 38,915 | | | 9 | % | General and administrative | | | 140,334 | | | 160,972 | | | (20,638) | | | (13) | % |
| Restructuring charges, net | 34,934 | | | — | | | 34,934 | | | NM* | | 34,934 | | | — | | | 34,934 | | | NM* | |
| Total Operating Expenses | 691,013 | | | 581,313 | | | 109,700 | | | 19 | % | | 2,099,194 | | | 1,573,980 | | | 525,214 | | | 33 | % | |
| Operating Loss | $ | (310,035) | | | $ | (226,551) | | | $ | (83,484) | | | 37 | % | | $ | (957,034) | | | $ | (588,822) | | | $ | (368,212) | | | 63 | % | |
| Restructuring and other | | Restructuring and other | | | 1,665 | | | — | | | 1,665 | | | NM* |
| Total operating expenses | | Total operating expenses | | | 705,994 | | | 649,091 | | | 56,903 | | | 9 | % |
| Operating loss | | Operating loss | | | $ | (209,447) | | | $ | (287,467) | | | $ | 78,020 | | | (27) | % |
| Other income, net | Other income, net | 103,522 | | | 172,139 | | | (68,617) | | | (40) | % | | 175,067 | | | 68,507 | | | 106,560 | | | 156 | % | Other income, net | | | 38,707 | | | 36,018 | | | 2,689 | | | 7 | % |
| Loss Before Income Taxes | $ | (206,513) | | | $ | (54,412) | | | $ | (152,101) | | | 280 | % | | $ | (781,967) | | | $ | (520,315) | | | $ | (261,652) | | | 50 | % | |
| Loss before income taxes | | Loss before income taxes | | | $ | (170,740) | | | $ | (251,449) | | | $ | 80,709 | | | (32) | % |
| Income tax (benefit) expense | Income tax (benefit) expense | (836) | | | 259 | | | (1,095) | | | (423) | % | | (2,584) | | | 706 | | | (3,290) | | | (466) | % | Income tax (benefit) expense | | | 1,043 | | | (180) | | | 1,223 | | | (679) | % |
| Net Loss | $ | (205,677) | | | $ | (54,671) | | | $ | (151,006) | | | 276 | % | | $ | (779,383) | | | $ | (521,021) | | | $ | (258,362) | | | 50 | % | |
| Net loss | | Net loss | | | $ | (171,783) | | | $ | (251,269) | | | $ | 79,486 | | | (32) | % |
|
* Not meaningful
(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
the life of the loan into interest income. When a loan is sold to a third-party loan buyer or off-balance sheet securitization trust, the unamortized discount is released in full at the time of sale and recognized as part of the gain or loss on sales of loans. However, the cumulative value of the loss on loan purchase commitment or loss 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 detailstables detail activity for the discount, included in loans held for investment, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
| Balance at the beginning of the period | $ | 77,830 | | | $ | 47,960 | | | $ | 42,780 | | | $ | 53,177 | |
| Additions from loans purchased or originated, net of refunds | 58,909 | | | 87,161 | | | 201,953 | | | 286,034 | |
| Amortization of discount | (39,130) | | | (45,443) | | | (116,937) | | | (138,853) | |
| Unamortized discount released on loans sold | (8,203) | | | (40,177) | | | (37,156) | | | (150,857) | |
| Impact of foreign currency translation | (17) | | | — | | | (1,251) | | | — | |
| Balance at the end of the period | $ | 89,389 | | | $ | 49,501 | | | $ | 89,389 | | | $ | 49,501 | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | | | 2023 | | 2022 |
| | | | | (in thousands) |
| Balance at the beginning of the period | | | | | $ | 96,576 | | | $ | 42,780 | |
| Additions from loans purchased or originated, net of refunds | | | | | 52,420 | | | 70,394 | |
| Amortization of discount | | | | | (45,118) | | | (38,969) | |
| Unamortized discount released on loans sold | | | | | (13,060) | | | (15,174) | |
| Impact of foreign currency translation | | | | | (956) | | | (1,554) | |
| Balance at the end of the period | | | | | $ | 89,862 | | | $ | 57,477 | |
(2) Amounts include stock-based compensation as follows:
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | | Three Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 | | | 2023 | | 2022 |
| | (in thousands) | | | (in thousands) |
| General and administrative | General and administrative | $ | 54,789 | | | $ | 58,100 | | | $ | 188,788 | | | $ | 187,789 | | General and administrative | | $ | 70,184 | | | $ | 67,340 | |
| Technology and data analytics | Technology and data analytics | 45,040 | | | 33,639 | | | 137,002 | | | 75,133 | | Technology and data analytics | | 35,135 | | | 43,428 | |
| Sales and marketing | Sales and marketing | 5,840 | | | 5,998 | | | 19,517 | | | 15,655 | | Sales and marketing | | 5,465 | | | 8,128 | |
| Processing and servicing | Processing and servicing | 1,120 | | | 650 | | | 3,065 | | | 1,536 | | Processing and servicing | | 1,575 | | | 912 | |
| Total stock-based compensation in operating expenses | Total stock-based compensation in operating expenses | 106,789 | | | 98,387 | | | 348,372 | | | 280,113 | | Total stock-based compensation in operating expenses | | 112,359 | | | 119,808 | |
| Capitalized into property, equipment and software, net | Capitalized into property, equipment and software, net | 19,113 | | | 14,618 | | | 62,760 | | | 39,691 | | Capitalized into property, equipment and software, net | | 38,803 | | | 21,204 | |
| Total stock-based compensation expense | $ | 125,902 | | | $ | 113,005 | | | $ | 411,132 | | | $ | 319,804 | | |
| Total stock-based compensation | | Total stock-based compensation | | $ | 151,162 | | | $ | 141,012 | |
Comparison of the Three and Nine Months Ended March 31,September 30, 2023 and 2022
Merchant network revenue
Merchant network revenue is impacted by both GMV and the mix of loans originated on our platform as merchant fees vary based on loan characteristics. In particular, merchant network revenue as a percentage of GMV typically increases with longer-term, non interest-bearing loans with higher AOVs, and decreases with shorter-term, interest-bearing loans with lower AOVs.
Merchant network revenue decreasedincreased by $2.0$32.8 million, or 2%29%, for the three months ended March 31,September 30, 2023, compared to the same period in fiscal 2022. The decrease is primarily attributed to a decrease of $274.2 million in long-term non-interest bearing loans, our highest merchant fee category, for the three months ended March 31, 2023. The decrease was partially offset by an increase of $742.8 million in short term interest bearing loans, which typically have lower merchant fees, in line with the decline in merchant network revenue as a percentage of GMV discussed below.
Merchant network revenue increased by $25.8 million, or 8%, for the nine months ended March 31, 2023, compared to the same period in fiscal 2022. The increase is primarily attributed to an increase of $3.6$1.2 billion in GMV for the ninethree months ended March 31, 2023.September 30, 2023, compared to the same time period in 2022. The increase in GMV is a result of the expansion of our active merchant base from 207,049and consumers, reaching approximately 266,000 and 16.9 million, respectively, as of March 31, 2022 to 245,652September 30, 2023, up from approximately 245,000 and 14.7 million, respectively, as of March 31, 2023, an increase in active consumers from 12.7 million as of March 31, 2022 to 16.0 million as of March 31, 2023, and an increase inSeptember 30, 2022. Additionally, the average transactions per consumer increased from 2.73.3 as of March 31,September 30, 2022 to 3.64.1 as of March 31,September 30, 2023. Despite theThe increase in merchant network revenue, merchant network revenue asconsumers and average transactions per consumer is partially offset by a percentage of GMV contracted and AOVs decreased duringdecrease in AOVs. For the period. Merchant network revenue as a percentage of GMV was 2% for the ninethree months ended March 31,September 30, 2023 AOV was $299, down from 3%$331 for the same period in fiscal 2022. The decrease in AOV was $319 foris due to the nine months ended March 31, 2023, down from $377 for the same period in fiscal 2022. These decreases are the resultdiversification of a higher frequencyour merchant base and our initiative to drive repeat usage of consumers choosing Affirm as their payment option with merchants that offer shorter-term, interest-bearing loans with lower AOVs, resulting in lower merchant fees.our platform beyond one-time high AOV purchases.
Virtual cardCard network revenue
Virtual cardCard network revenue increased by $6.3$6.8 million, or 27%, and $16.2 million, or 23%25%, for the three and nine months ended March 31,September 30, 2023 respectively, compared to the same period in 2022. Virtual cardCard network revenue growth is correlated with the growth of GMV processed by our issuer processors. As such, the increase is primarily driven by $1.4 billion and $4.2$1.8 billion of GMV processed through our issuer processors, an increase of 22% and 27%35% for the three and nine months ended March 31,September 30, 2023 respectively, as compared to the same period in 2022. This is the result ofwas driven by increased card activity on our virtual card-enabled mobile application, as well as growth in existing and new merchants using our virtual card platform, growing from 1,053approximately 1,100 merchants as of March 31,September 30, 2022 to 1,2261,400 merchants
as of March 31,September 30, 2023. Virtual cardCard 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
Interest income increased by $43.7$125.9 million, or 32%, and $80.1 million, or 21%92%, for the three and nine months ended March 31,September 30, 2023, respectively, compared to the same period in fiscal 2022. Generally, interest income is correlated with the changes in the average balance of loans held for investment. The average balance of loans held for investment increased by 51%73% to $3.7 billion and 39% to $3.2$4.5 billion for the three and nine months ended March 31,September 30, 2023 respectively, compared to the same period in fiscal 2022. The increase in loans held for investment on our interim consolidated balance sheet is in response to the current market environment and our ability to allocate loans to warehouse credit facilities with better economic terms while optimizing cost of funds. Coupled withAs a result of the increase in loans held for investment on our interim consolidated balance sheet, interest income from interest bearinginterest-bearing loans increased from $95.3 million and $266.9$106.1 million for the three and nine months ended March 31,September 30, 2022 to $147.8 million and $379.8$226.2 million for three and nine months ended March 31, 2023, respectively.September 30, 2023. This increase was partially due to an increase in part duevolume of interest bearing loans which increased to 74% of total GMV for the three months ended September 30, 2023 compared to 64% of total GMV in the same period in 2022, in addition to recent pricing initiatives, including increasingthe increase of the maximum APR for loans facilitated on our platform from 30% to 36% and introducing merchant-subsidized low APR loans (4-9.99%) as an alternative to monthly 0% APR programs.replacing previously non-interest bearing loans.
Gain on sales of loans
Gain on sales of loans decreased by $19.7$29.3 million, or 37%46%, for the three months ended March 31,September 30, 2023 compared to the same period in 2022, primarily due to a2022. The decrease was partially driven by higher benchmark interest rates, which impacted pricing terms on loan sales during the period. The decrease was partially offset by an increase in loan sale volume as we retain more loans on balance sheet in response to the current market environment.third-party loan buyers. We sold loans with an unpaid principal balance of $1.7$2.2 billion for the three months ended March 31,September 30, 2023 compared to $2.0 billion for the same period in 2022.
Gain on sales of loansincreased by $14.9 million, or 11%, for the nine months ended March 31, 2023, compared to the same period in 2022, mainly driven by increased loan sale activity. We sold loans with an unpaid balance of $5.8 billion for the nine months ended March 31, 2023 compared to $5.6 billion for the same period in 2022. This increase was driven by higher loan sale volume to third-party loan buyers and optimizing the allocation of loans to loan buyers with more favorable pricing terms.
Servicing income
Servicing income includes net servicing fee revenue and fair value adjustments for servicing assets and liabilities, and is recognized for loan portfolios sold to third party loan buyers and for loans held within our off balance sheet securitizations. Servicing fee revenue varies by contractual servicing fee arrangement and is earned as a percentage of the average unpaid principal balance of loans held by each counterparty where we have a servicing agreement. We reduce servicing income for certain fees we are required to pay per our contractual servicing arrangement.
With respect to fair value adjustments, we remeasure the fair value of servicing assets and liabilities each period and recognize the change in fair value in servicing income. We utilize a discounted cash flow approach to remeasure the fair value of servicing rights. Because we earn servicing income based on the outstanding principal balance of the portfolio, fair value adjustments are impacted by the timing and amount of loan repayments. As such, over the term of each loan portfolio sold, fair value adjustments for servicing assets will decrease servicing income and fair value adjustments for servicing liabilities will increase servicing income. We discuss our valuation methodology and significant levelLevel 3 inputs for servicing assets and liabilities within Note 14.13. Fair Value of Financial Assets and Liabilities.
Servicing income decreased by $2.0$1.2 million, or 9%6%, for the three months ended March 31,September 30, 2023, compared to the same period in 2022, primarily driven by changes in fair value of servicing assets and liabilities.2022. The decrease relatedwas primarily due to changes in fair value of servicing assets and liabilities was partially offset by an increase in servicing fee revenue driven by an increase in the average unpaid principal balance of loans owned by third-party loan owners, which increaseddecreased from $4.0$4.6 billion during the three months ended March 31,September 30, 2022 to $4.5$4.4 billion during the three months ended March 31,September 30, 2023.
Servicing income increased by $20.0 million, or 45%, for the nine months ended March 31, 2023, compared to the same period in 2022, driven primarily by an increase in servicing fee revenue driven by an increase in the average unpaid principal balance
Loss on Loan Purchase Commitmentloan purchase commitment
We purchase certain loans from our originating bank partners that are processed through our platform and put back to us by our originating bank partners put back to us.. Under the terms of the agreements with our originating bank partners, we are generally required to pay the principal amount plus accrued interest for such loans. 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.
Loss on loan purchase commitment decreased by $15.6$0.7 million, or 33%, and $58.5 million, or 36%2%, for the three and nine months ended March 31,September 30, 2023 respectively, compared to the same period in 2022. This decrease was due to a decrease in the volume and concentration of long-term 0% APR loans purchased from our originating bank partners which are purchased above fair market value.value, in contrast to an increase in total loans purchased. The difference between fair value and purchase price for our loans is generally correlated with the term length and APR of the loans. As such, the reduction in the long term 0% loans purchased from our bank partner contributed to the decline in loss on loan purchase commitment. Additionally, as the percentage of our portfolio shifts towards more interest bearing loans, loss on loan purchase commitment decreases.is expected to decrease as a percentage of the originated principal amount. During the three and nine months ended March 31,September 30, 2023, we purchased $306.5$4.6 billion of loans from our originating bank partners, compared to $3.5 billion in the same period in 2022, representing an increase of 31%. Of those loans, $278.8 million and $1,056.9 million, respectively, ofwere long-term 0% APR loan receivables from our originating bank partners,for the three months ended September 30, 2023, representing a decrease of $224.6$117.8 million, or 42%30%, and $559.6 million, or 35%, respectively, compared to the same period in 2022.
Provision for Credit Lossescredit losses
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 bybased on our estimate of expected future losses on loans originated during the changeperiod and held for investment on our balance sheet, changes in estimates forour estimate of future losses on loans outstanding as of the end of the period 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.
Provision for credit losses increased by $0.1$35.4 million, or less than 1%55%, for the three months ended March 31, 2023 compared to the same period in 2022, driven by growth in the volume of loans held for investment. Loans held for investment increased by $120.0 million during the three months ended March 31, 2023 compared to a $78.0 million increase during the same period in 2022. The increase was almost entirely offset by improvements in credit quality of loans outstanding and updates to the assumptions used in our credit loss valuation model, including a refinement to the application of our stress loss multiple.
Provision for credit losses increased by $54.8 million, or 30%, for the nine months ended March 31,September 30, 2023 compared to the same period in 2022, driven by growth in the volume of loans held for investment and partially offset by improvements in credit quality of loans outstanding. Loans held for investment increased by $1,272.0 million during the nine months ended March 31,as of September 30, 2023 was $4.5 billion, an increase of $1.9 billion, or 70%, as compared to a $481.2 million increase during the same period in 2022.
Total loans held for investment was $3,775.5 million and $2,502.9 million as of March 31, 2023 and 2022, respectively. The allowance for credit losses as a percentage of loans held for investment decreased from 6.4%was 5.1% as of March 31,September 30, 2023 compared to 5.7% in the same period in 2022 to 4.7%and 4.6% as of March 31, 2023,June 30, 2023. The decrease from September 30, 2022, was primarily driven by improvements in credit quality of loans outstanding and updatesenhancements to the assumptions used in our credit loss valuation model.
Funding Costs
Funding costs consist of interest expense and the amortization of fees for certain borrowings collateralized by our loans including on balance sheet VIEs,warehouse credit facilities and consolidated securitizations, sale and repurchase agreements collateralized by our retained securitization interests, and other costs incurred in connection with funding the purchases and originations of loans. Funding costs for a given period are correlated withdriven by the sum of the average outstanding balance of funding debt and the average balance of notes issued by securitization trusts.trusts as well as our contractual interest rate and distribution of loans across funding facilities, net of the impact of any designated cash flow hedges.
Funding costs increased by $35.4$48.9 million, or 223%, and $69.7 million, or 139%195%, for the three and nine months ended March 31,September 30, 2023, respectively, compared to the same period in 2022. The increase was primarily due to higher benchmark interest rates increased utilization fees and an increase of funding debt and notes issued by securitization trustsduring the current fiscal year. Additionally,three months ended September 30, 2023. The average total of funding debt from warehouses and securitizations for the three months ended September 30, 2023 was $4.0 billion compared to $2.4 billion during the same period in 2022, an increase isof $1.6 billion, or 67%. The increase was also attributable to a larger volume of on-balance sheet loans being retained during the period. The average balance of notes issued by securitization trusts during both the three and nine months ended March 31, 2023 was $1.6 billion, respectively, compared with $1.5 billion and $1.4 billion during the same periods in 2022, respectively. The average balance of funding debt for the three and nine months ended March 31, 2023 was $1.7 billion and $1.2 billion, respectively, compared with $773.6 million and $688.9 million during the same periods in 2022, respectively. Additionally, the averageon-balance sheet loan balance on-balance sheet was $3.7 billion and $3.2$4.5 billion for the three and nine months ended March 31,September 30, 2023, respectively,an increase of 72% compared to $2.5 billion and $2.3$2.6 billion during the same period in 2022, respectively. Average total funding debt from warehouses and securitizations for the three and nine months ended March 31, 2023 increased by $963.9 million, or 42%, and $724.2 million, or 34%, respectively, compared to the same period in 2022.
Processing and Servicingservicing
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.
Processing and servicing expense increased by $21.9$21.3 million, or 50%, and $75.7 million, or 69%39%, for the three and nine months ended March 31,September 30, 2023 respectively, compared to the same period in 2022. This increase was driven primarily by an increase in payment processing fees of $9.9$11.6 million, or 39%, and $34.9 million, or 55%40%, for the three and nine months ended March 31,September 30, 2023 respectively, related to increased merchant payment volume. Additionally, during the three and nine months ended March 31,September 30, 2023, our platform fees and servicing costs increased by $5.8$7.8 million, and $20.5 million, respectively,or 107%, due to an increase in our platform partner feevolume with a large enterprise partner.
Technology and Data Analyticsdata analytics
Technology and data analytics expense consists primarily of the salaries, stock-based compensation, and personnel-related costs of our engineering, product, and productcredit and analytics employees, as well as the amortization of internally-developed software and technology intangible assets, and our creditinfrastructure and analytics employees who develop our proprietary risk model and internally-developed software.hosting costs.
Technology and data analytics expense increaseddecreased by $51.5$12.0 million, or 47%, and $180.2 million, or 64%8%, for the three and nine months ended March 31,September 30, 2023 respectively, compared to the same period in 2022. This increaseThe decrease is primarily driven by an increasea decrease of $22.5$18.1 million, or 33%, and $97.1 million, or 56%21%, in stock-based compensation and payroll and personnel-related costs for the three and nine months ended March 31,September 30, 2023 respectively, compared to the same period in 2022, resulting from efforts to continue to support our growth and technology platform. Additionally, data infrastructure and hosting costs increased by $3.1 million, or 13%, and $27.2 million, or 43%, for the three and nine months ended March 31, 2023, respectively, compared to the same period in 2022, due to increased capacity requirementshigher capitalized expenses related to internally-developed software. Additionally, data infrastructure and hosting costs decreased by $8.1 million, or 27%, for the three months ended September 30, 2023 compared to the same period in 2022, due to cost improvements achieved as a result of our technology platform drivencontract renegotiation. The decrease is partially offset by increases in active users and transactions per active consumer.
Furthermore, amortization of internally-developed software and intangible assets which increased by $24.6$11.8 million, or 257%, and $46.0 million, or 184%61%, for the three and nine months ended March 31,September 30, 2023 respectively, compared to the same period in 2022, primarily as a result of an increase in the number of capitalized projects and our periodic reassessment of the remaining useful lives of those assets.projects. Capitalized projects grew by 121%83% from 213 projects to 471approximately 330 projects as of March 31,September 30, 2022 to 610 projects as of September 30, 2023. Additionally, data provider costs increased by $1.7 million, or 19%, for the three months ended September 30, 2023, compared to the same period in 2022.2022, due to an increase in transactions on our platform.
Sales and Marketingmarketing
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.
Sales and marketing expensedecreased by $15.3$17.0 million, or 10%, during the three months ended March 31,September 30, 2023 compared to the same period in 2022. The decrease was primarily driven by a $6.2Amazon warrant expense which decreased from $119.2 million or 70%, decrease in brand and consumer marketing spend, as well as a decrease of $3.3 million, in business-to-business marketing spend duringfor the three months ended March 31, 2023, comparedSeptember 30, 2022 to the same period in 2022. Additionally, the sales and marketing expenses related to our Shopify commercial agreement decreased by $7.8$106.3 million or 47%, duringfor the three months ended March 31,September 30, 2023 due to a decrease in the number of new users to the Amazon program in the current period, which is the basis for a portion of the warrant expense. Additionally, personnel-related costs decreased by $9.9 million, or 46%, for the three months ended September 30, 2023 compared to the same period in 2022 driven by an extensionas a result of our partnership agreement, which also extended the amortization period.
Salesreduction in force and marketing expenseincreased by $129.5 million, or 36%, during the nine months ended March 31, 2023, compared to the same period in 2022.cost management plans. The increase was primarily driven by amortization on our commercial agreements with Amazon which increased from $173.0 million for the nine months ended March 31, 2022 to $361.8 million for the same period 2023. The increase wasdecrease is partially offset by a $27.2$5.6 million or 64%, decreaseincrease in brand and consumer marketing spend associated with our brand-activation, holiday shopping, lifestyle, and travel marketing campaigns, as well as a decreasethe amortization of $11.0 million, or 82%, in business-to-business marketing spend duringintangible assets for the ninethree months ended March 31, 2023 compared to the same period in 2022. Additionally, the sales and marketing expenses related to our Shopify commercial agreement decreased by $23.8 million, or 47%, during the nine months ended March 31,September 30, 2023 compared to the same period in 2022 driven by an extensiondue to accelerated amortization of Returnly’s intangibles assets related to the wind down of our partnership agreement, which also extended the amortization period.returns management platform.
General and Administrativeadministrative
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, allocated overhead, and certain discretionary expenses incurred from operating our technology platform.
General and administrative expense decreased by $3.2$20.6 million, or 2%13%, during the three months ended March 31,September 30, 2023 compared to the same period in 2022. The decrease was primarily due to a $3.3 million, or 3%, decrease in payroll and personnel-related costs, a $6.6 million, or 45%, decrease in professional service fees and contractor expenses, and a $2.9 million, or 38%, decrease in bonuses during the three months ended September 30, 2023 compared to the same period in 2022, drivenas a result of our reduction in partforce and cost management plans. Additionally insurance expense decreased by $2.0 million, or 39%, driven by a $5.4 million, or 46%, decrease in professional service feesrate reduction during policy renewals.
Restructuring and a $2.5 million, or 82%, decrease in recruiting expenses, which was offset by an increase of $4.4 million, or 4%, in payrollother
Restructuring and personnel-related related costs.
General and administrative expenseother for the three months ended September 30, 2023 increased by $38.9$1.7 million or 9%, during the nine months ended March 31, 2023 compared to the same period in 2022, primarily due to an increase of $39.7 million in payroll2022. The associated restructuring and personnel-related costs partially offset by a $9.5 million, or 32%, decrease in professional service fees.
Restructuring Charges, net
Duringother expenses during the three months ended March 31,September 30, 2023 we committed to a restructuring plan designed to manage our operating expenses in response to current macroeconomic conditions and ongoing business prioritization efforts. The associated restructuring charges during the three and nine ended March 31, 2023 were approximately $34.9 million, which included expenditures of $28.8 million relatingrelated to employee severance and other employment termination benefits and $6.2 million of accelerations of amortization expense which primarily related to the lease asset associatedoffered in connection with the exit of certainwind down of our office space. For further information, refer to Note 17. Restructuring charges, net to the interim condensed consolidated financial statements in this Form 10-Q.returns management platform, Returnly.
Other Income (Expense),(expense) income, net
Other income, net consists primarily ofincludes 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 on derivative agreements and other liabilities driven by increaseschanges in fair value, amortization of convertible debt issuance cost andas well as gains (losses) on extinguishment, revolving credit 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.costs.
Other income, (expense), net decreasedincreased by $68.6$2.7 million, or 40%7%, during the three months ended March 31, 2023 compared to the same period in 2022. The decrease is primarily driven by a $2.1 million loss related to a decrease in the fair value of our contingent consideration liability, as compared to a gain of $136.2 million in the same period in 2022, a change of $138.4 million, primarily due to changes in the fair value of our common stock. Additionally, we had a $3.7 million loss on derivative instruments compared to a $35.1 million gain during the same period in 2022. This was partially offset by an increase in interest income on investments of $21.0 million and a gain of $89.8 million on the extinguishment of convertible debt.
Other income (expense), net increased by $106.6 million, or 156%, during the nine months ended March 31,September 30, 2023 compared to the same period in 2022. The increase is primarily driven by a gain of $89.8 million on the extinguishment of convertible debt during the nine months ended March 31, 2023 and an increase in interest income from cash and investments of $10.5 million during the three months ended September 30, 2023 compared to the same period in 2022 due to higher interest rates. Additionally, we recognized a gain of $3.5 million on the changes in fair value of liabilities, primarily related to our profit sharing liability, during the three months ended September 30, 2023 compared to a loss of $5.3 million on other liabilities in the same period in 2022, an increase of $8.8 million. We also had a $9.9 million increase in other income related to the wind down of Returnly and our partnership with a third party returns provider. The increase is partially offset by a $4.0 million gain on derivative instruments during the three months ended September 30, 2023 compared to a $30.7 million gain during the same period in 2022, a decrease of $26.7 million, primarily driven by more stable interest rates.
income on investments of $48.3 million compared to the same period 2022. This increase is partially offset by a $7.2 million gain related to the fair value of our contingent consideration liability as compared to a loss of $28.7 million in the same period in 2022, a decrease of $21.5 million.
Liquidity and Capital Resources
Sources and Uses of Funds
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 credit 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. We proactively manage the allocation of loans on our platform across various funding channels based on several factors including, but not limited to, internal risk limits and policies, capital market conditions and channel economics. With rising interest rates and inflation, our excess funding capacity and committed and long-term relationships with a diverse group of existing funding partners help provide flexibility as we optimize our funding to support the growth in loan volume.
Our principal sources of liquidity are cash and cash equivalents, available for sale securities, available capacity from warehouse and revolving credit facilities, revolving securitizations, forward flow loan sale arrangements, and certain cash flows from our operations. As of March 31,September 30, 2023, we had $2.0$2.1 billion in cash and cash equivalents and available for sale securities, $2.5$2.8 billion in available funding debt capacity, remaining acrossexcluding our warehouse funding channelspurchase commitments from third party loan buyers, and $205.0 million in borrowing capacity available under our revolving credit facility.
The following table summarizes our cash, cash equivalents and investments in debt securities (in thousands):
| | | March 31, 2023 | | June 30, 2022 | | September 30, 2023 | | June 30, 2023 |
Cash and cash equivalents (1) | Cash and cash equivalents (1) | | $ | 972,477 | | | $ | 1,255,171 | | Cash and cash equivalents (1) | | $ | 1,079,261 | | | $ | 892,027 | |
Investments in short-term debt securities (2) | Investments in short-term debt securities (2) | | 826,246 | | | 1,295,811 | | Investments in short-term debt securities (2) | | 782,205 | | | 915,003 | |
Investments in long-term debt securities (2) | Investments in long-term debt securities (2) | | 232,785 | | | 299,562 | | Investments in long-term debt securities (2) | | 239,425 | | | 259,650 | |
| Cash, cash equivalent and investments in debt securities | Cash, cash equivalent and investments in debt securities | | $ | 2,031,508 | | | $ | 2,850,544 | | Cash, cash equivalent and investments in debt securities | | $ | 2,100,891 | | | $ | 2,066,680 | |
(1)Cash and cash equivalents consist of bankchecking, money market and savings accounts held at financial institutions and short term highly liquid marketable securities, including money market funds, certificates of deposits, other commercial paper, and government bonds, and other corporate securities purchased with maturities less thanan original maturity of three months.months or less.
(2)Securities available for sale at fair value primarily consist of certificates of deposits, corporate bonds, commercial paper, and government bonds. Short-term securities have maturities less than or equal to one year, and long-term securities range from greater than one year to less than five years.
Available Credit and Funding Debt
Funding Debt
Our available capacityfunding debt as of March 31,September 30, 2023 primarily includeincludes warehouse credit facilities convertible senior notes, revolving credit facilitiesand sale and repurchase liabilities.agreements. A detailed description of each of our borrowing arrangements is included in Note 10.9. Debt in the notes to the interim condensed consolidated financial statements.
The following table summarizes our funding creditdebt facilities as of March 31,September 30, 2023. The funding debt consists of warehouse credit facilities, revolving credit facilities, and repurchase liabilities:
| | Maturity Fiscal Year | Maturity Fiscal Year | | Borrowing Capacity | | Principal Outstanding | Maturity Fiscal Year | | Borrowing Capacity | | Principal Outstanding |
| | | (in thousands) | | | (in thousands) |
| 2023 | | $ | — | | | $ | 17,503 | | |
| 2024 | 2024 | | 1,048,938 | | | 598,318 | | 2024 | | $ | 700,000 | | | $ | 183,530 | |
| 2025 | 2025 | | 960,740 | | | 419,580 | | 2025 | | 842,092 | | | 390,881 | |
| 2026 | 2026 | | 834,566 | | | 231,308 | | 2026 | | 1,634,184 | | | 633,452 | |
| 2027 and thereafter | | 1,150,000 | | | 261,210 | | |
| 2027 | | 2027 | | — | | | — | |
| 2028 | | 2028 | | 26,660 | | | 26,660 | |
| Thereafter | | Thereafter | | 1,302,602 | | | 490,488 | |
| Total | Total | | $ | 3,994,244 | | | $ | 1,527,919 | | Total | | $ | 4,505,538 | | | $ | 1,725,011 | |
Warehouse Credit FacilitiesU.S.
Our warehouse credit facilities which allow us to borrow up to an aggregate of $4.0 billion, mature between 20232024 and 20292031 and subject to covenant compliance, generally permit borrowings up to 12 months prior to the final maturity date. As of March 31,September 30, 2023, we have drawn an aggregate of $1.5$1.4 billion on our warehouse credit facilities. As of March 31,September 30, 2023, we were in compliance with all applicable covenants in the agreements. Refer
International
We use various credit facilities to Note 10. Debtfinance the origination of loan receivables in Canada. Similar to our U.S. warehouse credit facilities, borrowings under these agreements are referred to as funding debt, and proceeds from the notesborrowings may only be used for the purposes of facilitating loan funding and origination. These facilities are secured by Canadian loan receivables pledged to the interim condensed consolidated financial statements included elsewhererespective facility as collateral, mature between 2025 and 2029. As of September 30, 2023, the aggregate commitment amount of these facilities was $505.5 million on a revolving basis, of which $360.4 million was drawn.
Sale and Repurchase Agreements
We have various sale and repurchase agreements pursuant to our retained interests in this Form 10-Qour off-balance sheet securitizations where we have sold these securities to a counterparty with an obligation to repurchase at a future date and price. These agreements have an initial term of three months and subject to mutual agreement by Affirm and the counterparty, we may enter into one or more repurchase date extensions, each for further detailsan additional three month term at market interest rates on such extension date. We had $5.9 million and $11.0 million in debt outstanding under our warehouse credit facilities.
Convertible Senior Notes
In November 2021, we closedsale and repurchase agreements disclosed within funding debt on the issuanceinterim consolidated balance sheets as of $1.7 billion aggregate principal amount of a convertible senior note which does not bear regular interest,September 30, 2023 and will mature on November 15, 2026 unless earlier converted, redeemed, or repurchased in accordance with their terms. During the period ended March 31,June 30, 2023, we entered into a series of privately negotiated transactions with certain holders of our 2026 Notes, pursuant to which we paid an aggregate amount of $206.6 million in cash for the repurchase of $299.1 million aggregate principal amount of our 2026 Notes. Refer to Note 10. Debt in the notes to the interim condensed consolidated financial statements for further details on our convertible debt note.respectively.
Revolving Credit Facility
In February 2022, we entered into a revolving credit agreement for a $165.0 million unsecured revolving credit facility, maturing on February 4, 2025, which was subsequently amended to increase the unsecured revolving commitments to $205.0 million. The facility contains certain covenants and restrictions, including certain financial maintenance covenants. As of March 31, 2023, we were in compliance with all applicable covenants in the agreements. To date, there are no borrowings outstanding under the facility. Refer to Note 10. Debt in the notes to the interim condensed consolidated financial statements for further details on our revolving credit facility.Other Funding Sources
Securitizations
In connection with asset-backed securitizations, we sponsor and establish trusts (deemed to be VIEs) to ultimately purchase loans facilitated by our platform. Securities issued from our asset-backed securitizations are senior or subordinated, based on the waterfall criteria of loan payments to each security class. The subordinated residual interests issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria. We consolidate securitization VIEs when we are deemed to be the primary beneficiary and therefore have
the power to direct the activities that most significantly affect the VIEs’ economic performance and a variable interest that could potentially be significant to the VIE. Where we consolidate the securitization trusts, the loans held in the securitization trusts are included in loans held for investment, and the notes sold to third-party investors are recorded in notes issued by securitization trusts in the interim condensed consolidated balance sheets. Refer to Note 11.10. Securitization and Variable Interest Entities.Entities for further details.
Revolving Credit Facility
Factors Impacting Liquidity
We believe our current levelsSeptember 30, 2023, there were no borrowings outstanding under the facility. The facility contains certain covenants and restrictions, including certain financial maintenance covenants. As of cash, cash equivalents, marketable debt securities, available borrowing capacity underSeptember 30, 2023, we were in compliance with all applicable covenants in the agreements. Refer to Note 9. Debt in the notes to the interim condensed consolidated financial statements for further details on our revolving credit facilities and other liquidity actions currently availablefacility.
Forward Flow Loan Sale Arrangements
We have forward flow loan sale arrangements that facilitate the sale of whole loans to uscounterparties. Forward flow arrangements are sufficientgenerally fixed term in nature, with term lengths ranging between one to meetthree years, during which we periodically sell loans to our liquidity requirements for at least the next 12 months. However, we cannot provide assurance 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.
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 and instability of certain financial institutions. If our available cash balances are insufficient to satisfy our liquidity requirements, we will seek additional equity or debt financing. In a rising interest rate environment, our ability to issue additional equity or incur debt may be impaired and our borrowing costs may increase. Additionally, 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 the necessary cash flows, our results of operations and financial condition could be materially and adversely impacted.counterparties.
Cash Flow Analysis
The following table provides a summary of cash flow data during the periods indicated:
| | | | | | | | | | | | | | |
| | Nine Months Ended March 31, |
| | 2023 | | 2022 |
| | (in thousands) |
| Net Cash Used in Operating Activities | | (31,608) | | | (103,085) | |
| Net Cash Used in Investing Activities | | (875,896) | | | (985,621) | |
Net Cash Provided by Financing Activities(1) | | 740,396 | | | 2,066,000 | |
(1)Amounts include net cash provided by the issuance of convertible debt as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended March 31, |
| | 2023 | | 2022 |
| | (in thousands) |
| | | | |
| | | | |
| Repurchase of convertible debt | | (206,567) | | | — | |
| Proceeds from issuance of convertible debt, net | | — | | | 1,704,300 | |
| Proceeds from issuance of common stock, net of repurchases | | 8,800 | | | 67,656 | |
| Net cash provided by equity-related financing activities | | $ | (197,767) | | | $ | 1,771,956 | |
| Net cash provided by debt-related financing activities | | 1,001,652 | | | 460,986 | |
| Payments of tax withholding for stock-based compensation | | (63,489) | | | (166,942) | |
| Net cash provided by financing activities | | $ | 740,396 | | | $ | 2,066,000 | |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2023 | | 2022 |
| | (in thousands) |
| Net cash provided by (used in) operating activities | | 98,902 | | | 51,215 | |
| Net cash provided by investing activities | | (15,859) | | | 117,273 | |
| Net cash provided by financing activities | | 148,806 | | | 199,542 | |
Cash Flows from 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.
For the ninethree months ended March 31,September 30, 2023, net cash used in operating activities of $31.6$98.9 million stemmed from a net loss of $779.4$171.8 million, an unfavorable change in our operating assets net of operating liabilities of $8.9 million, including net cash outflows from the sale and purchase of loans of $5.9 million, partially offset by a positive adjustment for non-cash items of $702.5$279.6 million. The change in operating assets net of operating liabilities was primarily a result of an increase of our purchase and sale of loans held for sale activities. We purchased loans of $1.2 billion, which was offset by proceeds from loan sales of $1.2 billion. The positive adjustment for non-cash items primarily consisted of provision for credit losses of $99.7 million, which increased by $35.4 million as a result of the growth in the volume of loans held for investment and gain on sale of loans of $34.3 million which increased by $29.3 million driven by the increase in loan sale volume to third-party loan buyer, partially offset by the amortization expense of $40.1 million associated with our commercial agreement asset with Shopify, which decreased by $12.8 million.
For the three months ended September 30, 2022, net cash provided by operating activities was $51.2 million. This reflects a net loss of $251.4 million, offset by a favorable change in our operating assets net of operating liabilities of $45.3$13.4 million, includinga favorable change in net proceeds from sale and purchase of loans of $118.5$52.6
million and a positive adjustment for non-cash items of $236.5 million. The change in operating assets net of operating liabilities was primarily a result of our purchase and sale of loans held for sale activities. We purchased loans of $4.7$1.7 billion, which was offset by proceeds from loan sales of $4.8$1.7 billion. The positive adjustment for non-cash items was primarily driven by commercial agreement assets of $330.7$108.7 million, which increased compared to the third quarter of the prior year as a result of amortization on our commercial agreements with Amazon, provision for credit losses of $237.4 million which increased by $54.8 million compared to the third quarter of the prior year, and stock-based compensation of $348.4$119.8 million, which increased by $68.3 million compared to the third quarter of the prior year saw an increase resulting from year over yearincremental compensation recognized from award modifications and increased headcount.
For the nine months ended March 31, 2022, net cash used in operating activities was $103.1 million. This reflectsheadcount, offset by a net loss on sale of $521.0loans of $63.6 million, adjusted for non-cash charges of $426.9 million, and net cash outflows of $9.0 million provided by changes in our operating assets and liabilities.
Cash Flows from Investing Activities
For the ninethree months ended March 31,September 30, 2023, net cash used inprovided by investing activities of $875.9$15.9 million was primarily attributable to purchases and origination of loans held for investment of $9.6 billion, partially offset by repayments of loans and proceeds from sale of loans of $8.3 billion. During the period we originated loans of $2.7$4.1 billion and purchasedproceeds from maturities and repayments of securities available for sale of $262.3 million, partially offset by purchases and origination of loans held for investment of $7.0 billion, representing a combined increase of $2.2 billion compared to the same period in 2022, due partly to continued growth in GMV.$4.2 billion. Loan repayments and sale of loans of $8.3$4.1 billion during the period represented an increase of $1.1$1.6 billion, compared to the same period in 2022, due in part to shifting of the length of loan terms on our balance sheet netted ofoff by higher average balance of loans held for investment compared to the same period in 2022. The additional offset duringDuring the nine months ended March 31, 2023 related to the net proceeds from maturitiesperiod we originated loans of securities available for sale$913.6 million and purchased loans of $0.6$3.3 billion, representing an increasea combined decrease of $1.1$1.5 billion compared to the same period in 2022.
For the ninethree months ended March 31,September 30, 2022, net cash used inprovided by investing activities of $985.6$117.3 million was primarily attributable to $7.5 billion of purchases and originationsorigination of loans held for investment of $2.7 billion, partially offset by repayments of loans of $2.5 billion. During the period, we originated loans of $836.8 million and purchased loans of $1.9 billion, representing an increase compared to the same quarter of the prior year, due partly to continued growth in GMV. We recorded cash outflows of approximately $770.0 million related to purchases of available for sale securities in the current period. These cash outflows were partially offset byThe repayments ofon loans of $5.9$2.5 billion during the period represented an increase compared to the same 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 obtained $1.3 billion in cashThe additional offset during the three months ended September 30, 2022 related to the net proceeds from selling loansmaturities of securities available for sale of $359.9 million, representing an increase compared to whole loan buyers and securitization investors.the same quarter of the prior year.
Cash Flows from Financing Activities
For the ninethree months ended March 31,September 30, 2023, net cash provided by financing activities of $740.4$148.8 million, was primarily attributable to net cash inflows from funding debt of $853.7 million, and the issuance and repayment of notes and certificates issued byfor the securitization trust of $165.4$234.6 million, and partially offset by net cash outflows related to the repayment of a portionfunding debt of our convertible senior notes of $206.6$42.4 million. Our payments of debt issuance costs were in the normal course of business and reflective of our recurring debt warehouse credit facility activity, which involves securing new warehouse credit facilities and extending existing warehouse credit facilities. Additionally, we paid taxes related to RSU vesting of $36.5 million.
For the three months ended September 30, 2022, net cash provided by financing activities of $199.5 million, was primarily attributable to proceeds from funding debt and notes and residual trust certificates for the securitization trusts of $1.4 billion. These were partially offset by our debt repayments related to our lending activities of $1.2 billion, of which $1.1 billion were related to our warehouse credit facilities. Our payments of debt issuance costs were in the normal course of business and reflective of our recurring warehouse credit facility activity, which involves securing new warehouse credit facilities and extending existing warehouse credit facilities. Finally, we paid taxes related to RSU vesting of $63.5$27.3 million.
For the nine months ended March 31, 2022, net cash provided by financing activities of $2.1 billion, was primarily driven by the issuance of convertible debt which resulted in net cash inflows of $1.7 billion, net of debt issuance costs. Additionally, the issuance of notes by securitization trusts resulted in net cash inflows of $265.8 million, net of in-period principal repayments, and our funding debt resulted in $203.4 million of net cash inflows as draws on our revolving credit facilities exceeded principal repayments on the debt. These cash inflows were partially offset by tax payments related to RSU vesting of $166.9 million.
Contractual Obligations
There were no material changes outside of the ordinary course of business in our commitments and contractual obligations for the three and nine months ended March 31,September 30, 2023 from the commitments and contractual obligations disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations,” set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022,2023, which was filed with the SEC on August 29, 2022.25, 2023.
Off-Balance Sheet Arrangements
In the ordinary course of business, we engage in activities that are not reflected on our interim condensed consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities involve transactions with unconsolidated VIEs, including our sponsored securitization transactions, which we contractually service.
For off-balance sheet loan sales where servicing is the only form of continuing involvement, we would onlycould 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 trust certificates. As of March 31,September 30, 2023, the aggregate outstanding balance of loans held by third-party investors for off-balance sheet VIEs was $4.2$4.3 billion. In the unlikely event principal payments on the loans backing any off-balance sheet securitization are insufficient to pay note holders of senior notes and residual trust certificates, including any retained interest,interests held by Affirm, then any amounts the Companywe contributed to the securitization reserve accounts may be depleted. Refer to Note 11.10. Securitization and Variable Interest Entities for further detailsof the accompanying notes to our interim condensed consolidated financial statements included elsewhere in this Form 10-Q for more information..
Critical Accounting Policies and Estimates
Our condenseddiscussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally acceptedU.S. GAAP and requires us to make certain estimates and judgments that affect the amounts reported in the United States. In preparing our condensed consolidated financial statements, we make judgments, estimates and assumptions that affect reported amounts of assets and liabilities, as well as revenues and expenses.statements. We base our assumptions, judgments and estimates on historical experience and on various other factorsassumptions that we believe to be reasonable under the circumstances. TheBecause certain of these accounting policies require significant judgment, our actual results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results couldmay differ materially from these estimates under different assumptions or conditions. We regularly evaluateour estimates. To the extent that there are differences between our estimates assumptions and judgments, particularly those that include the most difficult, subjective or complex judgmentsactual results, our future consolidated financial statement presentation, financial condition, results of operations, and are often about matters that are inherently uncertain.cash flows may be affected. We evaluate our critical accounting policies and estimates on an ongoing basis and update them as necessary based on changes in market conditions or factors specific to us. There have been no material changes in our significant accounting policies or critical accounting estimates during the three and nine months ended March 31,September 30, 2023.
For a complete discussion of our significant accounting policies and critical accounting estimates, refer to our Annual Report on Form 10-K for the year ended June 30, 20222023 within Note 2 to the Notes to Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Estimates”.
Recent Accounting Standards Issued, But Not Yet Adopted
Refer to Note 2. Summary of Significant Accounting Policies within the notes to the interim condensed consolidated financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations within the United States Canada, and the United Kingdom,Canada, and we are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and interest rates. Our market risk exposure is primarily the result of fluctuations in interest rates. Foreign currency exchange rates do not pose a material market risk exposure, as most of our revenue is earnedcurrent operations are primarily in the U.S. dollars.
Interest Rate Risk
Our securities available for sale at fair value as of March 31,September 30, 2023 included $1.1$1.0 billion of marketable debt securities with maturities greater than three months. A riseAn increase in interest rates would have an adverse impact on the fair market value of our fixed rate securities while floating rate securities would produce less income than expected if interest rates were to decrease. Because our investment policy is to invest in conservative, liquid investments and because our business strategy does not rely on generating material returns from our investment portfolio, we do not expect our market risk exposure on marketable debt securities to be significant.
Continued volatility in interest rates and potentially inflation, which may persist longer than previously expected, may adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates may lead to higher payment obligations on our future credit products or tobut also for consumers’ other financial commitments, including their lenders under mortgage,mortgages, credit card,cards, and other types of loans. Therefore, higher interest rates may lead to increased delinquencies, charge-offs, and allowances for loans and interest receivable, which could have an adverse effect on our operating results.
We rely on a variety of funding sources with varying degrees of interest rate sensitivities. Certain of our funding arrangements bear a variable interest rate. Given the fixed interest rates charged on the loans that we purchase from our originating bank partners or originate ourselves, a rising variable interest rate would reduce our interest margin earned in these funding arrangements. Additionally, certain of our loan sale agreements are repriced on a recurring basis using a mechanism tied to interest rates as well as loan performance. Increases in interest rates could reduce our loan sale economics. We also rely on securitization transactions, with notes typically bearing a fixed coupon. Increases inFor future securitization issuances, higher interest rates could have several outcomes. For consolidated securitizations, higher interest rates may result in higher coupons paid and therefore lowerhigher funding costs. For transactions that are not consolidated, higher interest income received on securitizations where we retain the residual interest andrates may impact overall deal economics which are a lower gain on sale for securitizations in which we sell the equity interest.function of numerous transaction terms.
We maintain an interest rate risk management program which measures and manages the potential volatility of earnings that may arise from changes in interest rates. We use interest rate derivatives to mitigate the effects of changes in interest rates on our variable rate debt which eliminates some, but not all, of the interest rate risk. Some of these contracts are designated as cash flow hedges for accounting purposes. For those contracts designated as cash flow hedges, the effective portion of the gain or loss on the derivatives is recorded in other comprehensive income (loss) and is reclassified into funding costs in the same period the hedged transaction affects earnings. Factoring in the interest rate risk management program and the repricing of investment securities, as of March 31,September 30, 2023, we estimate that a hypothetical instantaneous 100 basis point upward parallel shock to interest rates would have a less than $30.0$40.0 million adverse impact on our annual financial resultscash flows associated with our market risk sensitive instruments over the next 12 months. This measure projects the changes in cash flows associated with all assets and liabilities, including derivatives, based on contractual market rate-based repricing conditions over a twelve-month time horizon. It considers forecasted business growth and anticipated future funding mix.
Credit Risk
We have credit risk primarily related to our consumer loans held for investment. We are exposed to default risk on both loan receivables purchased from our originating bank partners and loan receivables that are directly originated. The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions. To manage this risk, we utilize our ITACsproprietary underwriting models to underwrite,make lending decisions, score, and price loans in a manner that we believe is reflective of the credit risk. Other credit levers, such as user limits and/or down payment requirements, are used to determine the likelihood of a consumer being able to pay.
To monitor portfolio performance, we utilize a wide range of internal and external metrics to review user and loan populations. Each week, management reviews performance for each customer segment, typically split by ITACs model score, financial product originated, age of loan, and delinquency status. Internal performance trendlines are measured against external factors such as unemployment, CPI, and consumer sentiment to determine what changes, if any, in risk strategy is warranted.
As of March 31,September 30, 2023 and June 30, 2022,2023, we were exposed to credit risk on $3.8$4.5 billion and $2.5$4.4 billion, respectively, of loans held on our interim condensed consolidated balance sheet. Loan receivables are diversified geographically. As of March 31,both September 30, 2023 and June 30, 2022,2023, approximately 11% and 12% of loan receivables related to customers residing in the state of California, respectively.California. No other states or provinces exceeded 10%.
We are also exposed to credit risk in the event of nonperformance by the financial institutions holding our cash and the issuers of our cash equivalents and available for sale securities. We maintain our cash deposits and cash equivalents in highly-rated, federally-insured financial institutions in excess of federally insured limits. We manage this risk by conducting business with well establishedwell-established financial institutions, diversifying our counterparties and having guidelines regarding credit rating and investment maturities to safeguard liquidity. Although, we are not substantially dependent on a single financing source and have not historically experienced any credit losses related to these financial institutions, since the beginning of March 2023, there have been public reports of instability at certain financial institutions. If multiple financing sources were to be unable to fulfill their funding obligations to us, it could have a material adverse effect on our financial condition, results of operations and cash flows.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our CEO and CFO concluded that such disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q and designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms and that it is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31,September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on the Effectiveness of Internal Control
The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, no matter how well designed and operated, can only provide reasonable, not absolute assurance that its objectives will be met. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficientsubject to provide us with effective internal control over financial reporting.the same inherent limitations outlined in this section.
Part II - Other Information
Item 1. Legal Proceedings
Please refer to Note 8. “Commitments and Contingencies” of the accompanying notes to our interim condensed consolidated financial statements.
From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. We are not presently a party to any such other legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition, or cash flows. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
The risks described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 and in our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 20222023 could materially and adversely affect our business, financial condition, and results of operations, cash flows, future prospects, and the trading price of our Class A common stock could decline.stock. The risks and uncertainties described therein are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that adversely affect our business.
You should carefully read and consider such risks, together with all of the other information in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022,2023, in this Quarterly Report on Form 10-Q (including the disclosures in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our interim condensed consolidated financial statements and related notes), and in the other documents that we file with the SEC.
Except as may be reflected in the updated risk factors included below, thereThere have been no material changes from the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 and in our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022.
The success of our business depends on our ability to work with our originating bank partners to enable effective underwriting of loans facilitated through our platform and accurately price credit risk. We currently rely on Celtic Bank to originate a majority of the loans facilitated through our platform. If our relationship with Celtic Bank terminates, or if Celtic Bank were to suspend, limit, or cease its operations or loan origination activities for any reason, and we are unable to engage another originating partner on a timely basis or at all, our business, results of operations, financial condition, and future prospects would be materially and adversely affected.
We believe that one of our core competitive advantages, and a core tenet of our platform, is our ability to work with originating bank partners to use our data-driven risk model to enable the effective underwriting of loans facilitated through our platform and to accurately and effectively price credit risk. Any deterioration in the performance of the loans facilitated through our platform, or unexpected losses on such loans, would materially and adversely affect our business and results of operations. Loan repayment underperformance would impact our interest-related and gain-on-sale income generated from loans we purchase from our originating bank partners, which are underwritten in accordance with each bank’s credit policy. Additionally, incremental charge-offs may affect future credit decisioning, growth of transaction volume, and the amount of provisions for underperforming loans we will need to take.
As of the end of the second quarter of fiscal 2023, we relied on Cross River Bank and Celtic Bank to originate a majority of the loans facilitated through our platform and to comply with various federal, state, and other laws, with the balance of the loans facilitated on our platform being originated directly under our lending, servicing,
and brokering licenses in Canada and across various states in the United States through our consolidated subsidiaries. During the first half of fiscal 2023, we began accelerating the execution of an existing strategy of identifying and engaging new originating bank partners in order to diversify our sources of loan originations. In January 2023, we made the strategic decision to begin reducing the volume of loans originated by Cross River Bank on our platform while at the same time continuing our ongoing work to identify and engage new originating bank partners. Consequently, as of March 31, 2023, Celtic Bank originates substantially all partner bank originated loans facilitated through our platform. As a result, the risks discussed in the paragraphs below relating to our reliance on Celtic Bank have increased and will remain as such unless and until we complete the process of engaging and onboarding one or more new originating bank partners. The process of engaging and onboarding new originating bank partners is inherently uncertain, and there can be no assurances as to when we will be able to complete that process.
Celtic Bank handles a variety of consumer and commercial financing programs. The Celtic Bank loan program agreement has an initial three-year term, which is scheduled to expire in calendar year 2023. In addition, upon the occurrence of certain early termination events, either we or Celtic Bank may terminate the loan program agreement immediately upon written notice to the other party. Our Celtic Bank loan program agreement does not prohibit Celtic Bank from working with our competitors or from offering competing services, and Celtic Bank currently offers loan programs through other competing platforms. Celtic Bank could decide not to work with us for any reason, could make working with us cost-prohibitive, or could decide to enter into an exclusive or more favorable relationship with one or more of our competitors. In addition, Celtic Bank may not perform as expected under our loan program agreement. We could in the future have disagreements or disputes with Celtic Bank, which could negatively impact or threaten our relationship with other originating banks with whom we may seek to partner. For a further discussion of our relationship with Celtic Bank, particularly the regulations applicable to this relationship, see “Business — Regulatory Environment” in the Annual Report on Form 10-K we filed with the SEC on August 29, 2022.
If Celtic Bank were to suspend, limit, or cease its operations or loan origination activities for any reason, or if our relationship with Celtic Bank were to otherwise terminate for any reason (including, but not limited to, its failure to comply with regulatory actions), we may need to implement an additional substantially similar arrangement with another bank, obtain additional state licenses, or curtail our operations. If we need to enter into alternative arrangements with a different bank to replace our existing arrangement, we may not be able to negotiate a comparable alternative arrangement in a timely manner or at all. In addition, transitioning loan originations to a new bank is untested and may result in delays in the issuance of loans or, if our platform becomes inoperable, may result in the inability to facilitate loans through our platform. If we are unable to enter into an alternative arrangement with different banks to fully replace or supplement our relationship with Celtic Bank, we would potentially need to obtain additional state licenses to enable us to originate loans directly, as well as comply with other state and federal laws, which would be costly and time consuming, and there can be no assurances that any such licenses could be obtained in a timely manner or at all.
We rely on a variety of funding sources to support our business model. If our existing funding arrangements are not renewed or replaced or our existing funding sources are unwilling or unable to provide funding to us on terms acceptable to us, or at all, it could have a material adverse effect on our business, results of operations, financial condition, cash flows, and future prospects.
Our high-velocity, capital efficient funding model is integral to the success of our commerce platform. To support this model and the growth of our business, we must maintain a variety of funding arrangements, including warehouse facilities, securities repurchase agreements, securitization trusts, and forward flow arrangements with a diverse set of funding sources. If we are unable to maintain access to, or to expand, our network and diversity of funding arrangements, our business, results of operations, financial condition, and future prospects could be materially and adversely affected.
We cannot guarantee that these funding arrangements will continue to be available on favorable terms or at all, and our funding strategy may change over time and depends on the availability of such funding arrangements.
Disruptions in the credit markets or other factors, such as the current inflationary environment and rising interest rates, could adversely affect the availability, diversity, cost, and terms of our funding arrangements.
Since the beginning of March 2023, there have been public reports of instability at certain financial institutions. Despite the steps taken to date by U.S. and foreign agencies and institutions, the follow-on effects of this instability are unknown and may lead to disruptions to the businesses and operations of our funding sources. Although we are not substantially dependent on a single financing source, if multiple financing sources were to be unable to fulfill their funding obligations to us, it could have a material adverse effect on our financial condition, results of operations and cash flows.
In addition, our funding sources may reassess their exposure to our industry and either curtail access to uncommitted financing capacity, fail to renew or extend facilities, or impose higher costs to access our funding. Further, our debt financing and loan sale forward flow facilities are generally fixed term in nature, with term lengths ranging between one to three years, during which we have access to committed capital pursuant to such facilities. If our existing funding arrangements are not renewed or replaced or our existing funding sources are unwilling or unable to provide funding to us on terms acceptable to us, or at all, we would need to secure additional sources of funding or reduce our operations significantly. The availability and diversity of our funding arrangements depends on various factors and are subject to numerous risks, many of which are outside of our control.
The agreements governing our funding arrangements require us to comply with certain covenants. A breach of such covenants or other events of default under our funding agreements could result in the reduction or termination of our access to such funding, could increase our cost of such funding or, in some cases, could give our lenders the right to require repayment of the loans prior to their scheduled maturity. Certain of these covenants are tied to our consumer default rates, which may be significantly affected by factors, such as economic downturns or general economic conditions, that are beyond our control and beyond the control of individual consumers. In addition, our revolving credit facility contains (a) certain covenants and restrictions that limit our and our subsidiaries’ ability to, among other things: incur additional debt; create liens on certain assets; pay dividends on or make distributions in respect of their capital stock or make other restricted payments; consolidate, merge, sell, or otherwise dispose of all or substantially all of their assets; and enter into certain transactions with their affiliates, and (b) certain financial maintenance covenants that require us and our subsidiaries to not exceed a specified leverage ratio, to maintain a minimum tangible net worth, and to maintain a minimum level of unrestricted cash while any borrowings under the revolving credit facility are outstanding.
In the future, we may seek to further access the capital markets to obtain capital to finance growth. However, our future access to the capital markets could be restricted due to a variety of factors, including a deterioration of our earnings, cash flows, balance sheet quality, or overall business or industry prospects, adverse regulatory changes, a disruption to or volatility or deterioration in the state of the capital markets, or a negative bias toward our industry by market participants. Due to the negative bias toward our industry, certain financial institutions have restricted access to available financing by participants in our industry, and we may have more limited access to institutional capital than other businesses. Future prevailing capital market conditions and potential disruptions in the capital markets may adversely affect our efforts to arrange additional financing on terms that are satisfactory to us, if at all. If adequate funds are not available, or are not available on acceptable terms, we may not have sufficient liquidity to fund our operations, make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges and this, in turn, could adversely affect our ability to advance our strategic plans. In addition, if the capital and credit markets experience volatility, and the availability of funds is limited, third-parties with whom we do business may incur increased costs or business disruption and this could adversely affect our business relationships with such third-parties, which in turn could have a material adverse effect on our business, results of operations, financial condition, cash flows, and future prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.Rule 10b5-1 Trading Plans
During the quarter ended September 30, 2023, the following officer, as defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement” as defined in Regulation S-K Item 408, as follows:
On September 15, 2023, Michael Linford, our Chief Financial Officer, adopted a Rule 10b5-1 trading arrangement providing for the sale of the Company's Class A common stock (a "Rule 10b5-1 Trading Plan") that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c). Mr. Linford's Rule 10b5-1
Trading Plan provides for the exercise of up to 315,000 employee stock options and sale of the underlying shares of our Class A common stock pursuant to one or more limit orders until April 30, 2024, or earlier if all transactions under the trading arrangement are completed.
No other officers or directors, as defined in Rule 16a-1(f), adopted and/or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Regulation S-K Item 408, during the quarter ended September 30, 2023.
Item 6. Exhibits
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| | | Incorporated by Reference | | |
Exhibit Number | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
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10.1 | | | | | | | | | | | | | X |
31.1 | | | | | | | | | | | | | X |
31.2 | | | | | | | | | | | | | X |
32.1 | | | | | | | | | | | | | X |
32.2 | | | | | | | | | | | | | X |
101.INS | | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | | X |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | | X |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | | X |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | | X |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | | X |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | | X |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | | | | | | | | | | X |
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* | | Portions of the exhibit have been omitted as the Company has determined that: (i) the omitted information is not material; and (ii) the omitted information would likely cause competitive harm to the Company if publicly disclosed. |
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| | | Incorporated by Reference | | | | |
| Exhibit Number | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith | | |
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| 3.1 | | | | 8-K | | 001-39888 | | 3.1 | | January 15, 2021 | | | | | | |
| 3.2 | | | | 8-K | | 001-39888 | | 3.1 | | October 20, 2023 | | | | | | |
| 10.1 | | | | | | | | | | | | | X | | |
| 10.2 | | | | | | | | | | | | | X | | |
| 31.1 | | | | | | | | | | | | | X | | |
| 31.2 | | | | | | | | | | | | | X | | |
| 32.1 | | | | | | | | | | | | | X | | |
| 32.2 | | | | | | | | | | | | | X | | |
| 101.INS | | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | | X | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | | X | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | | X | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | | X | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | | X | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | | X | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | | | | | | | | | | X | | |
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| * | | Portions of the exhibit have been omitted as the Company has determined that: (i) the omitted information is not material; and (ii) the Company customarily and actually treats the omitted information as private or confidential. | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized,
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| AFFIRM HOLDINGS, INC. |
| | |
Date: May 9,November 8, 2023 | By: | /s/ Max Levchin |
| | Max Levchin |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| By: | /s/ Michael Linford |
| | Michael Linford |
| | Chief Financial Officer |
| | (Principal Financial Officer) |