COINBASE GLOBAL, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis contain forward looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. Unless otherwise expressly stated or the context otherwise requires, references to "we," "our," "us," "the Company," and "Coinbase" refer toCoinbase Global, Inc. and its consolidated subsidiaries. The information contained on, or that can be accessed through, our website is not incorporated by reference into, and is not a part of, this Annual Report on Form 10-K. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this Annual Report on Form 10-K, and can be found in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our final prospectus datedApril 1, 2021 and filed with theSEC pursuant to Rule 424(b)(4) onApril 14, 2021 .
Executive Overview
This executive overview highlights selected information and does not contain all of the information that is important to readers of this Annual Report on Form 10-K. 2021 was a year of tremendous growth and development in the cryptoeconomy, as well as forCoinbase . The total crypto market capitalization at the end of Q4 was$2.3 trillion ? up nearly three-fold from approximately$800.0 billion at the end of 2020 ? and hit a peak of$3.1 trillion inNovember 2021 . Bitcoin and Ethereum prices reached new highs that were 247% and 457% higher, respectively, than prior peaks seen in 2017, with Bitcoin itself nearly reaching$1.3 trillion in market capitalization in Q4. 90 -------------------------------------------------------------------------------- For the year endedDecember 31, 2021 , we generated$7.4 billion of net revenue,$3.6 billion of net income,$4.1 billion of Adjusted EBITDA, and 11.4 million MTUs. For the year endedDecember 31, 2020 , we generated$1.1 billion of net revenue,$322.3 million of net income,$527.4 million of Adjusted EBITDA, and 2.8 million MTUs. In 2021, we saw an increase in all of our key business metrics compared to 2020, became the first publicly traded crypto asset trading platform, and made substantial progress in building a best-in-class infrastructure to enable easy, safe, and secure on-ramps and access into the global cryptoeconomy. Key Business Metrics In addition to the measures presented in our consolidated financial statements, we use the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, and make strategic decisions: December 31, % Change 2021 2020 2019 2021 2020 Verified Users (in millions) 89 43 32 107 % 34 % MTUs(1) (in millions) 11.4 2.8 1.0 307 % 180 % Assets on Platform (in billions)$ 278 $ 90 $ 17 209 % 432 % Trading Volume (in billions)$ 1,671 $ 193 $ 80 766 % 141 % Net income (loss) (in millions)$ 3,624 $ 322 $ (30) 1,025 % 1,173 % Adjusted EBITDA(2) (in millions)$ 4,090 $ 527 $ 24 676 % 2,096 %
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(1)MTUs presented above for the years endedDecember 31 are the average of each month's MTUs in the fourth quarter. The annual average of MTUs for the years endedDecember 31, 2021 ,December 31, 2020 , andDecember 31, 2019 were 8.4 million, 1.9 million, and 1.1 million. (2)Please see the section titled "? Non-GAAP Financial Measure" below for a reconciliation of net income to Adjusted EBITDA and an explanation for why we consider Adjusted EBITDA to be a helpful metric for investors.
Verified Users
We define "Verified Users" as all retail users, institutions, and ecosystem
partners that have registered an account on our platform and confirmed either
their email address or phone number, or that have established an account with a
username on our non-custodial wallet application, as of the date of measurement.
Verified Users are an indication of our scale and represent a potential revenue
opportunity for us. These customers have demonstrated an interest in our
platform or direct intent to transact with crypto assets. Verified Users
represent the top level of our customer acquisition funnel. We believe we have
an opportunity to engage Verified Users and convert them to MTUs by marketing
our growing suite of products and services. Verified Users may overstate the
number of unique customers who have registered an account on our platform as one
customer may register for, and use, multiple accounts with different email
addresses, phone numbers, or usernames.
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--------------------------------------------------------------------------------Monthly Transacting Users
We define an MTU as a retail user who actively or passively transacts in one or more products on our platform at least once during the rolling 28-day period ending on the date of measurement. MTUs presented as of the end of a quarter are the average of each month's MTUs in each respective quarter. MTUs presented as of the end of a year represent the MTUs for the last quarter of that year. The annual average MTUs for the years endedDecember 31, 2021 ,December 31, 2020 , andDecember 31, 2019 were 8.4 million, 1.9 million, and 1.1 million, respectively. MTUs represent our transacting base of retail users who drive potential revenue generating transactions on our platform. MTUs engage in transactions that generate both transaction revenue and subscription and services revenue. Revenue generating transactions include active transactions such as buying or selling crypto assets through our Invest product or passive transactions such as earning a staking reward. MTUs also engage in transactions that are non-revenue generating such as send and receive. MTUs may overstate the number of unique retail users due to differences in product architecture.
Assets on Platform
We define "Assets on Platform" as the totalU.S. dollar equivalent value of both fiat currency and crypto assets held or managed in digital wallets on our platform, including our custody services, calculated based on the market price on the date of measurement. Assets on Platform demonstrates the scale of balances held across our suite of products and services, the trust customers place in us to securely store their assets, and the underlying growth of the cryptoeconomy. Assets on Platform also represent our monetization opportunity for subscription products and services, including current products such as Custody, Stake, Borrow, and Lend. Assets on Platform generate fees that are recorded as subscription and services revenue when customers engage with these products. The value of Assets on Platform is driven by three factors: the price, quantity, and type of crypto assets held by customers on our platform. Changes in the price and quantity, particularly for Bitcoin and Ethereum, or type of crypto asset held on our platform, can result in the growth or decline in Assets on Platform in a particular period. Our Assets on Platform by asset are as follows: As of December 31, 2021 2020 2019 Assets on Platform: Bitcoin 40 % 70 % 70 % Ethereum 25 13 9 Other crypto assets 31 13 15 Fiat 4 4 6 Total 100 % 100 % 100 % During the years endedDecember 31, 2021 andDecember 31, 2020 , no asset other than Bitcoin and Ethereum individually represented more than 10% of our Assets on Platform. 92
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Trading Volume
We define "Trading Volume" as the totalU.S. dollar equivalent value of matched trades transacted between a buyer and seller through our platform during the period of measurement. Trading Volume represents the product of the quantity of asset transacted and the trade price at the time the transaction was executed. As trading activity directly impacts transaction revenue, we believe this measure is a reflection of liquidity on our order books, trading health, and the underlying growth of the cryptoeconomy. Trading Volume on our platform is influenced by the price of crypto assets and Crypto Asset Volatility1. In periods of high crypto asset prices and Crypto Asset Volatility, we have experienced correspondingly high levels of Trading Volume on our platform. Our trading volume in future periods will depend on the relative availability and adoption of Bitcoin, Ethereum, and Other crypto assets. Year Ended
2021 2020 2019
Trading Volume (in billions):
Retail $ 535 $ 73 $ 35
Institutional 1,136 120 45
Total $ 1,671 $ 193 $ 80
Trading Volume by crypto asset:
Bitcoin 24 % 41 % 58 %
Ethereum 21 % 15 % 14 %
Litecoin 3 % 4 % 10 %
Other crypto assets 52 % 40 % 18 %
Total 100 % 100 % 100 %
Transaction revenue by crypto asset: Bitcoin 25 % 44 % 60 % Ethereum 21 % 12 % 11 % Other crypto assets 54 % 44 % 29 % Total 100 % 100 % 100 % Crypto assets other than Bitcoin and Ethereum, or Other crypto assets, continued to contribute a greater share of Trading Volume during the year endedDecember 31, 2021 . Approximately 55% of our total Trading Volume came from Other crypto assets, up from 44% in 2020. This trend is consistent with the overall crypto market where crypto assets other than Bitcoin and Ethereum comprised a larger percent of spot market trading volumes during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Additionally, we continue to add trading support for new crypto assets, which contributes to the increased trading concentration in Other crypto assets. In 2021 and 2020, we added trading support for 95 and 21 Other crypto assets, respectively. During the years endedDecember 31, 2021 andDecember 31, 2020 , no asset other than Bitcoin and Ethereum individually represented more than 10% of our Trading Volume or transaction revenue. 1 "Crypto Asset Volatility" represents our internal measure of crypto volatility in the market relative to prior periods. The volatility of crypto assets is measured on an hourly basis (using 10 minute price intervals within each hour) for each crypto asset supported for trading onCoinbase , averaged over the applicable time period (quarterly), then weighted by each crypto asset's share of total trading volume during the same time period across a select set of trading platforms, in addition to theCoinbase platform, that operate in similar markets including itBit, Bitfinex,Bitstamp , bitFlyer, Binance.US, Binance, Kraken, Gemini, Bittrex, and Poloniex. 93 --------------------------------------------------------------------------------
Components of Results of Operations
Net revenue
Transaction revenue
We generate substantially all of our net revenue from transaction fees from trades that occur on our platform. The transaction fee earned is based on the price and quantity of the crypto asset that is bought, sold, or withdrawn. Transaction revenue is recognized at the time the transaction is processed and is directly correlated with Trading Volume on our platform.
Subscription and services revenue
Subscription and services revenue primarily consists of:
•Blockchain rewards: We derive Blockchain rewards through various blockchain protocols where we control the staking validator address. These blockchain protocols, or the participants that form the protocol networks, reward users for performing various activities on the blockchain, such as participating in proof-of-stake networks. We earn Blockchain rewards in crypto assets.
Our Staking revenue is included within Blockchain rewards, except for delegation services that are offered as part of Coinbase Cloud and included in Other subscription and services revenue. We believe Blockchain rewards better represents the various monetization opportunities available to us through blockchains and protocols.
•Custodial fee revenue: We derive custodial fee revenue based on a percentage of the daily value of customer crypto assets that we hold under custody in our dedicated cold storage solution. The value of crypto assets held under custody is driven by the same factors as Assets on Platform - the quantity, price, and type of crypto asset. •Earn campaign revenue: We provide asset issuers with a platform to engage with our users through education videos and tasks where users can earn crypto assets that they learned about. We earn a commission based on the amount of crypto assets distributed to our users. •Interest income: We earn interest income on fiat funds under a revenue sharing arrangement and on customer custodial fiat funds held at certain third-party banks, which is calculated using the interest method. Our interest income is dependent on the balance of such fiat funds and the prevailing interest rate environment. We also earn interest income on loans granted to our retail and institutional users.
•Other: Other subscription and services revenue primarily includes revenue from Coinbase Cloud, which includes staking application, delegation, and infrastructure services, as well as revenue from subscription licenses.
Other revenue
Other revenue includes the sale of crypto assets when we are the principal in the transaction. Periodically, as an accommodation to customers, we may fulfill customer transactions using our own crypto assets. We fulfill customer accommodation transactions using our own assets for orders that do not meet the minimum trade size for execution on our platform or to maintain customers' trade execution and processing times during unanticipated system disruptions. We have custody and control of these crypto assets prior to the sale to the customer and record revenue at the point in time when the sale is processed. Accordingly, we record the total value of the sale as revenue and the cost of the crypto asset in other operating expense, net. Transactions involving our sale of crypto assets represented 6.2% of our total revenue for the year endedDecember 31, 2021 . 94
-------------------------------------------------------------------------------- Other revenue also includes interest income earned primarily on our corporate cash and cash equivalents. Interest income is calculated using the interest method and depends on the balance of cash and cash equivalents as well as the prevailing interest rate environment.
Operating expenses
Operating expenses consist of transaction, technology and development, sales and marketing, general and administrative, restructuring expenses, and other operating expense.
Transaction expense
Transaction expense includes costs incurred to operate our platform, process crypto asset trades, and perform wallet services. These costs include account verification fees, miner fees to process transactions on blockchain networks, fees paid to payment processors and other financial institutions for customer transaction activity, and crypto asset losses due to transaction reversals. Transaction expense also includes rewards paid to users for blockchain activities conducted by us, such as staking. Fixed-fee costs are expensed over the term of the contract and transaction-level costs are expensed as incurred.
Technology and development
Technology and development expenses include personnel-related expenses incurred in operating, maintaining, and enhancing our platform. These costs also include website hosting, infrastructure expenses, costs incurred in developing new products and services and the amortization of acquired developed technology.
Sales and marketing
Sales and marketing expenses primarily include costs related to customer acquisition, advertising and marketing programs, and personnel-related expenses. Sales and marketing costs are expensed as incurred.
General and administrative
General and administrative expenses include personnel-related expenses incurred to support our business, including legal, finance, compliance, human resources, customer support, executive, and other support operations. These costs also include software subscriptions for support services, facilities and equipment costs, depreciation, amortization of acquired customer relationship intangible assets, gains and losses on disposal of fixed assets, legal reserves and settlements, and other general overhead. General and administrative costs are expensed as incurred.
Other operating expense, net
Other operating expense, net includes cost of our crypto assets used to fulfill
customer accommodation transactions. Periodically, as an accommodation to
customers, we may fulfill customer transactions using our own crypto assets. We
have custody and control of the crypto assets prior to the sale to the customer.
Accordingly, we record the total value of the sale in other revenue and the cost
of the crypto asset in other operating expense.
Other operating expense, net also includes impairment and realized gains on the
sale of crypto assets, realized gains and losses resulting from the settlement
of derivative instruments, and fair value gains and losses related to
derivatives and derivatives designated in qualifying fair value hedge accounting
relationships.
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Other expense (income), net
Other expense (income), net includes the following items:
•gains and losses on investments, net, which consists primarily of realized and unrealized gains and losses from fair value adjustments on investments;
•realized impacts on foreign exchange resulting from the settlement of our foreign currency assets and liabilities as well unrealized impacts on foreign exchange resulting from remeasurement of transactions and monetary assets and liabilities denominated in non-functional currencies; and
•interest expense on our Convertible Notes and Senior Notes.
(Benefit from) provision for income taxes
(Benefit from) provision for income taxes includes income taxes related to
foreign jurisdictions and
Results of Operations
The following table summarizes the historical consolidated statements of
operations data:
Year Ended December 31,
2021 2020 2019
(in thousands)
Revenue:
Net revenue $ 7,354,753 $ 1,141,167 $ 482,949
Other revenue 484,691 136,314 50,786
Total revenue 7,839,444 1,277,481 533,735
Operating expenses:
Transaction expense 1,267,924 135,514 82,055
Technology and development 1,291,561 271,732 185,044
Sales and marketing 663,689 56,782 24,150
General and administrative 909,392 279,880 231,929
Restructuring - - 10,140
Other operating expense, net 630,308 124,622 46,200
Total operating expenses 4,762,874 868,530 579,518
Operating income (loss) 3,076,570 408,951 (45,783)
Other expense (income), net 49,623 (248) (367)
Income (loss) before income taxes 3,026,947 409,199 (45,416)
(Benefit from) provision for income taxes (597,173) 86,882
(15,029)
Net income (loss) $ 3,624,120 $ 322,317 $ (30,387)
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The following table presents the components of the consolidated statements of operations as a percentage of total revenue:
Year Ended December 31,
2021 2020 2019
Total revenue 100 % 100 % 100 %
Operating expenses:
Transaction expense 16 11 15
Technology and development 16 21 35
Sales and marketing 9 4 5
General and administrative 12 22 43
Restructuring - - 2
Other operating expense, net 8 10 9
Total operating expenses 61 68 109
Operating income (loss) 39 32 (9)
Other expense (income), net - - -
Income (loss) before income taxes 39 32 (9)
(Benefit from) provision for income taxes (7) 7 (3)
Net income (loss) 46 % 25 % (6) %
Comparison of the years ended
Revenue
Year Ended December 31, % Change
2021 2020 2019 2021 2020
(in thousands)
Transaction revenue $ 6,837,266 $ 1,096,174 $ 463,005 524 % 137 %
Subscription and services revenue 517,487 44,993 19,944 1,050 126
Other revenue 484,691 136,314 50,786 256 168
Total revenue $ 7,839,444 $ 1,277,481 $ 533,735 514 139
Transaction revenue for the year ended
•Crypto Asset Volatility of 11.0 for the year endedDecember 31, 2021 increased 49% over the year endedDecember 31, 2020 . Trading Volume on our platform is correlated with higher Crypto Asset Volatility;
•an increase in retail Trading Volume of 633% for the year ended
•an increase in the number of crypto assets supported on our platform, from 45 as ofDecember 31, 2020 to 139 as ofDecember 31, 2021 . Our ability to expand our support of more crypto assets drove significant Trading Volume. There are a number of factors that contribute to changes in crypto asset prices and Crypto Asset Volatility, including, but not limited to, changes in the supply and demand for a particular crypto asset, crypto market sentiment, macroeconomic factors, utility of a particular crypto asset, and idiosyncratic events. 97
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Subscription and services revenue for the year ended
•an increase in Blockchain rewards of
•an increase in custodial fee revenue of$117.7 million for the year endedDecember 31, 2021 , due to an increase in the average assets under custody of$99.0 billion over the same period. The growth in assets under custody was driven by new and existing customers, an increase of 72 assets supported by custody during the year endedDecember 31, 2021 , and an increase in average crypto asset prices; and •an increase in Earn campaign revenue of$55.4 million for the year endedDecember 31, 2021 , driven by both an increase in MTUs that engaged with Earn campaigns and an increase in amounts earmarked by asset issuers for distribution over the same period. Our first Earn campaign was launched inJune 2020 . Other revenue for the year endedDecember 31, 2021 increased by$348.4 million , or 256%, compared to the year endedDecember 31, 2020 , driven by an increase in crypto assets sales revenue over the same period. We generated revenue from crypto asset sales where the transactions were fulfilled with our crypto assets to accommodate customers, primarily as a result of unanticipated system disruptions. For the year endedDecember 31, 2021 , we experienced 16 unanticipated system disruptions, including an exchange disruption, which resulted in$305.6 million of other revenue, or 63% of revenue from crypto asset sales to customers, compared to 12 unanticipated system disruptions which resulted in$94.8 million of other revenue, or 71% of revenue from crypto asset sales to customers for the year endedDecember 31, 2020 . While the number of unanticipated system disruptions increased year-over-year, during the year endedDecember 31, 2021 , the number of disruptions generally declined quarter-over-quarter, with the majority of disruptions taking place in the first half of the year. A system disruption which occurred onMay 19, 2021 as a result of unprecedented short term spike in Trading Volume as well as the exchange disruption onSeptember 7, 2021 were primarily responsible for the increase in crypto assets sales revenue during the year endedDecember 31, 2021 .
We continue to make significant investments in database and network infrastructure to support heightened trading volumes on our platform in order to reduce unanticipated system disruptions.
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Operating expenses
Year Ended December 31, % Change
2021 2020 2019 2021 2020
(in thousands)
Transaction expense $ 1,267,924 $ 135,514 $ 82,055 836 % 65 %
Technology and development 1,291,561 271,732 185,044 375 47
Sales and marketing 663,689 56,782 24,150 1,069 135
General and administrative 909,392 279,880 231,929 225 21
Restructuring - - 10,140 - (100)
Other operating expense, net 630,308 124,622 46,200 406 170
Total operating expenses $ 4,762,874 $ 868,530 $ 579,518 448 50
Transaction expense for the year ended
The increase in transaction expense for the year ended
•an increase of$519.3 million related to miner fees for the year endedDecember 31, 2021 . This increase was driven by an increase in crypto assets required to pay blockchain network fees such as Ethereum gas prices and an increase in crypto asset prices. Ethereum gas prices rose substantially due to congestion on the network as we saw a surge in DeFi volume throughout the year. We expect this congestion to stabilize and improve as the Ethereum network implements solutions to help reduce transaction congestion;
•an increase of
•an increase of
•an increase of
•an increase of
Technology and development expenses for the year ended
•an increase of$788.8 million for the year endedDecember 31, 2021 in personnel-related expenses due to a 129% increase in headcount growth, issuance of equity instruments in conjunction with business combinations, and higher payroll taxes as a result of increased exercises of stock options in conjunction with our direct listing of our Class A common stock on the Nasdaq Global Select Market onApril 14, 2021 , or the "Direct Listing. InDecember 2020 , we began granting RSUs to employees which increased our stock-based compensation expense compared to our option grants; and •an increase of$181.1 million in software and service costs for the year endedDecember 31, 2021 , driven by continued investment in our products and platform. We expect that these costs will continue to increase in the future as we scale our teams and deliver new products and services for the cryptoeconomy. 99 -------------------------------------------------------------------------------- Sales and marketing expenses for the year endedDecember 31, 2021 increased by$606.9 million , or 1,069%, compared to the year endedDecember 31, 2020 . Sales and marketing as a percentage of net revenue was 9.0% and 5.0% during the years endedDecember 31, 2021 andDecember 31, 2020 , respectively. The increase in sales and marketing expenses for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , was predominantly driven by the following:
•an increase of
•an increase of$105.7 million for the year endedDecember 31, 2021 in personnel-related expenses due to a 164% increase in headcount growth and higher payroll taxes as a result of increased exercises of stock options in conjunction with our Direct Listing. InDecember 2020 , we began granting RSUs to employees which increased our stock-based compensation expense compared to our option grants; and
•an increase of
General and administrative expenses for the year ended
•an increase of$341.3 million for the year endedDecember 31, 2021 in personnel-related expenses due to a 130% increase in headcount growth and higher payroll taxes as a result of increased exercises of stock options in conjunction with our Direct Listing. InDecember 2020 , we began granting RSUs to employees which increased our stock-based compensation expense compared to our option grants;
•an increase of
•an increase of
•$39.2 million of direct listing costs during the first half of 2021 associated with our Direct Listing.
Other operating expense, net for the year ended
•an increase of$304.0 million for the year endedDecember 31, 2021 , attributed to crypto assets sold in order to fulfill customer accommodation transactions as a result of unanticipated system disruptions; and
•$119.9 million net impairment on crypto assets decreasing below the carrying value of our crypto assets held during the year.
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Other expense (income), net
Year Ended December 31, % Change
2021 2020 2019 2021 2020
(in thousands)
Other expense (income), net $ 49,623 $ (248) $ (367) (20,109) % (32) %
During the year ended December 31, 2021 , we had other expense (income), net of
$49.6 million loss compared to a $0.2 million gain for the year ended December
31, 2020 . The change of $49.9 million in losses is largely driven by realized
losses from foreign exchange of $61.4 million and interest expense on our
Convertible Notes and Senior Notes of $29.2 million , offset by realized gains on
investments of $19.1 million and unrealized gains from foreign exchange of $19.9
million .
(Benefit from) provision for income taxes
Year Ended December 31, % Change
2021 2020 2019 2021 2020
(in thousands)
(Benefit from) provision for income
taxes $ (597,173) $ 86,882 $ (15,029) (787) % (678) %
The (benefit from) provision for income tax decreased by $684.1 million for the
year ended December 31, 2021 compared to the year ended December 31, 2020 . The
reduction was primarily driven by the tax effect of higher compensation expenses
on deductible stock option exercises at a fair market value as a result of our
Direct Listing, net of limitations associated with the related tax deduction. We
are entitled to a tax deduction for certain stock-based compensation equal to
the difference between the fair market value of our common stock and the strike
price, if any, at the date of inclusion in the grantee's taxable income.
Therefore, as our common stock price increases, the amount of allowable
deductions will also increase, which could result in a lower effective tax rate.
These deductions were higher in 2021 than in prior periods as a result of an
elevated amount of exercises and sales post our Direct Listing.
Non-GAAP Financial Measure
In addition to our results determined in accordance with GAAP, we believe
Adjusted EBITDA, a non-GAAP measure, is useful in evaluating our operating
performance. We use Adjusted EBITDA to evaluate our ongoing operations and for
internal planning and forecasting purposes. We believe that Adjusted EBITDA may
be helpful to investors because it provides consistency and comparability with
past financial performance. However, Adjusted EBITDA is presented for
supplemental informational purposes only, has limitations as an analytical tool,
and should not be considered in isolation or as a substitute for financial
information presented in accordance with GAAP. Among other non-cash and
non-recurring items, Adjusted EBITDA excludes stock-based compensation expense,
which has recently been, and will continue to be for the foreseeable future, a
significant recurring expense for our business and an important part of our
compensation strategy. In addition, other companies, including companies in our
industry, may calculate similarly titled non-GAAP measures differently or may
use other measures to evaluate their performance, all of which could reduce the
usefulness of our non-GAAP financial measures as tools for comparison. A
reconciliation is provided below for each non-GAAP financial measure to the most
directly comparable financial measure stated in accordance with GAAP. Investors
are encouraged to review the related GAAP financial measures and the
reconciliation of these non-GAAP financial measures to their most directly
comparable GAAP financial measures, and not to rely on any single financial
measure to evaluate our business.
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We calculate Adjusted EBITDA as net income, adjusted to exclude provision for or
benefit from income taxes, depreciation and amortization, interest expense,
crypto asset borrowing costs, stock-based compensation expense, impairment, net,
non-recurring Direct Listing expenses, restructuring expenses, non-recurring
acquisition-related compensation expenses, unrealized gain or loss on foreign
exchange, fair value gain or loss on derivatives, non-recurring legal reserves
and related costs, and other loss, net.
The following table provides a reconciliation of net income to Adjusted EBITDA:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net Income (loss)
(597,173) 86,882 (15,029)
Depreciation and amortization 63,651 30,962 16,878
Interest expense 29,160 - -
Crypto asset borrowing costs 11,847 2,634 -
Stock-based compensation 820,685 69,889 31,147
Impairment, net(1) 119,921 8,355 2,252
Non-recurring Direct Listing expenses 39,160 - -
Restructuring - - 10,140
Non-recurring acquisition-related compensation expenses - - 7,370
Unrealized (gain) loss on foreign exchange (14,944) 1,057 (3,106)
Fair value (gain) loss on derivatives (32,056) 5,254 -
Legal reserves and related costs 1,500 - 5,000
Other loss, net(2) 24,200 - -
Adjusted EBITDA $ 4,090,071 $ 527,350 $ 24,265
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(1)Impairment, net includes impairment on crypto assets still held and intangible assets.
(2)Other loss, net includes$25.1 million loss associated with an incident which did not breach our security infrastructure or broader systems, but for which impacted customers were reimbursed, offset by an unrealized gain of$0.9 million related to a contingent consideration arrangement. 102 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily with cash from operating activities, and net proceeds from the issuances of convertible preferred stock and notes payable. InSeptember 2021 , we issued$2.0 billion in Senior Notes consisting of$1.0 billion of 2028 Senior Notes due onOctober 1, 2028 and$1.0 billion of 2031 Senior Notes due onOctober 1, 2031 . Interest on the Senior Notes is payable semi-annually in arrears onApril 1 andOctober 1 of each year at 3.375% and 3.625% per annum for the 2028 Senior Notes and 2031 Senior Notes, respectively. The entire principal amount of the Senior Notes is due at the time of maturity, unless repurchased or redeemed on an earlier date. InMay 2021 , we issued an aggregate of$1.44 billion of 2026 Convertible Notes. The 2026 Convertible Notes are senior unsecured obligations and bear interest at a rate of 0.50% per year payable semi-annually in arrears onJune 1 andDecember 1 of each year, beginning onDecember 1, 2021 . The initial conversion rate and conversion rate as ofDecember 31, 2021 for the 2026 Convertible Notes is 2.6994 shares of our Class A common stock per$1,000 principal amount of 2026 Convertible Notes, which is equivalent to an initial conversion price of approximately$370.45 per share of the Class A common stock. The 2026 Convertible Notes mature onJune 1, 2026 , unless converted, redeemed or repurchased on an earlier date. See Note 11. Indebtedness, of the notes to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more details on the Senior Notes and 2026 Convertible Notes transactions. As ofDecember 31, 2021 , we had cash and cash equivalents of$7.1 billion , exclusive of restricted cash and customer custodial funds. Cash equivalents consisted primarily of cash deposits and money market funds denominated inU.S. dollars. As ofDecember 31, 2021 , we had restricted cash of$31.0 million which consisted primarily of amounts held in restricted bank accounts at certain third-party banks as security deposits or pledged as collateral to secure letters of credit. As ofDecember 31, 2021 , we had customer custodial funds of$10.5 billion which consisted of amounts held at certain third-party banks for the exclusive benefit of customers. Crypto asset trading on our platform occurs 24 hours a day. We restrict the use of the assets underlying the customer custodial funds to meet regulatory requirements based on their purpose and availability to fulfill our direct obligation under custodial funds due to customers. Certain jurisdictions where we operate require us to hold eligible liquid assets, as defined by applicable regulatory requirements and commercial law in these jurisdictions, equal to at least 100% of the aggregate amount of all custodial funds due to customers. Depending on the jurisdiction, eligible liquid assets can include cash and cash equivalents, customer custodial funds, and in-transit funds receivable. As ofDecember 31, 2021 andDecember 31, 2020 , our eligible liquid assets were greater than the aggregate amount of custodial funds due to customers. As ofDecember 31, 2021 , we had$100.1 million of USDC, a stablecoin which can be redeemed one USDC forone U.S. dollar on demand. While not accounted for as cash or cash equivalent, we believe our USDC holdings to be an important liquidity resource. InAugust 2021 , we announced our plans to invest over$500 million as well as 10% of our quarterly net income into a diversified portfolio of crypto assets. Our investments will be deployed over a multi-quarter window. We continue to execute all trades away from our crypto asset trading platform to avoid any conflict of interest with our customers. We may increase or decrease our allocation over time as the cryptoeconomy matures. 103 -------------------------------------------------------------------------------- As ofDecember 31, 2021 , we held$566.5 million of crypto assets for investment and operational purposes at cost, excluding crypto assets borrowed. Our future earnings and cash flows will be impacted when we choose to monetize our crypto assets and the variability of our earnings will be dependent on the future fair value of such crypto assets. We have limited ability to predict whether the sale of crypto assets received from airdrops or forks will be material to our future earnings, which is dependent on the future market viability and fair value of such crypto assets. Our current policy is not to monetize unsupported forks or airdrops held on our platform. Crypto assets received through airdrops and forks, at the time of the airdrop or fork and at the end of the periods presented, are not material to our financial statements.
As of
December 31,
2021 2020
Fair
Cost(1) Fair value(2) Cost(1) value(2)
(in millions)
Crypto assets held as investments:
Bitcoin $ 87.9 $ 265.8 $ 13.3 $ 100.7
Ethereum 46.1 167.1 3.5 22.1
Other crypto assets 75.4 263.1 7.6 24.9
Total crypto assets held as investments 209.4 696.0 24.4 147.7
Crypto assets held for operating purposes:
Bitcoin 95.5 97.9 26.1 29.4
Ethereum 58.2 75.4 1.7 1.7
Other crypto assets 203.4 267.5 10.1 9.1
Total crypto assets held for operating purposes 357.1 440.8 37.9 40.2
Total crypto assets held, excluding crypto asset
borrowings $ 566.5 $
1,136.8
Crypto assets held, excluding crypto asset borrowings: Bitcoin$ 183.4 $ 363.7 $ 39.4 $ 130.1 Ethereum 104.3 242.5 5.2 23.8 Other crypto assets 278.8 530.6 17.7 34.0 Total crypto assets held, excluding crypto asset borrowings$ 566.5 $ 1,136.8 $ 62.3 $ 187.9 __________________ (1)Cost amounts shown are net of impairment recognized. (2)The fair value of crypto assets held is based on quoted market prices for one unit of each crypto asset reported on our platform at11:59 pm Coordinated Universal Time (UTC) on the last day of the respective period multiplied by the quantity of each crypto asset held. We view our crypto asset investments as long term holdings and we do not plan to engage in regular trading of crypto assets. During times of instability in the market of crypto assets, we may not be able to sell our crypto assets at reasonable prices or at all. As a result, our crypto assets are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. Customer accommodations are fulfilled with crypto assets held for operational purposes. We recognized$43.1 million and$0.4 million of impairment expense on our crypto asset investment portfolio for the years endedDecember 31, 2021 andDecember 31, 2020 , respectively. 104
-------------------------------------------------------------------------------- Our cash flow from operating activities may materially fluctuate from period-to-period based on movement within our custodial funds due to customer liability. Since our customer custodial funds are included in cash and cash equivalents, any large fluctuations in the related liability will directly impact our cash flow from operating activities. In the short term, we believe our existing cash and cash equivalents will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including meeting our working capital and capital expenditure requirements. In the long term, our ability to meet our requirements and plans for cash, including meeting our working capital and capital expenditure requirements, will depend on many factors, including market acceptance of crypto assets and blockchain technology, our growth, our ability to attract and retain customers on our platform, the continuing market acceptance of our products and services, the introduction of new subscription products and services on our platform, expansion of sales and marketing activities, and overall economic conditions. We anticipate satisfying our short-term cash requirements with our existing cash and cash equivalents and may satisfy our long-term cash requirements with cash and cash equivalents on hand or with proceeds from a future equity or debt financing. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and cash and other requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. In the event that additional financing is required from outside sources, there is a possibility we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected. Our material cash requirements and contractual obligations arising in the normal course of business primarily consist of operating lease commitments, non-cancelable purchase obligations, long-term debt and related interest payments, and income taxes. With respect to operating lease commitments, which consists of operating leases for corporate offices, the total amount of lease payments due is$114.0 million , with$36.3 million due prior toDecember 31, 2022 . With respect to non-cancelable purchase obligations, which consists of committed spend relating to advertising and technology infrastructure, the total amount due is$269.2 million , with$133.6 million due prior toDecember 31, 2022 . See Notes 6. Leases, 11. Indebtedness and 17. Income Taxes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information pertaining to leases, debt, and income taxes as ofDecember 31, 2021 .
Cash flows
The following table shows a summary of our cash flows for the periods presented:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net cash provided by (used in) operating
activities $ 10,730,031 $ 3,004,070 $ (80,594)
Net cash (used in) provided by investing
activities (1,124,740) 50,822 (105,353)
Net cash provided by (used in) financing
activities 3,284,225 18,801 (16,605)
Net increase in cash, cash equivalents, and
restricted cash $ 12,889,516 $ 3,073,693 $ (202,552)
Effect of exchange rates on cash $ (64,883) $ (2,081) $ (170)
Change in customer custodial funds $ 6,762,841 $ 2,562,042 $ (94,795)
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Operating activities
We assess our cash flow from operating activities by adjusting for the change in customer custodial funds. We use this as a more accurate indicator of our cash growth and our ability to invest in our infrastructure and people to achieve our strategic objectives. Net cash provided by operating activities was$10.7 billion for the year endedDecember 31, 2021 , of which$6.7 billion related to cash from the change in custodial funds due to customers. Our net cash provided by operating activities, other than from custodial funds due to customers, reflected net income of$3.6 billion and non-cash adjustments of$272.6 million , which was driven by benefits from deferred income taxes and realized gains on crypto assets driven by net crypto assets received from operating activities. This was partially offset by stock-based compensation expense, impairment expense and depreciation and amortization expense. In addition to these changes were changes in operating assets and liabilities of$141.4 million . Net cash provided by operating activities was$3.0 billion for the year endedDecember 31, 2020 , of which$2.7 billion related to cash from the change in custodial funds due to customers. Our net cash provided by operating activities, other than from custodial funds due to customers, reflected net income of$322.3 million , non-cash adjustments of$64.8 million , which primarily consisted of$70.5 million in stock-based compensation,$31.0 million in depreciation and amortization,$25.0 million in non-cash lease expense, and$5.3 million in fair value derivative adjustments. These were partially offset by$54.0 million of net crypto assets received from operating activities and$23.7 million in realized gains on crypto assets which is excluded from operating activities and included in investing activities. In addition to these changes were changes in operating assets and liabilities, other than custodial funds due to customers, of$93.6 million . Investing activities Net cash used in investing activities of$1.1 billion for the year endedDecember 31, 2021 was due to$435.1 million in net outflow for the purchase and sale of crypto assets,$326.5 million for investments in companies and technologies,$211.7 million in net outflow for retail user loans originated and repaid,$70.9 million in net cash paid for acquisitions,$60.8 million related to the asset acquisition of assembled workforce and$22.1 million in capitalized internal-use software development costs. Net cash provided by investing activities of$50.8 million for the year endedDecember 31, 2020 primarily related to$46.0 million in net proceeds from the purchase and sale of crypto assets and$33.6 million in net cash and customer custodial funds acquired in the acquisition ofTagomi Holdings, Inc. This was partially offset by investments in companies and technologies of$10.3 million , leasehold and real estate expenditures to support our increased headcount of$9.9 million and capitalized internal-use software development costs of$8.9 million . Financing activities Net cash provided by financing activities of$3.3 billion for the year endedDecember 31, 2021 , was due to$2.0 billion of proceeds from the issuance of our Senior Notes, net of issuance costs and$1.4 billion of proceeds from the issuance of our Convertible Senior Notes, net of issuances costs,$217.1 million of proceeds from the issuance of common stock from stock option exercises, net of repurchases,$20.0 million of proceeds from the issuance of a short-term borrowing, and$19.9 million of proceeds received under the employee stock purchase plan. This was partially offset by$262.8 million of taxes paid related to net share settlement of equity awards and the purchase of$90.1 million of capped calls in connection with our Convertible Senior Notes.
Net cash provided by financing activities of
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, operating results, and cash flows will be affected. See Note 2. Significant Accounting Policies, of the notes to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.
Revenue recognition
We primarily generate revenue through transaction fees charged on our platform. We charge a fee at the transaction level. The transaction price, represented by the trading fee, is calculated based on volume and may vary depending on payment type and the value of the transaction. The transaction fee is collected from the customer at the time the transaction is executed. In certain instances, the transaction fee can be collected in crypto assets, with revenue measured based on the amount of crypto assets received and the fair value of the crypto assets at the time of the transaction. For the year endedDecember 31, 2021 , we collected approximately 13% of total revenue in crypto assets. We currently do not have any formal policies requiring conversion of these crypto assets received into fiat currency. The transaction price includes estimates for reductions in revenue from transaction fee reversals that may not be recovered from customers. Such reversals occur when the customer disputes a transaction processed on their credit card or their bank account for a variety of reasons and seeks to have the charge reversed after we have processed the transaction. These amounts are estimated based upon the most likely amount of consideration to which we will be entitled. All estimates are based on historical experience and our best judgment at the time to the extent it is probable that a significant reversal of revenue previously recognized will not occur. All estimates of variable consideration are reassessed periodically. The total transaction price is allocated to the single performance obligation. While we recognize transaction fee reversals due to transaction reversals as a reduction of net revenue, crypto asset losses due to transaction reversals are included in transaction expense.
Business combinations
We account for our business combinations using the acquisition method of
accounting, which requires, among other things, allocation of the fair value of
purchase consideration to the tangible and intangible assets acquired and
liabilities assumed at their estimated fair values on the acquisition date. When
determining the fair value of assets acquired and liabilities assumed, we make
significant estimates and assumptions, especially with respect to non-crypto
intangible assets. These intangible assets do not have observable prices. We
have generally applied a cost approach in estimating the fair values of acquired
intangible assets, with the number of working hours required to recreate the
intangible asset being a significant input to the estimate. Our estimates of
fair value are based upon assumptions believed to be reasonable, but which are
inherently uncertain and, as a result, actual results may differ from estimates.
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--------------------------------------------------------------------------------Stock-based compensation
We estimate the fair value of stock options with only service-based conditions and purchase rights granted under our 2021 Employee Stock Purchase Plan, or the ESPP, on the date of grant using the Black-Scholes-Merton option-pricing model. The model requires management to make a number of estimates and assumptions, including the fair value of our underlying common stock (prior to listing our Class A common stock on the Nasdaq Global Select Market), expected volatility of our underlying common stock, expected term of the stock option, and expected dividend yield. The expected term of the stock option is based on the average period the stock option is expected to remain outstanding based on the stock option's vesting and contractual terms. The expected stock price volatility assumption for our common stock is determined by using a weighted average of the historical stock price volatilities of comparable companies from a representative peer group, as sufficient trading history for our common stock is not available. Common stock valuations Prior to the Direct Listing of our Class A common stock on the Nasdaq Global Select Market, the fair value of our common stock was determined by our board of directors, with input from management, taking into account our most recent valuations from an independent third-party valuation specialist. Our board of directors intended all stock options granted to have an exercise price per share not less than the per share fair value of our common stock on the date of the grant and we believe that our board of directors had the relevant experience and expertise to determine the fair value of our common stock. The valuations of common stock were determined in accordance with the guidance provided by theAmerican Institute of Certified Public Accountants Practice Aid , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. If stock options were granted a short period of time prior to the date of a valuation report, we retrospectively assessed the fair value used for financial reporting purposes after considering the fair value reflected in the subsequent valuation report and other facts and circumstances on the date of grant as discussed below. The assumptions we used in the models were based on future expectations combined with management judgment and considered numerous and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:
•the results of contemporaneous valuations performed at periodic intervals by an independent valuation firm;
•the prices, rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;
•the prices of our convertible preferred stock and common stock sold to investors in arms-length transactions or offered to investors through a tender offer;
•our actual operating and financial performance and estimated trends and prospects for our future performance;
•our stage of development;
•the likelihood of achieving a liquidity event, such as an initial public offering, direct listing, or sale of our company, given prevailing market conditions;
•the lack of marketability involving securities in a private company;
•the market performance of comparable publicly-traded companies; and
•U.S. and global capital market conditions.
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In valuing our common stock, our board of directors determined the equity value
of our business generally using a weighting of the income and market approach
valuation methods with input from management. The income approach estimates
value based on the expectation of future cash flows that a company will
generate. These future cash flows are discounted to their present values using
an appropriate discount rate based on a weighted-average cost of capital and are
adjusted to reflect the risks inherent in us achieving these estimated cash
flows. The market approach estimates value based on a comparison of the subject
company to comparable public companies in a similar line of business. From the
comparable companies, a representative market value multiple is determined and
then applied to the subject company's financial forecasts to estimate the value
of the subject company.
For valuations prior to June 30, 2020 , the equity valuation was based on both
the income and the market approach valuation methods. Then, the option pricing
method, or OPM, was used to allocate equity value to each class of our stock.
When we had completed or were expecting to complete a convertible preferred
stock financing, the terms and pricing of the financing round were included in
the analysis used to estimate our value and the value of our common stock. These
methods were consistent with prior valuations.
For valuations as of and subsequent to June 30, 2020 , we used a hybrid method
utilizing a combination of the option pricing method, or OPM, and the
probability-weighted expected return method, or PWERM, in estimating the value
of our common stock. Using the PWERM, the value of our common stock was
estimated based upon a probability-weighted analysis of varying values for our
common stock assuming possible future events for our company, including a
scenario of an initial public offering or a direct listing of our common stock
on a stock exchange and a scenario assuming continued operation as a private
entity. We also applied a discount for lack of marketability to account for a
lack of access to an active public market.
Application of these approaches involved the use of estimates, judgment, and
assumptions that were highly complex and subjective, such as those regarding our
expected future revenue, expenses, and future cash flows, discount rates, market
multiples, the selection of comparable companies, and the probability of
possible future events. Changes in any or all of these estimates and assumptions
or the relationships between those assumptions would have impacted our
valuations as of each valuation date and may have had a material impact on the
valuation of our common stock.
Our board of directors' assessments of the fair value of our common stock for
grant dates between the dates of an available third-party valuation report were
based in part on the current available financial and operational information and
the fair market value provided in the most recent available third-party
valuation report as compared to the timing of each grant.
Following our Direct Listing, we use the closing price of our Class A common
stock as reported on The Nasdaq Global Select Market on the date of grant for
the fair value of our common stock, which is used in valuing stock options and
RSUs and purchase rights under our ESPP. Future expense amounts for any
particular period could be affected by changes in assumptions or market
conditions.
Income taxes
We utilize the asset and liability method for computing our income tax
provision. Deferred tax assets and liabilities reflect the expected future
consequences of temporary differences between the financial reporting and tax
bases of assets and liabilities as well as operating loss, capital loss, and tax
credit carryforwards, using enacted tax rates. Management makes estimates,
assumptions, and judgments to determine our provision for income taxes, deferred
tax assets and liabilities, and any valuation allowance recorded against
deferred tax assets. We assess the likelihood that our deferred tax assets will
be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we establish a valuation allowance.
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We recognize the tax benefit from an uncertain tax position only if it is more
likely than not the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized from such positions are then measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon settlement.
Interest and penalties related to unrecognized tax benefits are recognized
within provision for income taxes.
For U.S. federal tax purposes, crypto asset transactions are treated on the same
tax principles as property transactions. We recognize a gain or loss when crypto
assets are exchanged for other property, in the amount of the difference between
the fair market value of the property received and the tax basis of the
exchanged crypto assets. Receipts of crypto assets in exchange for goods or
services are included in taxable income at the fair market value on the date of
receipt.
Recent Accounting Pronouncements
See Note 2. Significant Accounting Policies, of the notes to the consolidated
financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a
discussion about new accounting pronouncements adopted and not yet adopted as of
the date of this report.
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