# Affirm Holdings, Inc. (AFRM) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Affirm Holdings, Inc.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1820953/000162828022023828/afrm-20220630.htm Accession: 0001628280-22-023828 Filing date: 2022-08-29 Report date: 2022-06-30 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/AFRM/ All MD&A years: /company/AFRM/mda/ Previous year: /company/AFRM/mda/fy2021/ (FY 2021) Next year: /company/AFRM/mda/fy2023/ (FY 2023) ITEM 7. 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 consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (“Form 10-K”). You should review the sections titled “Risk Factors” for a discussion of 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. Unless the context otherwise requires, all references in this report to “Affirm,” the “Company,” “we,” “our,” “us,” or similar terms refer to Affirm Holdings, Inc. and its subsidiaries. A discussion regarding our financial condition and results of operations for the fiscal year ended June 30, 2022 compared to the fiscal year ended June 30, 2021 is presented below. A discussion regarding our financial condition and results of operations for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. Overview We are building the next generation platform for digital and mobile-first commerce. We believe that by using modern technology, the very best engineering talent, and a mission-driven approach, we can reinvent payments and commerce. Our solutions, which are built on trust and transparency, make it easier for consumers to spend responsibly and with confidence, easier for merchants to convert sales and grow, and easier for commerce to thrive. Our point-of-sale solutions allow consumers to pay for purchases in fixed amounts without deferred interest, 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 manage payments, open a high-yield savings account, and access a personalized marketplace. Our company is predicated on the principles of simplicity, transparency, and putting people first. By adhering to these principles, we have built enduring, trust-based relationships with consumers and merchants that we believe will set us up for long-term, sustainable success. We believe our innovative approach uniquely positions us to define the future of commerce and payments. Technology and data are at the core of everything we do. Our expertise in sourcing, aggregating, and analyzing data has been what we believe to be the key competitive advantage of our platform since our founding. We believe our proprietary technology platform and data give us a unique advantage in pricing risk. We use data to inform our risk scoring in order to generate value for our consumers, merchants, and capital partners. We collect and store petabytes of information that we carefully structure and use to regularly recalibrate and revalidate our models, thereby getting to risk scoring and pricing faster, more efficiently, and with a higher degree of confidence. We also prioritize building our own technology and investing in product and engineering talent as we believe these are enduring competitive advantages that are difficult to replicate. Our solutions use the latest in machine learning, artificial intelligence, cloud-based technologies, and other modern tools to create differentiated and scalable products. We have achieved significant growth in recent periods. Our total revenue, net was approximately $1,349.3 million, $870.5 million, and $509.5 million for the years ended June 30, 2022, 2021, and 2020 respectively. We 59 Table of Contents incurred net losses of $707.4 million, $441.0 million, and $112.6 million for the years ended June 30, 2022, 2021, and 2020 respectively. The combination of our differentiated product offerings, efficient go-to-market strategy, and strong monetization engine has resulted in fast growth. •Rapid GMV growth.  We grew our GMV by approximately 87% year-over-year to $15.5 billion during the fiscal year ended June 30, 2022. During the fiscal year ended June 30, 2021, GMV was $8.3 billion, which represented 79% growth over the fiscal year ended June 30, 2020. •Increased consumer engagement.  The number of active consumers on our platform grew by 6.9 million consumers from June 30, 2021 to June 30, 2022, an increase of 96%, to a total of 14.0 million. •Expanded merchant network.  We have also continued to scale the breadth and reach of our platform. From June 30, 2021 to June 30, 2022, our merchant base expanded from 28,995 to 234,847 active merchants due primarily to continued expansion to merchants related to the Shopify partnership. Our business is designed to scale efficiently. Our partnerships with banks and other funding relationships have allowed us to remain equity capital efficient. Since July 1, 2016, we have processed approximately $33.0 billion of GMV on our platform. As of June 30, 2022, we had over $10.6 billion in funding capacity from a diverse set of capital partners, including through our warehouse facilities, securitization trusts, and forward flow arrangements, an increase of $4.1 billion from $6.5 billion as of June 30, 2021. Through the diversity of these funding relationships, the equity capital required to build our total platform portfolio has declined from approximately 4% of the total platform portfolio as of June 30, 2021, to approximately 3% as of June 30, 2022. This metric measures the equity intensity of our business or the amount of capital used in relation to the scale of our enterprise. We define our total platform portfolio as the unpaid principal balance outstanding of all loans facilitated through our platform as of the balance sheet date, including both those loans held for investment and those loans owned by third-parties. This amount totaled $7.1 billion and $4.7 billion as of June 30, 2022 and June 30, 2021, respectively. Additionally, we define the equity capital required as the balance of loans held for investment plus loans held for sale less funding debt and notes issued by securitization trusts, per our consolidated balance sheet. This amount totaled $206.1 million and $178.1 million as of June 30, 2022 and June 30, 2021, respectively. Equity capital required as a percent of the last twelve months’ GMV was 1% and 2% as of June 30, 2022 and June 30, 2021, respectively. We believe that our continued success will depend on many factors, including our ability to attract additional merchant partners, retain our existing merchant partners, and grow and develop our relationships with new and existing merchant partners, help our merchants grow their revenue on our platform, and develop new innovative solutions to establish the ubiquity of our network and breadth of our platform. For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled “Risk Factors” in Item 1A, which is incorporated herein by reference. Our Financial Model Our Revenue Model From merchants, we earn a fee when we help them convert a sale and facilitate a transaction. While merchant fees depend on the individual arrangement between us and each merchant and vary based on the terms of the product offering, we generally earn larger merchant fees on 0% APR financing products. For the years ended June 30, 2022, 2021, and 2020, Split Pay and Core 0% loans represented 22% and 21%, 11% and 32%, and 6% and 37%, respectively, of total GMV facilitated through our platform. From consumers, we earn interest income on the simple interest loans that we originate or purchase from our originating bank partners. Interest rates charged to our consumers vary depending on the transaction risk, creditworthiness of the consumer, the repayment term selected by the consumer, the amount of the loan, and the 60 Table of Contents individual arrangement with a merchant. Because our consumers are never charged deferred or compounding interest, late fees, or penalties on the loans, we are not incentivized to profit from our consumers’ hardships. In addition, interest income includes the amortization of any discounts or premiums on loan receivables created upon either the purchase of a loan from one of our originating bank partners or the origination of a loan. In order to accelerate our ubiquity, we facilitate the issuance of virtual cards directly to consumers through our app, allowing them to shop with merchants that may not yet be fully integrated with Affirm. When these virtual cards are used over established card networks, we earn a portion of the interchange fee from the transaction. Our Loan Origination and Servicing Model When a consumer applies for a loan through our platform, the loan is underwritten using our proprietary risk model. Once approved for the loan, the consumer then selects his/her/their preferred repayment option. The substantial majority of these loans are funded and issued by our originating bank partners. A substantial majority of the loans facilitated through our platform are originated through our originating bank partners: Cross River Bank, an FDIC-insured New Jersey state-chartered bank, and Celtic Bank, an FDIC-insured Utah state-chartered industrial bank. These partnerships allow us to benefit from our partners’ ability to originate loans under their banking licenses while complying with various federal, state, and other laws. Under this arrangement, we must comply with our originating bank partners' credit policies and underwriting procedures, and our originating bank partners maintain ultimate authority to decide whether to originate a loan or not. When an originating bank partner originates a loan, it funds the loan through its own funding sources and may subsequently offer and sell the loan to us. Pursuant to our agreements with these partners, we are obligated to purchase the loans facilitated through our platform that our partner offers us and our obligation is secured by cash deposits. To date, we have purchased all of the loans facilitated through our platform and originated by our originating bank partners. When we purchase a loan from an originating bank partner, the purchase price is equal to the outstanding principal balance of the loan, plus a fee and any accrued interest. The originating bank partner also retains an interest in the loans purchased by us through a loan performance fee that is payable by us on the aggregate principal amount of a loan that is paid by a consumer. See Note 14. 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 various states in the U.S. through our consolidated subsidiaries. We originated approximately $817.1 million and $257.7 million of loans in Canada for the years ended June 30, 2022 and June 30, 2021, respectively. We directly originated loans in the U.S. pursuant to our state licenses of approximately $2.5 billion and $336.1 million, for the years ended June 30, 2022 and June 30, 2021, respectively. For the year ended June 30, 2022, we self-originated 21% of total loan origination volume through our state and other licenses, compared to 7% for the year ended June 30, 2021. We act as the servicer on all loans that we originate directly or purchase from our originating bank partners and earn a servicing fee on loans we sell to our funding sources. We do not sell the servicing rights on any of the loans, allowing us to control the consumer experience end-to-end. To allow for flexible staffing to support overflow and seasonal traffic, we partner with several sub-servicers to manage customer care, first priority collections, and third-party collections in accordance with our policies and procedures. Our Funding Sources We maintain a capital-efficient model through a diverse set of funding sources. When we originate a loan directly or purchase a loan originated by our originating bank partners, we often utilize warehouse facilities with certain lenders to finance our lending activities or loan purchases. We sell the loans we originate or purchase from our originating bank partners to whole loan buyers and securitization investors through forward flow arrangements and securitization transactions, and earn servicing fees from continuing to act as the servicer on the loans. 61 Table of Contents Key Operating Metrics We collect and analyze operating and financial data of our business to assess our performance, formulate financial projections, and make strategic decisions. In addition to revenue, net (loss) income, and other results under accounting principles generally accepted in the United States (“U.S. GAAP”), the following tables set forth key operating metrics we use to evaluate our business. GMV [[GREPCENT_TABLE]] [["","","Year ended June 30,"],["","","2022","","2021","","2020"],["","","(in thousands)"],["Gross Merchandise Volume","","$","15,483,237","","","$","8,292,031","","","$","4,637,220"]] [[/GREPCENT_TABLE]] We measure GMV to assess the volume of transactions that take place on our platform. We define GMV as the total dollar amount of all transactions on the Affirm platform during the applicable period, net of refunds. GMV does not represent revenue earned by us. However, the GMV processed through our platform is an indicator of the success of our merchants and the strength of our platform. For the year ended June 30, 2022, GMV was $15.5 billion, which represents an increase of approximately 87% as compared to $8.3 billion for the year ended June 30, 2021. For the year ended June 30, 2021, GMV was $8.3 billion, which represents an increase of approximately 79% as compared to $4.6 billion for the year ended June 30, 2020. Active Consumers [[GREPCENT_TABLE]] [["","","June 30, 2022","","June 30, 2021","","June 30, 2020"],["","","(in thousands, except per consumer data)"],["Active Consumers","","13,980","","","7,121","","","3,618"],["Transactions per Active Consumer (x)","","3.0","","","2.3","","2.1"]] [[/GREPCENT_TABLE]] 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 June 30, 2022, we had 14.0 million active consumers, representing an increase of approximately 96% compared to 7.1 million as of June 30, 2021, and approximately 97% compared to 3.6 million as of June 30, 2020. Active consumer includes users on the PayBright and Returnly platforms during the twelve months prior to the respective measurement dates. Transactions per Active Consumer We believe the value of our network is amplified with greater consumer engagement and repeat usage, highlighted by increased transactions per active consumer. Transactions per active consumer is defined as the average number of transactions that an active consumer has conducted on our platform during the 12 months prior to the measurement date. As of June 30, 2022, we had approximately 3.0 transactions per active consumer, an increase of approximately 31% compared to June 30, 2021 and an increase of 41% compared to June 30, 2020. Transactions per active consumer includes transactions on the PayBright and Returnly platforms during the twelve months prior to the respective measurement dates. 62 Table of Contents Factors Affecting Our Performance Expanding our Network, Diversity, and Mix of Funding Relationships Our capital efficient funding model is integral to the success of our platform. As we scale the number of transactions on our network and grow GMV, we maintain a variety of funding relationships in order to support our network. Our diversified funding relationships include warehouse facilities, securitization trusts, forward flow arrangements, and partnerships with banks. Given the short duration and strong performance of our assets, funding can be recycled quickly, resulting in a high-velocity, capital efficient funding model. We have continued to reduce the percentage of our equity capital required to fund our total platform portfolio from approximately 4% as of June 30, 2021, to approximately 3% as of June 30, 2022. The mix of on-balance sheet and off-balance sheet funding is a function of both how we choose to allocate loan volume and the available supply of capital, both of which may also impact our results in any given period. Mix of Business on Our Platform The mix of products that our merchants offer and our consumers purchase in any period affects our operating results. In addition, shifts in volume among merchants in any period also affects our operating results. These mix impacts affect GMV, revenue, our financial results, and our key operating metric performance for that period. Differences in product mix relate to different loan durations, APR mix, and varying proportion of 0% APR versus interest-bearing financings. Differences in merchant mix relate to the variations in the product and economic terms of the commercial agreements among our merchants. For example, our low average order value (“AOV”) products generally benefit from shorter duration, but also have lower revenue as a percentage of GMV when compared to high AOV products. Merchant mix shifts are driven in part by the products offered by the merchant, the economic terms negotiated with the merchant, merchant-side activity relating to the marketing of their products, whether the merchant is fully integrated within our network, and general economic conditions affecting consumer demand. Our revenue as a percentage of GMV in any given period varies across products. As such, as we continue to expand our network to include more merchants, revenue as a percentage of GMV will vary. In addition, our commercial agreement with Shopify to offer Shop Pay Installments powered by Affirm and our Split Pay offering, a short-term payment plan with 0% APR, will continue to impact the mix of our shorter duration, low AOV products. Differences in the mix of high versus low AOV will also impact our results. For example, we expect that transactions per active consumer may increase while revenue as a percentage of GMV may decline in the medium term to the extent that a greater portion of our GMV comes from Split Pay and other low-AOV offerings. Sales and Marketing Investment We rely on the strength of our merchant relationships and positive user experience to develop our consumer brand and grow the ubiquity of our platform. During the year ended June 30, 2022, we continued to grow our investment in sales and marketing channels that we believe will drive further brand awareness and preference among both consumers and merchants. Given the nature of our revenue, our investment in sales and marketing in a given period may not impact results until subsequent periods. Additionally, given the increasingly competitive nature of merchant acquisition, we have previously made, and expect that we may make, significant investments in retaining and acquiring new merchants. We are focused on the effectiveness of sales and marketing spending and will continue to be strategic in maintaining efficient consumer and merchant acquisition. Seasonality We experience seasonal fluctuations in our revenue as a result of consumer spending patterns. Historically, our revenue has been the strongest during the second quarter of our fiscal year due to increases in retail commerce during the holiday season. Adverse events that occur during these months could have a disproportionate effect on our financial results for the fiscal year. 63 Table of Contents Components of Results of Operations Revenue Merchant Network Revenue   Merchant partners (or merchants) are generally charged a fee based on GMV processed through the Affirm platform. The fees vary depending on the individual arrangement between us and each merchant and on the terms of the product offering. The fee is recognized at the point in time the merchant successfully confirms the transaction, which is when the terms of the executed merchant agreement are fulfilled. We may originate certain loans via our wholly-owned subsidiaries, with zero or below market interest rates. In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting in a loss, which we record as a reduction to merchant network revenue. In certain cases, the losses incurred on loans originated for a merchant may exceed the total network revenue earned on those loans. We record the excess loss amounts as a sales and marketing expense. During the years ended June 30, 2022, 2021, and 2020 we generated 34%, 44%, and 50% of our revenue, respectively, from merchant network fees. Virtual Card Network Revenue A smaller portion of our revenue comes from our Virtual Card product. We have agreements with issuer processors to facilitate transactions through the issuance of virtual debit cards to be used by consumers at checkout. Consumers can apply for a virtual debit card through the Affirm app and, upon approval, receive a single-use virtual debit card to be used for their purchase online or offline at a non-integrated merchant. The virtual debit card is funded at the time a transaction is authorized using cash held by the issuer processor in a reserve fund. We, or our originating bank partner, then originates a loan to the consumer once the transaction is confirmed by the merchant. The non-integrated merchants are charged interchange fees by the issuer processor for virtual debit card transactions, as with all debit card purchases, and the issuer processor shares a portion of this revenue with us. We also leverage this issuer processor as a means of integrating certain merchants. Similarly, for these arrangements with integrated merchants, the merchant is charged interchange fees by the issuer processor and the issuer processor shares a portion of this revenue with us. This revenue is recognized as a percentage of both our captured volume transacted on the payment processor network and net interchange income, and this revenue related to net interchange income is presented net of associated processing fees. We generated 7%, 6%, and 4% of our revenue from virtual card network fees for the years ended June 30, 2022, 2021, and 2020, respectively. Interest Income We also earn revenue through interest earned on loans facilitated through our platform. Interest income includes interest charged to consumers over the term of the consumers’ loans based on the principal outstanding and is calculated using the effective interest method. In addition, interest income includes the amortization of any discounts or premiums on loan receivables created upon either the purchase of a loan from our originating bank partners or the origination of a loan. These discounts and premiums are accreted or amortized over the life of the loan using the effective interest method and represented 35%, 31%, and 19% of total interest income for the years ended June 30, 2022, 2021, and 2020, respectively. During the years ended June 30, 2022, 2021, and 2020, respectively, we generated 39%, 37%, and 37% of our revenue from interest income, respectively. Gain on Sales of Loans We sell a portion of the loans we originate or purchase from our originating bank partners to third-party investors. We recognize a gain or loss on sale of such loans as the difference between the proceeds received, adjusted for initial recognition of servicing assets and liabilities obtained at the date of sale, and the carrying value of the loan. During the years ended June 30, 2022, 2021, and 2020, we generated 15%, 10%, and 6% of our revenue from gain on sales of loans. 64 Table of Contents Servicing Income We earn a specified fee from providing professional services to manage loan portfolios on behalf of our third-party loan owners. Under the servicing agreements with our third-party loan owners, we are entitled to collect servicing fees on the loans that we service, which are paid monthly based upon an annual fixed percentage of the outstanding loan portfolio balance. Servicing income also includes fair value adjustments for servicing assets and servicing liabilities. During the years ended June 30, 2022, 2021, and 2020, we generated 5%, 3%, and 3% of our revenue from servicing income, respectively. We expect our revenue may vary from period to period based on, among other things, the timing of onboarding and size of new merchants, the mix of 0% APR loans versus interest-bearing loans with simple interest, loan funding strategy and mix, type and mix of products that our merchants offer to their customers, the rate of repeat transactions, transaction volume, and seasonality of or fluctuations in usage of our platform. Operating Expenses Our operating expenses consist of the loss on loan purchase commitment made to our originating bank partners, the provision for credit losses, funding costs, processing and servicing, technology and data analytics, sales and marketing, and general and administrative expenses. Salaries and personnel-related costs, including benefits, bonuses, stock-based compensation expense and occupancy, comprise a significant component of several of these expense categories. An allocation of overhead, such as rent and other overhead, is based on employee headcount and included in processing and servicing, technology and data analytics, sales and marketing, and general and administrative expenses. As of June 30, 2022, we had 2,552 employees, compared to 1,641 employees as of June 30, 2021. We increased our headcount and personnel related costs across our business in order to support our growth expansion strategy. We expect headcount to continue to increase during fiscal year 2023 given our focus on growth and expansion. Loss on Loan Purchase Commitment We purchase certain loans from our originating bank partners that are processed through our platform and our originating bank 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 consolidated statements of operations and comprehensive loss. These costs are incurred on a per loan basis. Provision for Credit Losses Provision for credit losses consists of amounts charged against income during the period to maintain an allowance for credit losses. Our allowance for credit losses represents our estimate of the credit losses inherent in our loans held for investment and is based on a variety of factors, including the composition and quality of the portfolio, loan specific information gathered through our collection efforts, current economic conditions, future reasonable and supportable forecasts, and our historical net charge-off and loss experience. These costs are incurred on a per loan basis. Funding Costs Funding costs consist of interest expense and the amortization of fees for certain borrowings including on balance sheet VIEs and sale and repurchase agreements, and other costs incurred in connection with funding the purchases and originations of loans. Amortization of debt issuance costs totaled $16.2 million, $6.4 million, and $2.3 million for the years ended June 30, 2022, 2021, and 2020, respectively. 65 Table of Contents Processing and Servicing Processing and servicing expense consists primarily of payment processing fees, third-party customer support and collection expense, salaries and personnel-related costs of our customer care team, platform fees, and allocated overhead. Payment processing costs are primarily driven by the number and dollar value of consumer repayments which grow as the number of transactions and GMV processed on our platform increases. Customer care loan servicing costs are primarily staffing costs related to third-party and in-house loan servicing agents, the demand for which generally increases with the number of transactions on our platform. Collection fees are fees paid to agencies as percentages of the dollars of repayment they recuperate from borrowers whose loans had previously been charged off. Platform fees are revenue sharing fees paid to our e-commerce platform partners. Technology and Data Analytics Technology and data analytics expense consists primarily of the salaries, stock-based compensation, and personnel-related costs of our engineering and product employees as well as our credit and analytics employees who develop our proprietary risk model, which totaled $254.6 million, $171.5 million, and $75.8 million for the years ended June 30, 2022, 2021, and 2020, respectively. Additionally, for the years ended June 30, 2022, 2021, and 2020, $133.7 million, $29.0 million, and $17.1 million, respectively, of salaries and personnel costs that relate to the creation of internally-developed software were capitalized into property, equipment and software, net on the consolidated balance sheets, and amortized into technology and data analytics expense over the useful life of the developed software. This amortization expense totaled $23.9 million, $10.3 million, and $5.5 million for the years ended June 30, 2022, 2021, and 2020, respectively. Additional technology and data analytics expenses include platform infrastructure and hosting costs, third-party data acquisition expenses, amortization of intangible assets, and expenses related to the maintenance of existing technology assets and our technology platform as a whole. Sales and Marketing Sales and marketing costs consist of the expense related to warrants and other share-based payments granted to our enterprise partners, salaries and personnel-related costs, as well as costs of general marketing and promotional activities, promotional event programs, sponsorships, and allocated overhead. In July 2020, we recognized an asset in connection with a commercial agreement with Shopify in which we granted warrants in exchange for their promotion of the Affirm platform with potential new merchant partners. This asset represents the probable future economic benefit to be realized over the expected benefit period and is valued based on the fair value of the warrants on the grant date. The expected benefit period of the asset was initially estimated to be four years, and the remaining useful life of the asset is reevaluated each reporting period. During the year ended June 30, 2022 the remaining expected benefit period was extended by two years upon the execution of an amendment to the commercial agreement with Shopify which extended the term of the agreement. In November 2021, we entered into a commercial agreement with Amazon and granted warrants in exchange for certain exclusivity provisions and the benefit of acquiring new users. In connection with the agreements, we recognized an asset associated with the portion of the warrants that were fully vested upon execution of the agreement. The asset is valued based on the fair value of the warrants on the grant date and represents the probable future economic benefit to be realized over the approximately 3.2 year remaining initial term of the commercial agreement. For the year ended June 30, 2022, we recognized $281.0 million of expenses related to the warrants within sales and marketing expense, respectively, which included the amortization expense of the commercial agreement asset and the expense based upon the grant-date fair value for the warrant shares that vested during the period. For the year ended June 30, 2022, the expense related to warrants and other share-based payments comprised 64% of sales and marketing expenses, compared to 36% for the year ended June 30, 2021. 66 Table of Contents Additionally, in order to continue to expand our consumer base, we may originate certain loans via our wholly-owned subsidiaries with zero or below market interest rates. In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting in a loss, which we record as a reduction to merchant network revenue. In certain cases, the losses incurred on loans originated for a merchant may exceed the total network revenue earned on those loans. We record the excess loss amounts as a sales and marketing expense. These losses totaled $19.8 million, during the year ended June 30, 2022, compared to $1.7 million for the year ended June 30, 2021. We expect that our sales and marketing expense will continue to increase as we expand our sales and marketing efforts to drive our growth, expansion, and diversification. General and Administrative General and administrative expenses consist primarily of expenses related to our finance, legal, risk operations, human resources, and administrative personnel. General and administrative expenses also include costs related to fees paid for professional services, including legal, tax and accounting services, allocated overhead, and certain discretionary expenses incurred from operating our technology platform. We continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services. We expect that our general and administrative expense will increase in absolute dollars as our business grows. Other Income and Expenses Other (Expense) Income, Net Other (expense) income, net consists primarily of interest earned on our money market funds included in cash and cash equivalents and restricted cash, interest earned on securities available for sale, gains and losses incurred on derivative agreements, amortization of convertible debt issuance cost and revolving debt facility issuance costs, and fair value adjustments resulting from changes in the fair value of our contingent consideration liability, primarily driven by changes in the market price of our Class A common stock. Income Tax Expense Our Income tax expense (benefit) consists of U.S. federal and state income taxes, Canadian federal and provincial income taxes, and income taxes attributable to other foreign jurisdictions. 67 Table of Contents Results of Operations The following tables set forth selected consolidated statements of operations and comprehensive loss data for each of the periods presented in dollars: [[GREPCENT_TABLE]] [["","","Year ended June 30,"],["","","2022","","2021","","2020"],["","","(in thousands)"],["Revenue"],["Merchant network revenue","","$","458,511","","","$","379,551","","","$","256,752"],["Virtual card network revenue","","100,696","","","49,851","","","19,340"],["Total network revenue","","559,207","","","429,402","","","276,092"],["Interest income (1)","","527,880","","","326,417","","","186,730"],["Gain on sales of loans (1)","","196,435","","","89,926","","","31,907"],["Servicing income","","65,770","","","24,719","","","14,799"],["Total Revenue, net","","$","1,349,292","","","$","870,464","","","$","509,528"],["Operating Expenses (2)"],["Loss on loan purchase commitment","","$","204,081","","","$","246,700","","","$","161,452"],["Provision for credit losses","","255,272","","","65,878","","","105,067"],["Funding costs","","69,694","","","52,700","","","32,316"],["Processing and servicing","","157,814","","","73,578","","","49,831"],["Technology and data analytics","","418,643","","","249,336","","","122,378"],["Sales and marketing","","532,343","","","182,190","","","25,044"],["General and administrative","","577,493","","","383,749","","","121,230"],["Total Operating Expenses","","2,215,340","","","1,254,131","","","617,318"],["Operating Loss","","$","(866,048)","","","$","(383,667)","","","$","(107,790)"],["Other (expense) income, net","","141,217","","","(59,703)","","","(4,432)"],["Loss Before Income Taxes","","$","(724,831)","","","$","(443,370)","","","$","(112,222)"],["Income tax expense (benefit)","","(17,414)","","","(2,343)","","","376"],["Net Loss","","$","(707,417)","","","$","(441,027)","","","$","(112,598)"],["Excess return to preferred stockholders on repurchase","","\u2014","","","\u2014","","","(13,205)"],["Net Loss Attributable to Common Stockholders","","$","(707,417)","","","$","(441,027)","","","$","(125,803)"],["Other Comprehensive Income (Loss)"],["Foreign currency translation adjustments","","$","(5,900)","","","$","7,046","","","$","(302)"],["Unrealized gain (loss) on securities available for sale, net","","(8,022)","","","29","","","\u2014"],["Net Other Comprehensive Income (Loss)","","(13,922)","","","7,075","","","(302)"],["Comprehensive Loss","","$","(721,339)","","","$","(433,952)","","","$","(112,900)"]] [[/GREPCENT_TABLE]] (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 68 Table of Contents on origination, the interest income recognized over time from the amortization of discount while retained, and the release of discount into gain on sales of loans, together net to zero over the life of the loan. The following table details activity for the discount, included in loans held for investment, for the periods indicated: [[GREPCENT_TABLE]] [["","","Year ended June 30,"],["","","2022","","2021","","2020"],["","(in thousands)"],["Balance at the beginning of the period","","$","53,177","","","$","28,659","","","$","13,068"],["Additions from loans purchased or originated, net of refunds","","366,279","","","264,725","","","157,426"],["Amortization of discount","","(185,050)","","","(101,078)","","","(35,251)"],["Unamortized discount released on loans sold","","(191,626)","","","(139,129)","","","(106,584)"],["Balance at the end of the period","","$","42,780","","","$","53,177","","","$","28,659"]] [[/GREPCENT_TABLE]] (2) Amounts include stock-based compensation as follows: [[GREPCENT_TABLE]] [["","","Year ended June 30,"],["","","2022","","2021","","2020"],["","(in thousands)"],["General and administrative","","$","248,797","","","$","196,554","","","$","13,682"],["Technology and data analytics","","116,531","","","76,643","","","12,285"],["Sales and marketing","","23,224","","","17,092","","","4,040"],["Processing and servicing","","2,431","","","2,218","","","82"],["Total stock-based compensation in operating expenses","","390,983","","","292,507","","","30,089"],["Capitalized into property, equipment and software, net","","54,542","","","13,999","","","2,921"],["Total stock-based compensation expense","","$","445,525","","","$","306,506","","","$","33,010"]] [[/GREPCENT_TABLE]] Comparison of the Years Ended June 30, 2022 and 2021 Total Revenue, net [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Merchant network revenue","","$","458,511","","","$","379,551","","","$","78,960","","","21","%"],["Virtual card network revenue","","100,696","","","49,851","","","50,845","","","102","%"],["Total network revenue","","559,207","","","429,402","","","129,805","","","30","%"],["Interest income","","527,880","","","326,417","","","201,463","","","62","%"],["Gain on sales of loans","","196,435","","","89,926","","","106,509","","","118","%"],["Servicing income","","65,770","","","24,719","","","41,051","","","166","%"],["Total Revenue, net","","$","1,349,292","","","$","870,464","","","478,828","","","55","%"]] [[/GREPCENT_TABLE]] Total Revenue, net for the year ended June 30, 2022 increased by $478.8 million or 55%, compared to the year ended June 30, 2021. The increase is primarily due to an increase of $7.2 billion or 87% in GMV on our platform during the year, from $8.3 billion for the year ended June 30, 2021 to $15.5 billion for the year ended June 30, 2022. This increase in GMV was driven by the strong network effects of the expansion of our active merchant base from 28,995 as of June 30, 2021 to 234,847 as of June 30, 2022, an increase in active consumers from 7.1 million as of June 30, 2021 to 14.0 million as of June 30, 2022, and an increase in average transactions per consumer from 2.3 as of June 30, 2021 to 3.0 as of June 30, 2022. 69 Table of Contents Merchant network revenue for the year ended June 30, 2022 increased by $79.0 million or 21%, compared to the year ended June 30, 2021. Merchant network revenue as a percentage of GMV for the year ended June 30, 2022 decreased to 3.0% compared to 4.6% for the year ended June 30, 2021. Merchant network revenue growth is generally correlated with both GMV growth and the mix of loans on our platform as different loan characteristics are positively or negatively correlated with merchant fee revenue as a percentage of GMV. In particular, merchant network revenue as a percentage of GMV typically increases with the term length and AOV of our loans, and typically decreases with shorter duration and higher APR loans. Specifically, long-term 0% APR loans typically carry higher merchant fees as a percentage of GMV and have higher AOVs. The increase in merchant network revenue during the year ended June 30, 2022 was primarily driven by an increase in GMV, partially offset by reductions in the concentration of long-term 0% APR loans, our highest merchant fee category, which decreased from 21% of total GMV during the year ended June 30, 2021 to 11% during the year ended June 30, 2022. For the year ended June 30, 2022, approximately 8%, of total revenue was driven by our largest merchant partner by merchant network revenue, Peloton, for which we facilitate long-term 0% APR loans with a higher merchant fee, compared with 20% of total revenue in the comparative period. More broadly, for the year ended June 30, 2022, loans with term lengths greater than 12 months accounted for 20% of GMV, compared to 29% for the year ended June 30, 2021, primarily due to the increased adoption of our Split Pay product. AOV was lower at $403 for the year ended June 30, 2022, compared to $550 for the year ended June 30, 2021, primarily due to the increased adoption of our Split Pay product. The increases were partially offset by a reduction of merchant network revenue of $80.4 million for the year ended June 30, 2022, associated with the creation of discounts upon the self-origination of loans with par values in excess of the fair value of such loans, compared to $11.4 million during the year ended June 30, 2021. These reductions to merchant network revenue are primarily due to our Split Pay product and our 0% APR lending programs outside of the United States, which we self-originate. For the year ended June 30, 2022, we self-originated $3.3 billion of loans, an increase of 453.9% compared to $0.6 billion during year ended June 30, 2021. While the discounts created upon the origination of a loan reduce merchant network revenue at the time of origination, the discounts are amortized into interest income over the life of the respective loans when retained on the balance sheet and any unamortized discount is reflected in the cost basis when determining gain on sale of loans. Virtual card network revenue for the year ended June 30, 2022 increased by $50.8 million or 102%, compared to the year ended June 30, 2021. This increase was driven by an increase in GMV processed through our issuer processor of 100% for the year ended June 30, 2022, due to increased activity on our virtual card-enabled mobile application as well as growth in existing and new merchants integrated using our virtual card platform, growing from 756 merchants as of June 30, 2021 to 1,099 merchants as of June 30, 2022. Virtual card network revenue is also impacted by the mix of merchants as different merchants can have different interchange rates depending on their industry or size, among other factors. Interest income for the year ended June 30, 2022 increased by $201.5 million or 62%, compared to the year ended June 30, 2021. Generally, interest income is correlated with the changes in the average balance of loans held for investment, as we recognize interest on loans held for investment using the effective interest method over the life of the loan. The average balance of loans held for investment increased by 27% to $2.3 billion for the year ended June 30, 2022, compared to the same period in the prior fiscal year. As an annualized percentage of average loans held for investment, total interest income increased from approximately 18% during the year ended June 30, 2021 to 23% during the year ended June 30, 2022. This change was driven by a decrease in the average proportion of 0% APR loans being held on our consolidated balance sheet as a percentage of the average loans held for investment, which decreased from 46% during the year ended June 30, 2021 to 39% during the year ended June 30, 2022. The shift was largely due to increased concentration of loans with large enterprise merchant partners; those loans tend to be interest-bearing. We recognize interest income on 0% APR loans via the amortization of the loan discount. Short term 0% APR loans, including Split Pay loans, carry higher annualized discounts as percentages of annualized loan balances than longer term loans, and thus amortize more discount into interest income as percentages of unpaid principal balance than longer term loans. Therefore, the change in the mix of 0% APR loans held for investment is also 70 Table of Contents contributing to the increase in interest income as an annualized percentage of average loans held for investment. The total amortization of discounts on loans held for investment increased by $84.0 million or 83% for the year ended June 30, 2022, compared with the year ended June 30, 2021. The amortization of discounts represented 35% of total interest income for the year ended June 30, 2022, compared to 31% for the year ended June 30, 2021, respectively. This increase included the amortization of discounts arising from self-originated loans held for investment of $106.1 million during the year ended June 30, 2022, which was $18.2 million for the year ended June 30, 2021. Gain on sales of loans for the year ended June 30, 2022 increased by $106.5 million or 118%, compared to the year ended June 30, 2021. We sold loans with an unpaid balance of $3.2 billion for the year ended June 30, 2021, and $7.1 billion for the year ended June 30, 2022, for which we retained servicing rights. This increase was primarily due to higher loan sale volume to third-party loan buyers and off-balance sheet securitizations, favorable loan sale pricing terms, and optimizing the allocation of loans to loan buyers with higher pricing terms. The increase was partially offset by a reduction of $6.2 million due to the net impact of the servicing assets and liabilities of the loans sold during the year ended June 30, 2022, compared to a reduction of $1.5 million for the year ended June 30, 2021 Servicing income for the year ended June 30, 2022 increased by $41.1 million or 166%, compared to the year ended June 30, 2021. This increase was primarily due to an increase in the average unpaid principal balance of loans owned by third-party loan owners, which increased from $1.8 billion during the year ended June 30, 2021 to $3.6 billion during the year ended June 30, 2022. Additionally, we recognized an increase of servicing income of $6.3 million related to the changes in fair value of servicing assets and liabilities during the year ended June 30, 2022, compared with a reduction to servicing income of $1.5 million during the year ended June 30, 2021. Operating Expenses [[GREPCENT_TABLE]] [["","","Year ended June 30,"],["","","2022","","2021"],["","(in thousands)"],["Loss on loan purchase commitment","","$","204,081","","","$","246,700"],["Provision for credit losses","","255,272","","","65,878"],["Funding costs","","69,694","","","52,700"],["Processing and servicing","","157,814","","","73,578"],["Total transaction costs","","686,861","","","438,856"],["Technology and data analytics","","418,643","","","249,336"],["Sales and marketing","","532,343","","","182,190"],["General and administrative","","577,493","","","383,749"],["Total operating expenses","","$","2,215,340","","","$","1,254,131"]] [[/GREPCENT_TABLE]] Loss on Loan Purchase Commitment [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Loss on loan purchase commitment","","$","204,081","","","$","246,700","","","$","(42,619)","","","(17)","%"],["Percentage of total revenue, net","","15","%","","28","%"]] [[/GREPCENT_TABLE]] Loss on loan purchase commitment for the year ended June 30, 2022 decreased by $42.6 million or 17%, compared to the year ended June 30, 2021. This decrease was due to a decrease in the volume of long-term 0% APR loans purchased from our originating bank partners compared to the prior period, which are purchased above fair market value. The decrease in loss on loan purchase commitment is also impacted by changes in the estimate of fair value of the loans driven primarily by the mix of loan terms. The differences in fair values and purchase values for our loans are generally correlated with the term length, so the reduction in long term loans reduced the differences between the estimates of fair value and purchase value. During the year ended June 30, 2022, we purchased $3,251.5 71 Table of Contents million, of 0% APR loan receivables from our originating bank partners, representing a decrease of $33.1 million or 1% compared to the year ended June 30, 2021. Provision for Credit Losses [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Provision for credit losses","","$","255,272","","","$","65,878","","","$","189,394","","","287","%"],["Percentage of total revenue, net","","19","%","","8","%"]] [[/GREPCENT_TABLE]] Provision for credit losses generally represents the amount of expense required to maintain the allowance for credit losses on our consolidated balance sheet, which represents management’s estimate of future losses. In the event that our loans outperform expectation and/or we reduce our expectation of credit losses in future periods, we may release reserves and thereby reduce the allowance for credit losses, yielding income in the provision for credit losses. The provision is determined by the change in estimates for future losses and the net charge-offs incurred in the period. We record provision expense for each loan we retain as loans held for investment, whether we originate the loan or purchase it from one of our originating bank partners. Additionally, during the prior fiscal year, following the loss of our emerging growth company status, we adopted Accounting Standard Update (“ASU”) 2016-13, “Financial Instruments — Credit Losses (Topic 326)” using the modified retrospective approach. The amendments replaced the incurred loss impairment methodology for computing our allowance for credit losses with the current expected credit loss model ("CECL"), effective July 1, 2020. As part of this modified retrospective approach to adoption, we recorded an adjustment increasing the provision for credit losses by $10.1 million for the year ended June 30, 2021. During the year ended June 30, 2022, the allowance as a percentage of loans held for investment increased from 5.8% as of June 30, 2021 to 6.2% as of June 30, 2022, primarily due to a deconcentration of long-term, lower-credit-risk 0% APR loans on our balance sheet and growth of new platforms and merchant partnerships with generally higher expected losses. Prior year provision for credit losses was unusually low due to release of stressed expected loss scenarios and the adoption of CECL. Those prior year impacts, combined with an overall larger loan population, shifting product mix, and normalized credit environment, resulted in an increase in provision for credit losses expense of $189.4 million or 287% compared to the year ended June 30, 2021. Funding Costs [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Funding costs","","$","69,694","","","$","52,700","","","$","16,994","","","32","%"],["Percentage of total revenue, net","","5","%","","6","%"]] [[/GREPCENT_TABLE]] Funding costs for the year ended June 30, 2022 increased by $17.0 million or 32%, compared to the year ended June 30, 2021. Funding costs for a given period are correlated with the sum of the average balance of funding debt and the average balance of notes issued by securitization trusts. This increase was primarily due to the increase of notes issued by securitization trusts during the current fiscal year, which bear interest at fixed rates. The average balance of notes issued by securitization trusts during the year ended June 30, 2022 was $1,490.1 million, compared with $747.0 million, during the year ended June 30, 2021. The average balance of funding debt for the year ended June 30, 2022 was $677.0 million, compared with $752.6 million, during the year ended June 30, 2021. Combined, average total debt for the year ended June 30, 2022 increased by $667.6 million or 45%, respectively, compared to the year ended June 30, 2021 while the average reference interest rate increased by 163% during the period. 72 Table of Contents Processing and Servicing [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Processing and servicing","","$","157,814","","$","73,578","","$","84,236","","","114","%"],["Percentage of total revenue, net","","12","%","","8","%"]] [[/GREPCENT_TABLE]] Processing and servicing expense for the year ended June 30, 2022 increased by $84.2 million or 114%, compared to the year ended June 30, 2021. This increase was primarily due to a $56.1 million or 163% increase in payment processing fees related to increased servicing activity and payments volume for the year ended June 30, 2022. Additionally, processing fees paid to our platform partners increased by $5.4 million or 104%, for the year ended June 30, 2022. Personnel costs increased by $5.6 million or 47% for the year June 30, 2022 driven by growth in headcount. For the year ended June 30, 2022, third-party loan servicing and collections spend increased $17.0 million or 82%, due to increased loan volume. Technology and Data Analytics [[GREPCENT_TABLE]] [["","","Year ended June 30,","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Technology and data analytics","","$","418,643","","$","249,336","","$","169,307","","","68","%"],["Percentage of total revenue, net","","31","%","","29","%"]] [[/GREPCENT_TABLE]] Technology and data analytics expense for the year ended June 30, 2022 increased by $169.3 million or 68%, compared to the year ended June 30, 2021. For the year ended June 30, 2022, we saw a $83.1 million or 48% increase in personnel costs compared to the year ended June 30, 2021 primarily due to an increased headcount as we continue to support our growth and technology platform as a whole. A portion of these personnel costs was stock-based compensation, which accounted for a $39.9 million increase compared to the year ended June 30, 2021, respectively, largely due to vesting of RSUs. Additionally, there was a $51.9 million or 132%, increase in data infrastructure and hosting costs for the year ended June 30, 2022, compared to the year ended June 30, 2021, due to increased capacity requirements of our technology platform driven by increase in active users and transactions per active consumer. There was a $12.8 million or 75%, increase in underwriting data provider costs for the year ended June 30, 2022, compared to the year ended June 30, 2021, due to an increase in applications, partially offset by cost improvements achieved as a result of contract renegotiations. Furthermore, amortization of internally-developed software increased by $13.6 million or 132%, compared to the year ended June 30, 2021, primarily as a result of an increase in the number of capitalized projects during the period due to our ongoing investment in software development. Capitalized projects grew 370% from 30 projects for the year ended June 30, 2021 to 141 projects for the year ended June 30, 2022. Sales and Marketing [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Sales and marketing","","$","532,343","","","$","182,190","","","$","350,153","","","192","%"],["Percentage of total revenue, net","","39","%","","21","%"]] [[/GREPCENT_TABLE]] Sales and marketing expense for the year ended June 30, 2022 increased by $350.2 million or 192%, compared to the year ended June 30, 2021. This increase was primarily due to $281.0 million of expense related to warrants granted to Amazon during the year ended June 30, 2022. Additionally, personnel costs related to employees in the sales and marketing functions increased $19.5 million or 45%, compared to the year ended June 30, 2021 largely due to an increased headcount. Loss on loan originations increased $18.1 million or 1,067%, compared to the year ended June 30, 2021, primarily due to an increase in self-originated loans. 73 Table of Contents Furthermore, there was a $20.9 million or 59%, increase in brand and consumer marketing spend during the year ended June 30, 2022, compared to the year ended June 30, 2021, associated with our expanded brand-activation, holiday shopping, lifestyle, and travel marketing campaigns, as well as a $5.1 million or 40% increase in business-to-business marketing spend compared to the year ended June 30, 2021. General and Administrative [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["General and administrative","","$","577,493","","","$","383,749","","","$","193,744","","","50","%"],["Percentage of total revenue, net","","43","%","","44","%"]] [[/GREPCENT_TABLE]] General and administrative expense for the year ended June 30, 2022 increased by $193.7 million or 50%, compared to the year ended June 30, 2021 primarily due to an increased headcount as we continue to grow our finance, legal, operations, and administrative organizations. Additionally, professional fees increased by $16.0 million or 56%, during the year ended June 30, 2022 compared to the year ended June 30, 2021, to support our acquisitions, international expansion, and regulatory compliance programs. Other (Expense) Income, net [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Other (expense) income, net","","$","141,217","","","$","(59,703)","","","$","200,920","","","(337)","%"],["Percentage of total revenue, net","","10","%","","(7)","%"]] [[/GREPCENT_TABLE]] For the year ended June 30, 2022, other (expense) income, net, was largely comprised of a gain of $89.3 million, recognized based on the change in fair value of the contingent consideration liability associated with our acquisition of PayBright, driven by decreases in the value of our common stock. Additionally other (expense) income, net included a gain of $48.6 million on hedging instruments due to increases in fair value of interest rate caps as a direct correlation with LIBOR and increased volatility in the market. For the year ended June 30, 2021, other (expense) income, net was primarily comprised of a loss of $92.9 million recognized based on the change in fair value of the contingent consideration liability associated with our acquisition of PayBright, driven by changes in the value of our common stock. Additionally, for the year ended June 30, 2021, other (expense) income, net included a gain of $30.1 million recognized upon the conversion of convertible notes into shares of Series G-1 preferred stock. The conversion of convertible notes was accounted for as a debt extinguishment since the number of shares of Series G-1 preferred stock issued upon conversion was variable and this gain represented the difference between the carrying value of the debt at the time of extinguishment and the allocated proceeds. Income tax expense (benefit) [[GREPCENT_TABLE]] [["","","Year ended June 30,","","Change"],["","","2022","","2021","","$","","%"],["","(in thousands, except percentage)"],["Income tax expense (benefit)","","$","(17,414)","","","$","(2,343)","","","$","(15,071)","","","643","%"],["Percentage of total revenue, net","","(1)","%","","\u2014","%"]] [[/GREPCENT_TABLE]] The income tax benefit for the year ended June 30, 2022 was primarily attributable to a change in our assessment of the future realization of certain foreign deferred tax assets, while the income tax benefit for the year ended June 30, 2021 was primarily attributable to an adjustment to the Company's valuation allowance resulting from a deferred tax liability assumed with the acquisition of Returnly. 74 Table of Contents In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including our historical financial performance, projections of future taxable income - incorporating any changes in circumstance for the business, future reversals of existing taxable temporary differences, and any carryback available. The assumptions about future taxable income require the use of Management’s judgment and are consistent with the plans and estimates we are using to manage the underlying businesses, yet they are subject to change from period to period. As a result of (i) the integration and consolidation of our PayBright business into and with Affirm’s Canadian business, which makes PayBright’s tax attributes utilizable against future income in the combined Canadian operations, (ii) the expansion of our overall business in Canada, and (iii) other objectively verifiable positive evidence that became available during the year ended June 30, 2022 - all of which we have concluded is sufficient to outweigh the existing negative evidence, including the presence of a three-year cumulative loss attributable to the related foreign jurisdiction, we have determined that it is more likely than not that our foreign deferred tax assets will be realized and a valuation allowance is not required. Even though our determination that our foreign deferred tax assets will more likely than not be realized is primarily based on sufficient, objectively verifiable positive evidence, consideration was still required for the underlying projections of future income. If our assumptions change in the future and we determine that we will not be able to realize our foreign deferred tax assets, the tax benefits related to any release of the valuation allowance on foreign deferred tax assets as of June 30, 2022 will be reversed and recorded as an increase of income tax expense for the period. We continue to recognize a full valuation allowance against our U.S. federal and state net deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Company for the years ended June 30, 2022, 2021, and 2020. The presence of a three-year cumulative loss limits the ability to consider other subjective evidence, such as our expectations of future taxable income and projections for growth, and the other positive evidence available is not sufficient to outweigh the existing negative evidence at this time. Liquidity and Capital Resources Sources and Uses of Funds We have incurred losses since our inception, accumulating a deficit of $1.6 billion and $0.9 billion as of June 30, 2022 and June 30, 2021, respectively. We have historically financed the majority of our operating and capital needs through the sales of equity securities, borrowings from debt facilities and convertible debt, third-party loan sale arrangements, and cash flows from operations. In September and October 2020, we issued an aggregate of 21,836,687 shares of Series G preferred stock for aggregate cash proceeds of $435.1 million. On January 15, 2021, we closed an initial public offering of our Class A common stock with cash proceeds, before expenses, of $1.3 billion. On November 23, 2021, we issued the 2026 Notes, generating cash proceeds of $1.7 billion. As of June 30, 2022, our principal sources of liquidity were available for sale securities and cash and cash equivalents, available capacity from revolving debt facilities, revolving securitizations, forward flow loan sale arrangements, and certain cash flows from our operations. We believe that our existing cash balances, available capacity under our revolving debt facilities, revolving securitizations and off-balance sheet loan sale arrangements, and cash from operations, are sufficient to meet both our existing operating, working capital, and capital expenditure requirements and our currently planned growth for at least the next 12 months. We cannot provide assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to fund our liquidity needs in the long-term. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control. Our on- and off-balance sheet facilities provide funding subject to various constraining limits on the financed portfolios. These limits are generally tied to loan-level attributes such as loan term, credit quality, and interest rate, as well as borrower- and merchant-level attributes. 75 Table of Contents Cash and Cash Equivalents As of June 30, 2022, we had approximately $1.3 billion of cash and cash equivalents to fund our future operations compared to approximately $1.5 billion as of June 30, 2021. Our cash and cash equivalents were comprised of operating bank accounts, money market funds, certificates of deposits, corporate bonds, and other commercial paper with maturities less than three months. Cash and cash equivalents are held primarily for continued investment in our business, for working capital purposes, and to facilitate a portion of our lending activities. Our policy is to invest cash in excess of our immediate working capital requirements in liquid investments and deposit accounts to preserve the principal balance and maintain adequate liquidity. Restricted Cash Restricted cash consists primarily of: (i) deposits restricted by standby letters of credit for office leases and merchant partnership agreements; (ii) funds held in accounts as collateral for our originating bank partners; and (iii) servicing funds held in accounts contractually restricted by agreements with warehouse credit facilities and third-party loan owners. We have no ability to draw on such funds as long as they remain restricted under the applicable arrangements. Securities, Available for Sale As of June 30, 2022, we had $1.6 billion of investments in marketable debt securities classified as available-for-sale, compared to $16.2 million as of June 30, 2021. Our securities available for sale at fair value primarily consist of certificates of deposits, corporate bonds, commercial paper, and government bonds with maturities greater than three months. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. Funding Debt The following table summarizes our funding debt facilities as of June 30, 2022. The funding debt consists of warehouse credit facilities, other funding facilities, revolving credit facilities, and repurchase liabilities: [[GREPCENT_TABLE]] [["Maturity Fiscal Year","","Borrowing Capacity","","Principal Outstanding"],["","","(in thousands)"],["2023","","$","271,055","","","$","158,547"],["2024","","1,812,972","","","421,484"],["2025","","\u2014","","","\u2014"],["2026","","\u2014","","","\u2014"],["2027","","250,000","","","34,428"],["2028 and thereafter","","600,000","","","68,936"],["Total","","$","2,934,027","","","$","683,395"]] [[/GREPCENT_TABLE]] Warehouse Credit Facilities Through trusts, we entered into warehouse credit facilities with certain lenders to finance the purchase and origination of our loans. These trusts are consolidated variable interest entities (“VIEs”), and each trust entered into a credit agreement and security agreement with a commercial bank as administrative agent and a national banking association as collateral trustee and paying agent. Borrowings under these agreements are referred to as funding debt. These credit agreements contain operating covenants, including limitations on the incurrence of certain indebtedness and liens, restrictions on certain intercompany transactions, and limitations on the amount of dividends and stock repurchases. Our funding debt facilities include concentration limits for various loan characteristics including credit quality, product mix, geography, and merchant concentration. As of June 30, 2022, we were in 76 Table of Contents compliance with all applicable covenants in the agreements. Refer to Note 11. Debt in the notes to the consolidated financial statements included elsewhere in this Form 10-K for additional information. These revolving facilities mature between 2023 and 2029, and subject to covenant compliance generally permit borrowings up to 12 months prior to the final maturity date. Borrowings under these facilities generally occur multiple times per week, and generally coincide with the purchase of loans from our originating bank partners. We manage liquidity by accessing diversified pools of capital and avoid concentration with any single counterparty; we are diversified across different types of investors including investment banks, asset managers, and insurance companies. Borrowings under these facilities bear interest at an annual benchmark rate of LIBOR or at an alternative commercial paper rate (which is either (i) the per annum rate equivalent to the weighted-average of the per annum rates at which all commercial paper notes were issued by certain lenders to fund advances or maintain loans, or (ii) the daily weighted-average of LIBOR, as set forth in the applicable credit agreement), plus a spread ranging from 1.65% to 4.00%. Interest is payable monthly. In addition, these agreements require payment of a monthly unused commitment fee ranging from 0% to 0.75% per annum on the undrawn portion available. Other Funding Facilities Prior to our acquisition of PayBright on January 1, 2021, PayBright entered into various credit facilities utilized to finance the origination of loans in Canada. Similar to our warehouse credit facilities, borrowings under these agreements are referred to as funding debt, and proceeds from the borrowings may only be used for the purposes of facilitating loan funding and origination. These facilities are secured by PayBright loan receivables pledged to the respective facility as collateral, mature between 2023 and 2024, and bear interest based on a benchmark rate plus a spread ranging from 1.25% to 4.25%. Revolving Credit Facility On February 4, 2022, we entered into a revolving credit agreement with a syndicate of commercial banks for a $165.0 million unsecured revolving credit facility, maturing on February 4, 2025. On May 16, 2022, we increased unsecured revolving commitments under the facility to $205.0 million. This facility bears interest at a rate equal to, at our option, either (a) a SOFR rate determined by reference to the forward-looking term SOFR rate for the interest period, plus an applicable margin of 1.85% per annum or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate last quoted by the Wall Street Journal as the U.S. prime rate and (iii) the one-month forward-looking term SOFR rate plus 1.0% per annum, in each case, plus an applicable margin of 0.85% per annum. The facility contains certain covenants and restrictions, including certain financial maintenance covenants, and requires payment of a monthly unused commitment fee of 0.20% per annum on the undrawn balance available. There are no borrowings outstanding under the facility. Refer to Note 11. Debt. Securitizations In connection with asset-backed securitizations, we sponsor and establish trusts to ultimately purchase loans facilitated by our platform. Securities issued from our asset-backed securitizations are senior or subordinated, based on the waterfall criteria of loan payments to each security class. The subordinated residual interests issued from these transactions are first to absorb credit losses in accordance with the waterfall criteria. The assets are transferred into a trust such that the assets are legally isolated from the creditors of Affirm and are not available to satisfy our obligations. These assets can only be used to settle obligations of the underlying trusts. Each securitization trust issued senior notes and residual certificates to finance the purchase of the loans facilitated by our platform. The 2020-Z1, 2020-Z2, 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 securitizations are secured by static pools of loans contributed at closing, whereas the 2021-A, 2021-B, and 2022-A securitizations are revolving and we may contribute additional loans from time to time until the end of the respective revolving period. The 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 securitizations are off balance sheet since we determined we are not the primary beneficiary as of June 30, 2022. Refer to Note 12. Securitization and Variable Interest Entities. 77 Table of Contents Cash Flows The following table summarizes our cash flows for the periods presented: [[GREPCENT_TABLE]] [["","","Year ended June 30,"],["","","2022","","2021"],["","","(in thousands)"],["Net Cash Used in Operating Activities","","(162,194)","","","(193,130)"],["Net Cash Used in Investing Activities","","(2,011,338)","","","(1,022,033)"],["Net Cash Provided by Financing Activities(1)","","2,037,119","","","2,577,830"]] [[/GREPCENT_TABLE]] (1) Amounts include net cash provided by the issuance of redeemable convertible preferred stock and convertible debt as follows: [[GREPCENT_TABLE]] [["","","Year ended June 30,"],["","","2022","","2021"],["","","(in thousands)"],["Proceeds from issuance of convertible debt, net","","$","1,704,300","","","$","\u2014"],["Proceeds from issuance of common stock, net of repurchases","","73,828","","","46,242"],["Proceeds from initial public offering, net","","\u2014","","","1,305,176"],["Proceeds from issuance and conversion of redeemable convertible preferred stock, net of repurchases and issuance costs","","\u2014","","","434,529"],["Net cash provided by equity-related financing activities","","$","1,778,128","","","$","1,785,947"],["Net cash provided by debt-related financing activities","","444,169","","","950,163"],["Payments of tax withholding for stock-based compensation","","(185,178)","","","(158,280)"],["Net cash provided by financing activities","","$","2,037,119","","","$","2,577,830"]] [[/GREPCENT_TABLE]] Operating Activities Our largest sources of operating cash are fees charged to merchant partners on transactions processed through our platform and interest income from consumers’ loans. Our primary uses of cash from operating activities are for general and administrative, technology and data analytics, funding costs, processing and servicing, and sales and marketing expenses. Cash used in operating activities for the year ended June 30, 2022 was $162.2 million, a decrease of $30.9 million from cash used in operating activities of $193.1 million for the year ended June 30, 2021. This reflects our net loss of $707.4 million, adjusted for non-cash charges of $525.8 million, net cash inflows of $29.4 million from the purchase and sale of loans held for sale, and net cash outflows of $9.9 million provided by changes in our operating assets and liabilities. For the year ended June 30, 2022, net cash inflows from the purchase and sale of loans held for sale increased $75.3 million compared to the $45.9 million net cash outflows for the year ended June 30, 2021. Non-cash charges primarily consisted of: provision for credit losses, which increased by $189.4 million or 287% due to a change in product mix for on-balance sheet loans and an unusually low provision expense in the prior comparative period; gain on sales of loans, which increased by $106.5 million from $89.9 million for the year ended June 30, 2021 due to improved loan sale economics, loan credit quality mix and increased loan sales since the year ended June 30, 2021; and amortization of premiums and discounts, which increased by $81.6 million or 90% due to increased amortization of discounts related to loans purchased from our originating bank partners at a price above fair market value. Furthermore, we incurred $391.0 million of stock-based compensation, up from $292.5 million due to accelerated vesting of RSUs for which the service-based condition had been met prior to the IPO, the 78 Table of Contents performance-based condition was met on the IPO date and the addition of the Employee Share Purchase Plan during the period, and gains of $89.3 million due to the decrease in the fair value of our contingent consideration liability, driven by changes in the value of our common stock. Additionally, during the year ended June 30, 2022, we incurred $96.7 million of amortization expense associated with our commercial agreement assets. Our net cash outflows resulting from changes in operating assets and liabilities decreased to $9.9 million for the year ended June 30, 2022, compared to net cash outflows of $53.7 million for the year ended June 30, 2021. This change was primarily driven by a decrease in other assets due to a reduction of prepaid payroll taxes during the year ended June 30, 2022. Investing Activities Cash used in investing activities for the year ended June 30, 2022 was $2,011.3 million, an increase of $989.3 million from $1,022.0 million for the year ended June 30, 2021. The main driver of this was $10.4 billion of purchases of loans, representing an increase of $4.5 billion or 76% compared to the year ended June 30, 2021, due partly to continued growth in GMV. We recorded cash outflows of approximately $1,841.4 million related to purchases of available for sale securities in the current period. Additionally, we recorded cash outflow of approximately $25.4 million related to purchases of intangibles in connection with an asset acquisition during the period. These cash outflows were partially offset by $8.1 billion of repayments of loans, representing an increase of $3.8 billion, or 88%, compared to the year ended June 30, 2021, due to a higher average balance of loans held for investment and generally increasing credit quality of the portfolio. Financing Activities Cash provided by financing activities for the year ended June 30, 2022 was $2,037.1 million, a decrease of $540.7 million from $2,577.8 million during the year ended June 30, 2021. During the year ended June 30, 2022, we saw a $738.2 million decrease in cash inflows from the issuance of notes by our securitization trusts due to a smaller volume of newly formed securitization trusts compared to the year ended June 30, 2021. Additionally, for the year ended June 30, 2021, cash from financing activities included proceeds of $1,305.2 million from the issuance of common stock upon our initial public offering and $434.5 million from the issuance of Series G redeemable convertible preferred stock. This decrease was partially offset by the issuance of convertible debt during the year ended June 30, 2022, which resulted in net cash inflows of $1,704.3 million, net of debt issuance costs. Liquidity and Capital Risks and Requirements There are numerous risks to our financial results, liquidity, capital raising, and debt refinancing plans, some of which may not be quantified in our current liquidity forecasts. The principal factors that could impact our liquidity and capital needs are customer delinquencies and defaults, a prolonged inability to adequately access capital market funding, declines in loan purchases and therefore revenue, fluctuations in our financial performance, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products, and the continuing market adoption of our platform. We intend to support our liquidity and capital position by pursuing diversified debt financings (including new securitizations and revolving debt facilities) and extending existing secured revolving facilities to provide committed liquidity in case of prolonged market fluctuations. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing in connection with those efforts. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. Additionally, as a result of any of these actions, we may be subject to restrictions and covenants in the agreements governing these transactions that may place limitations on us, and we may be required to pledge additional collateral as security. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition. It is also possible that the actual outcome of one or more of 79 Table of Contents our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect. Concentrations of Revenue For the year ended June 30, 2022, there were no merchants that exceeded 10% of total revenue. For the years ended June 30, 2021 and 2020 approximately 20% and 28% of total revenue, respectively, was driven by one merchant partner. While we believe our growth will facilitate both revenue growth and merchant diversification as we continue to integrate with a wide range of merchants, changes in merchant loan volume and revenue concentration may cause our financial and operating performance to fluctuate significantly from period to period. Our revenue as a percentage of GMV in any given period varies across products. As such, as we continue to expand our network to include more merchants, revenue as a percentage of GMV will vary. Contractual Obligations [[GREPCENT_TABLE]] [["","Payments Due By Period"],["","Total","","Less than 1 Year","","1 - 3 Years","","3 - 5 Years","","More than 5 Years"],["","(in thousands)"],["Funding debt","$","683,395","","","$","158,547","","","$","421,484","","","$","34,428","","","$","68,936"],["Notes issued by securitization trusts","1,632,401","","","\u2014","","","632,492","","","999,909","","","\u2014"],["Operating lease commitments(1)","74,536","","","16,445","","","32,453","","","17,950","","","7,688"],["Purchase commitments(2)","37,054","","","37,054","","","\u2014","","","\u2014","","","\u2014"],["Contingent consideration liability(3)","23,348","","","23,348","","","\u2014","","","\u2014","","","\u2014"],["Convertible senior notes(4)","1,725,000","","","\u2014","","","\u2014","","","1,725,000","","","\u2014"],["Total","$","4,175,734","","","$","235,394","","","$","1,086,429","","","$","2,777,287","","","$","76,624"]] [[/GREPCENT_TABLE]] (1)Consists of payment obligations under our office leases. (2)In May 2020, we entered into an addendum to our agreement with our cloud computing web services provider which included annual spending commitments, as further described below. Refer to Note 9.   Commitments and Contingencies for further information. (3)Refer to Note 6.  Balance Sheet Components for a description of the contingent consideration liability, recorded as a component of accrued expenses and other liabilities on the consolidated balance sheets. (4)On November 23, 2021, the Company issued $1.7 billion in aggregate principal amount of 0% convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes mature on November 15, 2026. Refer to Note 11.  Debt for further information. The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Off-Balance Sheet Arrangements Off-balance sheet loans relate to unconsolidated securitization transactions and loans sold to third-party investors for which we have some form of continuing involvement, including as servicer. For off-balance sheet loan sales where servicing is the only form of continuing involvement, we would only experience a loss if we were required to repurchase such a loan due to a breach in representations and warranties associated with our loan sale or servicing contracts. For unconsolidated securitization transactions where Affirm is the sponsor and risk retention holder, Affirm could experience a loss of up to 5% of both the senior notes and residual certificates. As of June 30, 80 Table of Contents 2022, the aggregate outstanding balance of loans held by third-party investors or off-balance sheet VIEs was $4.5 billion. As of June 30, 2022, we had four off-balance sheet VIEs, the 2021-Z1, 2021-Z2, 2022-X1, and 2022-Z1 securitization trusts. In the unlikely event payments on the loans backing any off-balance sheet securitization are insufficient to pay note holders, including any retained interest, then any amounts the Company contributed to the securitization reserve accounts may be depleted. See Note 12. Securitization and Variable Interest Entities of the accompanying notes to our consolidated financial statements for more information. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. U.S. GAAP requires us to make certain estimates and judgments that affect the amounts reported in consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because certain of these accounting policies require significant judgment, our actual results may differ materially from our estimates. To the extent that there are differences between our estimates and actual results, our future consolidated financial statement presentation, financial condition, results of operations, and cash flows will be affected. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to merchant network revenue, loss on loan purchase commitment and allowance for credit losses. We believe these estimates have the greatest potential effect on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information, our significant accounting policies are described in Note 2. Summary of Significant Accounting Policies within the notes to the consolidated financial statements. Merchant Network Revenue Merchant network revenue consists primarily of merchant fees. Merchants are charged a fee on each transaction processed through the Affirm platform. The fees range depending on the individual arrangement between us and each merchant and vary based on the terms of the product offering. The fee is recognized as earned when the terms of the executed merchant agreement have been fulfilled and the merchant successfully confirms the transaction. We present our transaction with the merchant separate from our transactions with our originating bank partners. Except where we originate certain loans via our wholly-owned subsidiaries, our bank partners are the originator of the loan extended to the merchant’s customer, and accordingly we account for the loan separate from the fee received from the merchant. When we originate loans via our wholly-owned subsidiaries, certain loans may have zero or below market interest rates. In these instances, the par value of the loans originated is in excess of the fair market value of such loans, resulting in a loss, which we record as a reduction to merchant network revenue when we estimate that these losses will be recoverable over the term of our contract with the merchant. In order to continue to expand our consumer base, we may originate loans under certain merchant arrangements that we do not expect to achieve positive revenue. In these instances, the loss is recorded as sales and marketing expense. Loss on Loan Purchase Commitment We purchase loans from our originating bank partners that are facilitated through our platform. Under the terms of the agreement, we are generally required to pay the principal amount plus accrued interest for such loans. In certain instances, our originating bank partner 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 on loan purchase and is recognized as loss on loan purchase commitment in our consolidated statements of operations. The fair value is determined by taking the difference between the estimated fair value of the loan and the anticipated purchase price. When the loan is purchased, the liability is included in the amortized cost basis of the purchased loan as a discount, which is then amortized into interest income over the life of the loan. 81 Table of Contents Allowance for Credit Losses The allowance for credit losses on loans held for investment is determined based on management’s current estimate of expected credit losses over the remaining contractual term, historical credit losses, consumer payment trends, estimates of recoveries, and future expectations as of each balance sheet date. We immediately recognize an allowance for expected credit losses upon origination of a loan. Adjustments to the allowance each period for changes in our estimate of lifetime expected credit losses are recognized in earnings through the provision for credit losses presented on our consolidated statements of operations and comprehensive loss. We have made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables. Previously recognized interest receivable from charged-off loans that is accrued but not collected from the consumer is reversed. In estimating the allowance for credit losses, management utilizes a migration analysis of delinquent and current loan receivables. Migration analysis is a technique used to estimate the likelihood that a loan receivable will progress through various stages of delinquency and to charge-off. The analysis focuses on the pertinent factors underlying the quality of the loan portfolio. These factors include historical performance, the age of the receivable balance, seasonality, customer credit-worthiness, changes in the size and composition of the loan portfolio, delinquency levels, bankruptcy filings, actual credit loss experience. We also take into consideration certain qualitative factors where we adjust our quantitative baseline using our best judgement to consider the inherent uncertainty regarding future economic conditions and consumer loan performance. For example, the Company considers the impact of current economic and environmental factors at the reporting date that did not exist over the period from which historical experience was used. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit losses. Loans are charged-off in accordance with our charge-off policy, as the contractual principal becomes 120 days past due. Subsequent recoveries of the unpaid principal balance, if any, are credited to the allowance for credit losses. The underlying assumptions, estimates, and assessments we use to provide for losses are updated periodically to reflect our view of current conditions, which can result in changes to our assumptions. Changes in such estimates can significantly affect the allowance and provision for credit losses. It is possible that we will experience loan losses that are different from our current estimates. Recent Accounting Pronouncements Refer to Note 2. Summary of Significant Accounting Policies within the notes to the consolidated financial statements. 82 Table of Contents