COINBASE GLOBAL, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 II, Item 1A of this Quarterly Report on Form 10-Q and in our 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 Quarterly Report on Form 10-Q.
Executive Overview
This executive overview of the Management's Discussion and Analysis ("MD&A")
highlights selected information and does not contain all of the information that
is important to readers of this Quarterly Report on Form 10-Q.
The second quarter of 2022 continued a trend of lower crypto asset prices and
trading volume that began in late 2021. Our results were impacted by a shift in
customer and market activity, driven by macroeconomic and crypto credit factors.
We do not believe that these market conditions are permanent. We continue to
take a long-term view and remain focused on building for the future.
On the product side, we are focused on our highest priority product opportunities of Coinbase Retail App, Coinbase Prime, Staking, Developer Products under Coinbase Cloud, and Web3.
For the three and six months ended
Subscription and services revenues was
For the three and six months endedJune 30, 2022 , our net loss was$1.1 billion and$1.5 billion , respectively, and Adjusted EBITDA was negative$151.1 million and negative$131.4 million , respectively. 47 --------------------------------------------------------------------------------
Key Business Metrics
In addition to the measures presented in our condensed 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:
Three Months Ended June 30, % Six Months Ended June 30, %
2022 2021 Change 2022 2021 Change
Verified Users (in
millions) 103 68 51 % 103 68 51 %
MTUs(1) (in millions) 9.0 8.8 2 % 9.1 7.5 21 %
Assets on Platform (in
billions) $ 96 $ 180 (47) % $ 96 $ 180 (47) %
Trading Volume (in
billions) $ 217 $ 462 (53) % $ 526 $ 796 (34) %
Net (loss) income (in
millions) $ (1,094) $ 1,606 (168) % $ (1,523) $ 2,378 (164) %
Adjusted EBITDA(2) (in
millions) $ (151) $ 1,150 (113) % $ (131) $ 2,267 (106) %
___________________
(1)We recently identified an issue in the calculation of our Monthly Transacting
Users ("MTU") metric related to the complexity in measuring users and activity
in self-custodial products (notably Coinbase Wallet) that resulted in the
overstatement of the MTU figures previously disclosed as of September 30, 2021
and December 31, 2021 . Accordingly, the MTU metric as of September 30, 2021 and
December 31, 2021 will be revised from 7.4 million to 7.3 million and from 11.4
million to 11.2 million, respectively, to reflect our estimate of the
overstatement. These figures are not disclosed in this Quarterly Report on Form
10-Q, but we intend to update them in subsequent filings in which such figures
are reported.
(2)Please see the section titled Non-GAAP Financial Measure for a reconciliation
of net (loss) 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. 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. 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.
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 for the end of a quarter are
the average of each month's MTUs in each respective quarter. 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 or user behavior.
48
--------------------------------------------------------------------------------Assets on Platform
We previously defined "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. As a result of our adoption ofSAB 121 as ofJune 30, 2022 , which requires an entity to recognize a liability for the obligation to safeguard a users' crypto assets and a corresponding customer asset in its condensed consolidated balance sheets, we have updated our definition of Assets on Platform as the aggregate of "Customer crypto liabilities" and "Customer custodial cash liabilities," each as set forth on our condensed consolidated balance sheets. We updated this definition so that Assets on Platform will directly correspond to the amounts that we recognize with respect to custodied crypto assets and fiat for financial reporting purposes in our condensed consolidated balance sheets. Importantly, the updated definition of Assets on Platform does not result in any changes with respect to the figures reported in prior periods. 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 increase or decrease in Assets on Platform in a particular period. Our Assets on Platform by asset are as follows: As of June 30, % 2022 2021 Change Assets on Platform: Bitcoin 44 % 47 % (6) % Ethereum 20 % 24 % (17) Other crypto assets 29 % 25 % 16 Fiat 7 % 5 % 40 Total(1) 100 % 100 % - ___________________
(1)Figures presented above may not sum precisely due to rounding.
As of
49
--------------------------------------------------------------------------------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. Generally, Trading Volume on our platform is primarily 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. Three Months Ended June 30, % Six Months Ended June 30, % 2022 2021 Change 2022 2021 Change Trading Volume (in billions): Retail $ 46$ 145 (68) % $ 121$ 265 (54) % Institutional 171 317 (46) 405 531 (24) Total $ 217$ 462 (53) $ 526$ 796 (34) Trading Volume by crypto asset: Bitcoin 31 % 24 % 29 27 % 31 % (13) Ethereum 22 26 (15) 21 24 (13) Other crypto assets 47 50 (6) 52 45 16 Total 100 % 100 % 100 % 100 % Transaction revenue by crypto asset: Bitcoin 31 % 26 % 19 28 % 33 % (15) Ethereum 22 26 (15) 22 23 (4) Other crypto assets 47 48 (2) 50 44 14 Total 100 % 100 % 100 % 100 % Trading Volume decreased 53% and 34% for the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 , respectively. The decrease in Trading Volume was driven by steep declines in both the average crypto asset prices and total crypto spot market volumes associated with macroeconomic challenges during the second quarter of 2022. In addition, Crypto Asset Volatility decreased 32% and 31% for the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 , respectively. During the three and six months endedJune 30, 2022 andJune 30, 2021 , no asset other than Bitcoin and Ethereum individually represented more than 10% of our Trading Volume or Transaction revenue, respectively. 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 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. 50 --------------------------------------------------------------------------------
Components of Results of Operations
Net revenue
Transaction revenue
We generate the majority 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 converted. 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. 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. Our blockchain services offered as part of Coinbase Cloud's blockchain infrastructure solutions are included in Other subscription and services revenue.
•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 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, subscription revenue from Coinbase One, and revenue from other 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 less than 1% of our total revenue for the three and six months endedJune 30, 2022 . 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. 51 --------------------------------------------------------------------------------
Operating expenses
Operating expenses consist of Transaction expense, Technology and development, Sales and marketing, General and administrative, and Other operating expense, net. 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. Restructuring Restructuring expenses primarily consist of non-recurring costs and severance for employees related to reductions in the Company's headcount during the three and six months endedJune 30, 2022 . For more information, see Note 3. Restructuring of the Notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Other operating expense, net
Other operating expense, net 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.
Other operating expense, net also 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
held for operating purposes. 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, net.
52
--------------------------------------------------------------------------------Interest expense
Interest expense on debt includes coupon interest expense, as well as amortization of debt discounts and debt issuance costs.
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
•impairment recognized on certain strategic equity investments in privately held companies without readily determinable fair values.
Benefit from income taxes
Benefit from income taxes includes income taxes related to foreign jurisdictions
and
Results of Operations
The following table summarizes the historical condensed consolidated statements
of operations data:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in thousands)
Revenue:
Net revenue $ 802,603 $ 2,033,011 $ 1,967,494 $ 3,629,991
Other revenue 5,722 194,951 7,267 399,082
Total revenue 808,325 2,227,962 1,974,761 4,029,073
Operating expenses:
Transaction expense 167,187 335,426 445,013 569,492
Technology and development 609,249 291,461 1,179,913 475,686
Sales and marketing 140,894 195,733 341,098 313,722
General and administrative 470,169 248,195 883,747 369,426
Restructuring 42,453 - 42,453 -
Other operating expense, net 422,762 282,422 681,389 438,309
Total operating expenses 1,852,714 1,353,237 3,573,613 2,166,635
Operating (loss) income (1,044,389) 874,725 (1,598,852) 1,862,438
Interest expense 23,656 748 45,794 748
Other expense (income), net 172,524 5,096 205,368 (3,857)
(Loss) income before income taxes (1,240,569) 868,881 (1,850,014) 1,865,547
Benefit from income taxes (146,915) (737,468) (326,701) (512,265)
Net (loss) income $ (1,093,654) $ 1,606,349 $ (1,523,313) $ 2,377,812
53
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The following table presents the components of the condensed consolidated statements of operations data as a percentage of total revenue:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(as a % of total revenue) (1)
Total revenue 100 % 100 % 100 % 100 %
Operating expenses:
Transaction expense 21 15 23 14
Technology and development 75 13 60 12
Sales and marketing 17 9 17 8
General and administrative 58 11 45 9
Restructuring 5 - 2 -
Other operating expense, net 52 13 35 11
Total operating expenses 229 61 181 54
Operating (loss) income (129) 39 (81) 46
Interest expense 3 - 2 -
Other expense (income), net 21 - 10 -
(Loss) income before income taxes (153) 39 (94) 46
Benefit from income taxes (18) (33) (17) (13)
Net (loss) income (135) % 72 % (77) % 59 %
___________________(1)Figures presented above may not sum precisely due to rounding.
Comparison of the three and six months ended
Revenue
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Transaction revenue $ 655,213 $ 1,930,382 (66) % $ 1,668,250 $ 3,470,961 (52) %
Subscription and services
revenue 147,390 102,629 44 299,244 159,030 88
Other revenue 5,722 194,951 (97) 7,267 399,082 (98)
Total revenue $ 808,325 $ 2,227,962 (64) $ 1,974,761 $ 4,029,073 (51)
Transaction revenue for the three and six months ended June 30, 2022 decreased
by $1.3 billion and $1.8 billion compared to the three and six months ended June
30, 2021 , respectively, due to the following:
•Decrease in retail Trading Volume of 68% and 54% for the three and six months
ended
•Crypto Asset Volatility of 9.28 and 8.86 for the three and six months endedJune 30, 2022 , respectively, representing a decrease of 32% and 31% from the three and six months endedJune 30, 2021 . Trading Volume on our platform is correlated with Crypto Asset Volatility.
A number of factors 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.
54
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Subscription and services revenue for the three and six months ended June 30,
2022 increased by $44.8 million and $140.2 million compared to the three and six
months ended June 30, 2021 , respectively, due to the following:
•an increase in Blockchain rewards of $34.0 million and $106.6 million for the
three and six months ended June 30, 2022 , respectively, mainly as a result of
increased user participation in reward-generating activities such as staking;
•an increase in interest income of $26.0 million and $33.2 million for the three
and six months ended June 30, 2022 , respectively, predominantly due to an
increase in federal interest rates on both interest bearing custodial fiat funds
held and higher USDC due to increased customer activity;
•an increase in other subscription and services revenue of $8.7 million and
$21.4 million for the three and six months ended June 30, 2022 , respectively,
predominantly due to subscription fees for Coinbase One which was launched in
the fourth quarter of 2021, as well as an increase in participation and
delegation revenue for the six months ended June 30, 2022 ; offset by
•a decrease in earn campaign revenue of $14.5 million and $19.7 million for the
three and six months ended June 30, 2022 , respectively, driven by a decrease in
both the number of active Earn campaigns as well as in the amounts allocated by
asset issuers for distribution over the same periods; and
•a decrease in custodial fee revenue of $9.5 million and $1.3 million for the
three and six months June 30, 2022 , respectively, due to a decrease in the
average assets under custody of $34.2 billion and $8.4 billion over the same
periods. The decline in assets under custody was primarily driven by a decrease
in the price of crypto assets under custody over the same periods.
Other revenue for the three and six months ended June 30, 2022 decreased by
$189.2 million and $391.8 million , respectively, compared to the three and six
months ended June 30, 2021 , due to a decrease in crypto assets sales revenue
over the same period. A system disruption which occurred on May 19, 2021 as a
result of an unprecedented short term spike in Trading Volume was primarily
responsible for the decrease in crypto assets sales revenue over the same
period.
We generate revenue from crypto asset sales where the transactions are fulfilled
with our crypto assets to accommodate customers, primarily as a result of
unanticipated system disruptions. For the three and six months ended June 30,
2022 , we did not experience any unanticipated system disruptions with material
impact to our financial results compared to four and nine unanticipated system
disruptions for the three and six months ended June 30, 2021 , respectively. The
number of unanticipated system disruptions declined during the three and six
months ended June 30, 2022 as we continued to make significant investments in
database and network infrastructure to support trading volumes on our platform.
55
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Operating expenses
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Transaction expense $ 167,187 $ 335,426 (50) % $ 445,013 $ 569,492 (22) %
Technology and development 609,249 291,461 109 1,179,913 475,686 148
Sales and marketing 140,894 195,733 (28) 341,098 313,722 9
General and administrative 470,169 248,195 89 883,747 369,426 139
Restructuring 42,453 - 100 42,453 - 100
Other operating expense, net 422,762 282,422 50 681,389 438,309 55
Total operating expenses $ 1,852,714 $ 1,353,237 37 $ 3,573,613 $ 2,166,635 65
Transaction expense for the three and six months ended June 30, 2022 decreased
by $168.2 million and $124.5 million , compared to the three and six months ended
June 30, 2021 , respectively. Transaction expense as a percentage of net revenue
was 20.8% and 16.5% during the three months ended June 30, 2022 and 2021,
respectively, and 22.6% and 15.7% during the six months ended June 30, 2022 and
2021, respectively.
The decrease in Transaction expense for the three and six months ended June 30,
2022 , compared to the three and six months ended June 30, 2021 , was due to the
following:
•a decrease of $119.7 million and $157.4 million for three and six months ended
June 30, 2022 , respectively, related to miner fees driven by a decrease in
blockchain transmission volume, both related to customer withdrawals and
corporate wallet movements, and lower blockchain network fees such as Ethereum
gas prices;
•a decrease of
•a decrease of
•an increase of$30.6 million and$90.0 million for three and six months endedJune 30, 2022 , respectively, related to rewards paid or payable to users from blockchain activities such as staking. Technology and development expenses for the three and six months endedJune 30, 2022 increased by$317.8 million and$704.2 million , respectively, compared to the three and six months endedJune 30, 2021 , due to the following: •an increase of$172.4 million and$458.6 million for the three and six months endedJune 30, 2022 , respectively, in personnel-related expenses, including a$129.7 million and$313.0 million increase in stock-based compensation expense, due to a 135% and 147% increase in average headcount and the issuance of equity instruments in conjunction with business combinations;
•an increase of
•an increase of$24.3 million and$40.2 million for the three and six months endedJune 30, 2022 , respectively, related to amortization expense related to capitalized software and assembled workforce. 56 -------------------------------------------------------------------------------- Sales and marketing expenses for the three and six months endedJune 30, 2022 decreased by$54.8 million and increased by$27.4 million compared to the three and six months endedJune 30, 2021 , respectively. Sales and marketing as a percentage of net revenue was 17.6% and 9.6% during the three months endedJune 30, 2022 and 2021, respectively, and 17.3% and 8.6% during the six months endedJune 30, 2022 and 2021, respectively. The decrease and increase in Sales and marketing for the three and six months endedJune 30, 2022 , compared to the three and six months endedJune 30, 2021 , was largely due to the following: •an increase of$20.3 million and$44.5 million in personnel-related expenses for the three and six months endedJune 30, 2022 , including a$12.7 million and$24.1 million increase in stock-based compensation expense, due to a 178% and 207% increase in average headcount; •an increase of$25.6 million and$39.1 million for the three and six months endedJune 30, 2022 , respectively, in conference events and sponsorships; offset by
•a decrease of
•a decrease of$11.7 million and$6.6 million for the three and six months endedJune 30, 2022 , respectively, in customer referral and promotion fees related to marketing initiatives such as sweepstakes and incentivized campaigns. General and administrative expenses for the three and six months endedJune 30, 2022 increased by$222.0 million and$514.3 million compared to the three and six months endedJune 30, 2021 , respectively, predominantly driven by the following: •an increase of$121.5 million and$257.6 million in customer support costs for the three and six months endedJune 30, 2022 , respectively, due to an increase in contingent workforce and managed services to support customer experience and compliance, as a result of increased capacity needs. Our capacity needs may increase in periods following higher trading volumes; •an increase of$59.8 million and$143.3 million in personnel-related expenses excluding customer support for the three and six months endedJune 30, 2022 , respectively, including a$45.0 million and$87.7 million increase in stock-based compensation, due to a 121% and 128% increase in average headcount; •an increase of$29.9 million and$47.7 million in professional services for the three and six months endedJune 30, 2022 , respectively, largely due to increased business process and acquisition consulting services, as well as higher legal fees related to litigation, regulatory and compliance; and •an increase of$7.5 million and$15.0 million in software license costs for the three and six months endedJune 30, 2022 , respectively, to support business, security and risk applications; offset by
•a decrease of
Restructuring expenses were$42.5 million for the three and six months endedJune 30, 2022 , driven by separation pay and other post-employment benefits related to the workforce reduction inJune 2022 . There were no restructuring expenses for the three and six months endedJune 30, 2021 . 57
-------------------------------------------------------------------------------- Other operating expense, net for the three and six months endedJune 30, 2022 increased by$140.3 million and$243.1 million compared to the three and six months endedJune 30, 2021 , respectively, due to the following: •an increase of$260.4 million and$487.5 million for the three and six months endedJune 30, 2022 , respectively, related to gross impairment charges on crypto assets held during the quarter. Impairment charges, net of any recoveries, amounted to$377.0 million and$586.8 million during the three and six months endedJune 30, 2022 , respectively, which relate to the crypto assets still held as ofJune 30, 2022 ; •an increase of$45.4 million for the six months endedJune 30, 2022 due to certain platform-related incidents and losses; the incident losses expense remained flat for the three months endedJune 30, 2022 as compared toJune 30, 2021 ; offset by •a decrease of$178.9 million and$364.8 million for the three and six months endedJune 30, 2022 , respectively, attributed to the decrease in the crypto assets sold in order to fulfill customer accommodation transactions, primarily as a result of a decrease in the unanticipated system disruptions over the same period; and
•a decrease of
Interest expense
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Interest expense $ 23,656 $ 748 3063 % $ 45,794 $ 748 6022 %
During the three and six months ended June 30, 2022 , we had interest expense on
debt of $23.7 million and $45.8 million compared to $0.7 million for the three
and six months ended June 30, 2021 , respectively, due to our Convertible Notes
issued in May 2021 , our Senior Notes issued in September 2021 and short-term
borrowings outstanding during the first six months of 2022.
Other expense (income), net
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)Other expense (income), net$ 172,524 $ 5,096 3285 %$ 205,368 $ (3,857) 5425 % Other expense (income), net for the three and six months endedJune 30, 2022 increased by$167.4 million and$209.2 million compared to the three and six months endedJune 30, 2021 , respectively, due to the following: •an increase in net unrealized and realized losses related to foreign exchange of$96.9 million and$128.0 million for the three and six months endedJune 30, 2022 , respectively, predominantly due to the timing of Euro denominated intercompany settlements and depreciation of the Euro and British Pound against theU.S. dollar;
•an increase in impairment expense recognized on certain strategic equity
investments of
58
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•an increase in net realized and unrealized losses on investments of $4.3
million and $14.5 million for the three and six months ended June 30, 2022 ,
respectively, primarily due to the remeasurement gain of $8.8 million during the
six months ended June 30, 2021 related to our previously held investment in
Bison Trails, as a result of the acquisition that occurred in February 2021 ;
offset by
•a remeasurement gain of
Benefit from income taxes
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Benefit from income taxes $ (146,915) $ (737,468) (80) % $ (326,701) $ (512,265) (36) %
The benefit from income taxes decreased by$590.6 million and$185.6 million for the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 , respectively. The benefit from income taxes decreased due to the reduction in certain stock-based compensation and research and development credits, and a valuation allowance recorded on impairment charges, partially offset by tax benefits on pretax loss during the three and six months endedJune 30, 2022 .
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
We calculate Adjusted EBITDA as net loss or income, adjusted to exclude benefit
from income taxes, depreciation and amortization, interest expense, crypto asset
borrowing costs, stock-based compensation expense, crypto asset impairment, net,
other impairment, impairment on investments, non-recurring Direct Listing
expenses, restructuring, unrealized loss on foreign exchange, fair value gain or
loss on derivatives, non-recurring legal reserves and related costs, and other
adjustments, net.
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The following table provides a reconciliation of net (loss) income to Adjusted
EBITDA:
Three Months Ended
June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in thousands)
Net (loss) income $ (1,093,654) $
1,606,349
(146,915) (737,468) (326,701) (512,265)
Depreciation and amortization 42,027 12,612 73,607 23,534
Interest expense 23,656 748 45,794 748
Crypto asset borrowing costs 1,566 2,925 3,002 7,198
Stock-based compensation 391,496 189,335 743,637 293,963
Crypto asset impairment, net(1) 377,005 57,343 586,823 58,184
Impairment on investments 69,289 - 69,289 -
Other impairment(2) 6,770 - 7,949 -
Non-recurring Direct Listing expenses - 35,000 - 39,160
Restructuring 42,453 - 42,453 -
Unrealized loss on foreign exchange 107,683 5,261 115,072 2,392
Fair value (gain) loss on derivatives (2,500) (22,415) 952 (25,215)
Legal reserves and related costs 14,250 - 14,250 1,500
Other adjustments, net(3) 15,797 - 15,797 -
Adjusted EBITDA $ (151,077) $ 1,149,690 $ (131,389) $ 2,267,011
______________
(1)Crypto asset impairment, net represents impairment on crypto assets still
held.
(2)Other impairment represents impairment on Intangible assets, net of $3.2
million and $4.4 million for the three and six months ended June 30, 2022 ,
respectively, and impairment on Property and equipment, net of $3.6 million for
the three and six months ended June 30, 2022 , respectively.
(3)Other adjustments, net includes $12.5 million pertaining to value-added taxes
(VAT), $11.5 million associated with payments made on rescinded employment
offers, offset by an unrealized gain of $8.2 million related to a contingent
consideration arrangement.
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Liquidity and Capital Resources
Cash and Cash Equivalents, Restricted Cash and USDC
As ofJune 30, 2022 , we had cash and cash equivalents of$5.7 billion , exclusive of restricted cash and customer custodial cash. As ofJune 30, 2022 andDecember 31, 2021 , our cash and cash equivalents, restricted cash, and USDC balance consisted of the following (in millions): June 30, December 31, 2022 2021 Cash and cash equivalents: Cash equivalents(1)$ 2,773.1 $ 4,813.6 Cash held at banks 2,740.1 2,141.0 Cash held at venues 168.9 168.9
Total Cash and cash equivalents
Restricted cash(2)$ 29.0 $ 31.0 USDC(3)$ 361.7 $ 100.1 _________________________ (1) Cash equivalents consists of money market funds primarily denominated inU.S. dollars. (2) Restricted cash consists 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. (3) USDC is a stablecoin which can be redeemed one USDC forone U.S. dollar on demand. While not accounted for as cash or cash equivalents, we treat our USDC holdings as a liquidity resource.
Debt
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 . InMay 2021 , we issued an aggregate of$1.44 billion of 2026 Convertible Notes that mature onJune 1, 2026 , unless converted, redeemed or repurchased on an earlier date. We periodically issue short-term debt to support certain business operations. See Notes 10. Accrued Expenses and Other Current Liabilities and 11. Indebtedness of the Notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding our short and long-term borrowings, respectively. InJune 2022 , Moody's Investors Service ("Moody's") announced a downgrade of our Corporate Family Rating (CFR) to Ba3 from Ba2 and downgraded our guaranteed senior unsecured notes to Ba2 from Ba1. The ratings were placed under review for further downgrade. In addition,S&P Global Ratings revised their outlook to negative from stable.
Crypto Assets
Our crypto asset investment policy allows us to invest up to 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.
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-------------------------------------------------------------------------------- As ofJune 30, 2022 , we held$403.4 million of crypto assets for investment and operating purposes at impaired cost. 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 liquidity, 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
June 30, December 31,
2022 2021
Fair
Cost(1) value(2) Cost(1) Fair value(2)
(in millions)
Crypto assets held as investments:
Bitcoin $ 112.4 $ 173.6 $ 87.9 $ 265.8
Ethereum 98.6 135.4 46.1 167.1
Other 78.7 118.8 75.4 263.1
Total crypto assets held as investments 289.7 427.8 209.4 696.0
Crypto assets held for operating purposes:
Bitcoin 13.5 19.1 95.5 97.9
Ethereum 16.1 16.1 58.2 75.4
Other 84.1 90.0 203.4 267.5
Total crypto assets held for operating purposes 113.7 125.2 357.1 440.8
Total crypto assets held $ 403.4 $ 553.0 __________________
(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 and corporate expenses denominated in crypto assets are fulfilled with crypto assets held for operational purposes. We recognized$295.3 million and$436.3 million of impairment expense on our crypto asset investment portfolio for the three and six months endedJune 30, 2022 , respectively.
Customer crypto assets and liabilities
The Company safeguards customer crypto assets and the associated keys and is obligated to safeguard them from loss, theft, or other misuse. In accordance with recently adopted guidance,SAB 121, we record customer crypto assets, as well as corresponding customer crypto assets on the condensed consolidated balance sheets, at fair value. See Note 8. Customer assets and liabilities to the condensed consolidated financial statements included in Part 1. Item 1 of this Quarterly Report on Form 10-Q, for further information as ofJune 30, 2022 . 62
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Cash Requirements and Contractual Obligations
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 customer custodial cash liabilities. Depending on the jurisdiction, eligible liquid assets can include cash and cash equivalents, customer custodial cash, and in-transit funds receivable. As ofJune 30, 2022 andDecember 31, 2021 , our eligible liquid assets were greater than the aggregate amount of customer custodial cash liabilities. We are also required to hold corporate liquid assets at our subsidiaries to meet capital requirements established by our regulators based on the value of crypto assets held in custody. Our cash flow from operating activities may materially fluctuate from period-to-period based on movement within our customer custodial cash liabilities. Since our customer custodial cash is included in our cash, cash equivalents, and restricted cash balance on our statements of cash flows, any large fluctuations in the related liability will directly impact our cash flow from operating activities. We believe our existing cash and cash equivalents will be sufficient in both the short and long term to meet our requirements and plans for cash, including meeting our working capital and capital expenditure requirements. 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. As a result of our downgrade, our ability to raise additional financing from external sources in the future may be adversely affected and we may not be able to raise capital on terms acceptable to us or at all. In addition, even if debt financing is available, the cost of additional financing may be significantly higher than our current debt. Our material cash requirements and contractual obligations arising in the normal course of business primarily consist of operating lease commitments, non-cancelable purchase obligations, debt and related interest payments, and income taxes. With respect to operating lease commitments, which consists of operating leases for corporate offices as ofJune 30, 2022 , the total amount of lease payments due is$99.0 million , with$37.4 million due within the next 12 months. With respect to non-cancelable purchase obligations, which consists of committed spend relating to technology and advertising, as ofJune 30, 2022 , the total amount due was$602.5 million , with$328.7 million due within the next 12 months. See Notes 10. Accrued Expenses and Other Current Liabilities, 11. Indebtedness and 16. Income Taxes of the Notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further information relating to debt and income taxes as ofJune 30, 2022 . 63
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Cash flows
Six Months Ended June 30,
2022 2021
(in thousands)
Net cash (used in) provided by operating activities $ (3,863,775) $ 7,394,664
Net cash used in investing activities (618,620) (337,748)
Net cash (used in) provided by financing activities (186,157) 1,434,676
Net (decrease) increase in cash, cash equivalents, and restricted cash
$
(4,668,552)
$ (119,932) $ 11,015 Change in customer custodial cash $
(3,345,085)
Operating activities
We assess our cash flow from operating activities by adjusting for the change in customer custodial cash. We use this as a more accurate indicator of changes in our cash position and our ability to invest in our infrastructure and people to achieve our strategic objectives. Net cash used in operating activities was$3.9 billion for the six months endedJune 30, 2022 , of which$3.4 billion related to cash from the change in customer custodial cash liabilities. Our net cash used in operating activities, other than from customer custodial cash liabilities, reflected a net loss of$1.5 billion , partially offset by non-cash adjustments of$1.3 billion , which was driven by stock-based compensation expense, crypto asset impairment expense, unrealized losses on foreign exchange, depreciation and amortization expense, impairment expense on ventures investments, non-cash lease expense and other impairment expense. This was partially offset by deferred income taxes and realized gains on crypto assets driven by net crypto assets received from operating activities. In addition to these changes were changes in operating assets and liabilities, other than customer custodial cash liabilities, of$215.7 million . Net cash provided by operating activities was$7.4 billion for the six months endedJune 30, 2021 , of which$5.1 billion related to cash from the change in customer custodial cash liabilities. Our net cash provided by operating activities, other than from customer custodial cash liabilities, reflected net income of$2.4 billion , non-cash adjustments of$247.1 million , which was driven by stock-based compensation expense, impairment expense, depreciation and amortization expense, and non-cash lease expense. This was partially offset by realized gains on crypto assets driven by net crypto assets received from operating activities and fair value derivative adjustments. In addition to these changes were changes in operating assets and liabilities, other than customer custodial cash liabilities, of$331.5 million .
Investing activities
Net cash used in investing activities of$618.6 million for the six months endedJune 30, 2022 was due to$443.7 million in net outflow for the purchase and sale of crypto assets,$186.2 million in net cash paid in the Unbound Security and FairXchange acquisitions,$46.9 million in investments of companies and technologies and$32.1 million in capitalized internal-use software development costs. This was partially offset by$92.5 million in net inflow for retail user loans repaid and originated. Net cash used in investing activities of$337.7 million for the six months endedJune 30, 2021 was due to$163.4 million in net outflow for the purchase and sale of crypto assets,$68.7 million in net outflow for retail user loans originated and repaid,$38.6 million in investments of companies and technologies,$33.0 million in net cash paid in the Bison Trails acquisition,$24.0 million related to the asset acquisition of technical talent and$9.8 million in capitalized internal-use software development costs. 64 --------------------------------------------------------------------------------
Financing activities
Net cash used in financing activities of$186.2 million for the six months endedJune 30, 2022 was due to$213.1 million of taxes paid related to net share settlements of equity awards and$170.0 million in repayments of short-term borrowings. This was partially offset by$149.4 million of proceeds received from the issuance of short-term borrowings, net of issuance costs,$31.9 million of proceeds from the issuance of common stock from stock option exercises, net of repurchases, and$12.0 million of proceeds received under the employee stock purchase plan. Net cash provided by financing activities of$1.4 billion for the six months endedJune 30, 2021 was due to$1.4 billion of proceeds from the issuance of our convertible senior notes, net of issuances costs,$149.9 million of proceeds from the issuance of common stock from stock option exercises, net of repurchases, and$20.0 million of proceeds from the issuance of a short-term borrowing. This was partially offset by the purchase of$90.1 million of capped calls in connection with our convertible senior notes, and$51.7 million of taxes paid related to net share settlement of equity awards.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the condensed consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders' equity, revenue, expenses, and related disclosures. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. Except as described in Note 2. Summary of Significant Accounting Policies, of the Notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K which was filed with theSecurities and Exchange Commission (the "SEC") onFebruary 25, 2022 .
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies, of the Notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion about new accounting pronouncements adopted and not yet adopted as of the date of this report.
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