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 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 third quarter of 2022 was a mixed quarter forCoinbase . Transaction revenue was significantly impacted by stronger macroeconomic and crypto market headwinds, as well as trading volume moving offshore. Meanwhile, we saw strong growth in our subscription and services revenue, driven by our participation in the USDC ecosystem and growth in staking. While the macro headwinds are beyond our control, we continue to focus on factors within our control: narrowing our product focus to deliver amazing customer experiences and reducing our operating expenses. For the three and nine months endedSeptember 30, 2022 , our total net revenue was$576.4 million and$2.5 billion , respectively, including$365.9 million and$2.0 billion in transaction revenue, respectively.
Subscription and services revenue was
For the three and nine months ended
49
--------------------------------------------------------------------------------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 September
30, % Nine Months Ended September 30, %
2022 2021 Change 2022 2021 Change
Verified Users (in
millions) 108 73 48 % 108 73 48 %
MTUs(1) (in millions) 8.5 7.3 16 8.9 7.3 22
Assets on Platform (in
billions) $ 101 $ 255 (60) $ 101 $ 255 (60)
Trading Volume (in
billions) $ 159 $ 327 (51) $ 685 $ 1,124 (39)
Net (loss) income (in
millions) $ (545) $ 406 (234) $ (2,068) $ 2,784 (174)
Adjusted EBITDA(2) (in
millions) $ (116) $ 618 (119) $ (247) $ 2,885 (109)
___________________
(1)We previously 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
was revised from 7.4 million to 7.3 million to reflect our estimate of the
overstatement. Although the MTU metric as of December 31, 2021 is not disclosed
in this Quarterly Report on Form 10-Q, we intend to revise this metric from 11.4
million to 11.2 million in subsequent filings in which such figure is reported.
(2)Please see the section titled Non-GAAP Financial Measure below 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.
Assets on Platform
We define "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.
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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 September 30, %
2022 2021 Change
Assets on Platform:
Bitcoin 39 % 42 % (7) %
Ethereum 24 22 9
Other crypto assets 31 33 (6)
Fiat 6 3 100
Total(1) 100 % 100 % -
___________________(1)Figures presented above may not sum precisely due to rounding.
As of
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, Crypto Asset Volatility1 and macroeconomic conditions. 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. 1 We recently updated the definition of "Crypto Asset Volatility" which represents our internal measure of the volatility of crypto assets. The change aligns our definition with industry standards and is based on intraday returns of a volume-weighted basket of all assets listed on our trading platform. These returns are used to compute the basket's intraday volatility which is then scaled to a daily window. These daily volatility values are then averaged over the applicable time period as needed. The change did not affect any previously reported metrics. 51
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Three Months Ended September 30, % Nine Months Ended September 30, %
2022 2021 Change 2022 2021 Change
Trading Volume (in billions):
Retail $ 26 $ 93 (72) % $ 147 $ 358 (59) %
Institutional 133 234 (43) 538 766 (30)
Total $ 159 $ 327 (51) $ 685 $ 1,124 (39)
Trading Volume by crypto asset:
Bitcoin 31 % 19 % 63 28 % 27 % 4
Ethereum 33 22 50 24 23 4
Other crypto assets 36 59 (39) 48 50 (4)
Total 100 % 100 % 100 % 100 %
Transaction revenue by crypto asset:
Bitcoin 31 % 21 % 48 28 % 30 % (7)
Ethereum 24 22 9 23 23 -
Other crypto assets 45 57 (21) 49 47 4
Total 100 % 100 % 100 % 100 %
Trading Volume decreased 51% and 39% for the three and nine months ended
September 30, 2022 compared to the three and nine months ended September 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 third quarter of 2022. In
addition, Crypto Asset Volatility decreased 24% and 28% for the three and nine
months ended September 30, 2022 compared to the three and nine months ended
September 30, 2021 , respectively.
During the three and nine months ended
Given that crypto markets and our revenue sources continue to evolve rapidly, we believe there may be an opportunity to evolve our key business metrics disclosures to better align with business performance. This re-evaluation of our key business metrics may include changes to or the elimination of certain metrics. Based on this evaluation, we may determine to change or eliminate some of our current key business metrics in future filings we make with theSEC .
Components of Results of Operations
Net revenue
Transaction revenue
Net revenue consists of transaction revenue generated 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.
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--------------------------------------------------------------------------------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. •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 issued 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, Learning Rewards (formerly "Earn") campaign revenue, 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 0.1% of our total revenue for the three and nine months endedSeptember 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. 53 --------------------------------------------------------------------------------
Operating expenses
Operating expenses consist of transaction expense, technology and development, sales and marketing, general and administrative, restructuring, 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 nine months endedSeptember 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.
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--------------------------------------------------------------------------------Interest expense
Interest expense on debt includes coupon interest expense, as well as amortization of debt discounts and debt issuance costs.
Other expense, net
Other expense, 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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands)
Revenue:
Net revenue $ 576,375 $ 1,234,736 $ 2,543,869 $ 4,864,727
Other revenue 13,964 77,172 21,231 476,254
Total revenue 590,339 1,311,908 2,565,100 5,340,981
Operating expenses:
Transaction expense 101,876 197,251 546,889 766,743
Technology and development 556,338 356,264 1,736,251 831,950
Sales and marketing 75,888 105,395 416,986 419,117
General and administrative 339,157 242,642 1,222,904 612,068
Restructuring (1,232) - 41,221 -
Other operating expense, net 74,796 118,548 756,185 556,857
Total operating expenses 1,146,823 1,020,100 4,720,436 3,186,735
Operating (loss) income (556,484) 291,808 (2,155,336) 2,154,246
Interest expense 21,507 6,972 67,301 7,720
Other expense, net 65,699 13,976 271,067 10,119
(Loss) income before income taxes (643,690) 270,860 (2,493,704) 2,136,407
Benefit from income taxes (99,055) (135,240) (425,756) (647,505)
Net (loss) income $ (544,635) $ 406,100 $ (2,067,948) $ 2,783,912
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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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(as a % of total revenue)(1)
Total revenue 100 % 100 % 100 % 100 %
Operating expenses:
Transaction expense 17 15 21 14
Technology and development 94 27 68 16
Sales and marketing 13 8 16 8
General and administrative 57 18 48 11
Restructuring - - 2 -
Other operating expense, net 13 9 29 10
Total operating expenses 194 78 184 60
Operating (loss) income (94) 22 (84) 40
Interest expense 4 1 3 -
Other expense, net 11 1 11 -
(Loss) income before income taxes (109) 21 (97) 40
Benefit from income taxes (17) (10) (17) (12)
Net (loss) income (92) % 31 % (81) % 52 %
___________________(1)Figures presented above may not sum precisely due to rounding.
Comparison of the three and nine months ended
Revenue
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Transaction revenue $ 365,868 $ 1,089,656 (66) % $ 2,034,118 $ 4,560,617 (55) %
Subscription and services
revenue 210,507 145,080 45 509,751 304,110 68
Other revenue 13,964 77,172 (82) 21,231 476,254 (96)
Total revenue $ 590,339 $ 1,311,908 (55) $ 2,565,100 $ 5,340,981 (52)
Transaction revenue for the three and nine months ended
•a decrease in retail Trading Volume of 72% and 59% for the three and nine
months ended
•Crypto Asset Volatility decreased 24% and 28% for the three and nine months
ended
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--------------------------------------------------------------------------------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.
Subscription and services revenue for the three and nine months endedSeptember 30, 2022 increased by$65.4 million and$205.6 million compared to the three and nine months endedSeptember 30, 2021 , respectively, due to the following: •an increase in interest income of$93.4 million and$126.6 million for the three and nine months endedSeptember 30, 2022 , respectively, due to an increased return on interest-bearing customer custodial funds and as a result of our revenue sharing arrangement with the issuer of USDC. The increased yield was primarily related to an increase in interest rates; •an increase in blockchain rewards of$92.4 million for the nine months endedSeptember 30, 2022 due to the addition of new assets available for staking and increased staking activity with higher native tokens staked; and •an increase in other subscription and services revenue of$3.3 million and$4.9 million for the three and nine months endedSeptember 30, 2022 , respectively, primarily due to subscription fees for Coinbase One which was launched in the fourth quarter of 2021, partially offset by a decrease in Learning Rewards campaign revenue; offset by •a decrease in custodial fee revenue of$16.9 million and$18.2 million for the three and nine monthsSeptember 30, 2022 , respectively, due to a decrease in the average assets under custody of$66.7 billion and$27.8 billion over the same periods. The decline in average 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 nine months endedSeptember 30, 2022 decreased by$63.2 million and$455.0 million , respectively, compared to the three and nine months endedSeptember 30, 2021 , primarily due to a decrease in crypto asset sales revenue over the same period. A system disruption which occurred onMay 19, 2021 as a result of an unprecedented short term spike in Trading Volume as well as the exchange disruption onSeptember 7, 2021 were primarily responsible for the increase in crypto asset sales during the nine months endedSeptember 30, 2021 . 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 nine months endedSeptember 30, 2022 , we did not experience any unanticipated system disruptions with material impact to our financial results compared to three and twelve unanticipated system disruptions for the three and nine months endedSeptember 30, 2021 , respectively. The number of unanticipated system disruptions declined during the three and nine months endedSeptember 30, 2022 as we continued to make significant investments in infrastructure to support trading volumes on our platform. 57
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Operating expenses
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Transaction expense $ 101,876 $ 197,251 (48) % $ 546,889 $ 766,743 (29) %
Technology and development 556,338 356,264 56 1,736,251 831,950 109
Sales and marketing 75,888 105,395 (28) 416,986 419,117 (1)
General and administrative 339,157 242,642 40 1,222,904 612,068 100
Restructuring (1,232) - (100) 41,221 - 100
Other operating expense, net 74,796 118,548 (37) 756,185 556,857 36
Total operating expenses $ 1,146,823 $ 1,020,100 12 $ 4,720,436 $ 3,186,735 48
Transaction expense for the three and nine months ended September 30, 2022
decreased by $95.4 million and $219.9 million , compared to the three and nine
months ended September 30, 2021 , respectively. Transaction expense as a
percentage of net revenue was 17.7% and 16.0% during the three months ended
September 30, 2022 and 2021, respectively, and 21.5% and 15.8% during the nine
months ended September 30, 2022 and 2021, respectively. Our transaction expenses
as a percentage of net revenue will vary depending on the composition of our
revenue. For example, over the past few quarters, blockchain rewards revenues
have grown, and these revenues have a higher transaction expense as a percentage
of net revenue compared to transaction fees or interest income.
The decrease in transaction expense for the three and nine months ended
•a decrease of$41.7 million and$199.1 million for the three and nine months endedSeptember 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$17.0 million and$63.9 million for the three and nine months endedSeptember 30, 2022 , respectively, related to lower payment processing fees driven by lower settled trading volume during the comparative periods; •a decrease of$36.4 million and$50.3 million for the three and nine months endedSeptember 30, 2022 , respectively, related to transaction reversal losses driven by lower transaction volumes in the comparative periods; and •a decrease of$2.0 million for the three months endedSeptember 30, 2022 , related to decreased blockchain revenue and an increase of$88.0 million for the nine months endedSeptember 30, 2022 , related to an increase in blockchain activities associated with rewards paid or payable to users from blockchain activities such as staking.
Technology and development expenses for the three and nine months ended
•an increase of$135.5 million and$594.0 million for the three and nine months endedSeptember 30, 2022 , respectively, in personnel-related expenses, including a$98.3 million and$411.3 million increase in stock-based compensation expense, primarily due to a 75% and 117% increase in average headcount and the issuance of equity instruments in conjunction with business combinations; 58 -------------------------------------------------------------------------------- •an increase of$34.3 million and$193.3 million for the three and nine months endedSeptember 30, 2022 , respectively, in software and service costs, driven by continued investment in our products and platform;
•an increase of
•an increase of$2.5 million and$16.1 million for the three and nine months endedSeptember 30, 2022 , respectively, related to increased business processes and IT consulting services. Sales and marketing expenses for the three months endedSeptember 30, 2022 decreased by$29.5 million compared to the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , sales and marketing expenses remained relatively flat, which was driven by a decrease in digital advertising spend, offset by an increase in conferences, events and brand spend. Sales and marketing expenses as a percentage of net revenue was 13.2% and 8.5% during the three months endedSeptember 30, 2022 and 2021, respectively, and 16.4% and 8.6% during the nine months endedSeptember 30, 2022 and 2021, respectively.
The decrease in sales and marketing expenses for the three months ended
•a decrease of
•an increase of$17.5 million for the three months endedSeptember 30, 2022 in conference events and sponsorships as well as marketing collateral due to higher offline and brand spend; and
•an increase of
General and administrative expenses for the three and nine months ended
•an increase of
•an increase of$35.8 million and$179.0 million in personnel-related expenses excluding customer support for the three and nine months endedSeptember 30, 2022 , respectively, including a$13.2 million and$100.9 million increase in stock-based compensation, primarily due to a 77% and 107% increase in average headcount for the three and nine months endedSeptember 30, 2022 , respectively; •an increase of$21.2 million and$68.9 million in professional services for the three and nine months endedSeptember 30, 2022 , respectively, predominantly driven by increased business process as well as higher legal fees related to litigation, regulatory and compliance; and
•an increase of
•a decrease of
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Restructuring expenses were negative $1.2 million and $41.2 million for the
three and nine months ended September 30, 2022 , respectively. The negative $1.2
million is due to release of accruals for certain other personnel costs as of
June 30, 2022 which were not utilized; the $41.2 million is driven by separation
pay and other personnel costs related to the workforce reduction in June 2022 .
There were no restructuring expenses for the three and nine months ended
September 30, 2021 .
Other operating expense, net for the three and nine months ended September 30,
2022 decreased by $43.8 million and increased by $199.3 million compared to the
three and nine months ended September 30, 2021 , respectively, due to the
following:
•a decrease of $68.4 million and $433.2 million for the three and nine months
ended September 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 unanticipated system disruptions over the
comparative periods;
•a decrease of $32.5 million and an increase of $455.1 million for the three and
nine months ended September 30, 2022 , respectively, related to gross impairment
charges on crypto assets held during the period;
•an increase of
•a decrease of
Interest expense
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Interest expense $ 21,507 $ 6,972 208 % $ 67,301 $ 7,720 772 %
During the three and nine months ended September 30, 2022 , we had interest
expense on debt of $21.5 million and $67.3 million compared to $7.0 million and
$7.7 million for the three and nine months ended September 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
nine months of 2022.
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Other expense, net
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Other expense, net $ 65,699 $ 13,976 370 % $ 271,067 $ 10,119 2,579 %
Other expense, net for the three and nine months ended
•an increase in net unrealized and realized losses related to foreign exchange of$68.6 million and$196.6 million for the three and nine months endedSeptember 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, offset by an unrealized fair value gain on foreign exchange forward derivative contracts of$22.9 million for the three and nine months endedSeptember 30, 2022 , respectively;
•an increase in impairment expense recognized on certain strategic equity
investments of
•a decrease in net realized and unrealized losses on investments of$1.0 million and$13.5 million for the three and nine months endedSeptember 30, 2022 , respectively, primarily due to the remeasurement gain of$8.8 million during the nine months endedSeptember 30, 2021 related to our previously held investment in Bison Trails, as a result of the acquisition that occurred inFebruary 2021 .
Benefit from income taxes
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
(in thousands) (in thousands)
Benefit from income taxes $ (99,055) $ (135,240) (27) % $ (425,756) $ (647,505) (34) %
The benefit from income taxes decreased by $36.2 million and $221.7 million for
the three and nine months ended September 30, 2022 compared to the three and
nine months ended September 30, 2021 , respectively, due to a 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 nine months ended September 30,
2022 .
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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,
impairment on investments, other impairment, non-recurring Direct Listing
expenses, restructuring, unrealized loss on foreign exchange, fair value gain on
foreign exchange derivatives, 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
September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands)
Net (loss) income $ (544,635)
(99,055) (135,240) (425,756) (647,505)
Depreciation and amortization 40,114 17,099 113,721 40,633
Interest expense 21,507 6,972 67,301 7,720
Crypto asset borrowing costs 945 2,326 3,947 9,524
Stock-based compensation 391,441 264,195 1,135,078 558,157
Crypto asset impairment, net(1) - 17,485 586,823 75,669
Impairment on investments 1,577 - 70,866 -
Other impairment(2) 1,122 - 9,071 -
Non-recurring Direct Listing expenses - - - 39,160
Restructuring (1,232) - 41,221 -
Unrealized loss on foreign exchange 77,181 13,692 192,253 16,084
Fair value gain on foreign exchange
derivatives (22,935) - (22,935) -
Fair value loss (gain) on derivatives 2,399 1,392 3,351 (23,823)
Legal reserves and related costs - - 14,250 1,500
Other adjustments, net 15,679 24,200 31,476 24,200
Adjusted EBITDA $ (115,892) $ 618,221 $ (247,281) $ 2,885,231
______________
(1)Crypto asset impairment, net represents impairment on crypto assets still
held.
(2)Other impairment represents impairment on intangible assets, net of $0.1
million and $4.5 million for the three and nine months ended September 30, 2022 ,
respectively, and impairment on property and equipment, net of $1.0 million and
$4.6 million for the three and nine months ended September 30, 2022 ,
respectively.
63
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Liquidity and Capital Resources
Cash and cash equivalents, restricted cash, USDC and cash collateral
As ofSeptember 30, 2022 , we had cash and cash equivalents of$5.0 billion , exclusive of restricted cash and customer custodial cash. As ofSeptember 30, 2022 andDecember 31, 2021 , our cash and cash equivalents, restricted cash, USDC and cash collateral balance consisted of the following (in millions): September 30, December 31, 2022 2021 Cash and cash equivalents: Cash equivalents(1)$ 2,282.1 $ 4,813.6 Cash held at banks 2,556.7 2,141.0 Cash held at venues 167.8 168.9 Total cash and cash equivalents$ 5,006.6 $ 7,123.5 Restricted cash(2) $ 23.1 $ 31.0 USDC(3) 368.1 100.1 Cash collateral posted against foreign currency forward contracts(4) 145.0 - _________________________ (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. (4) See Note 9. Prepaid Expenses and Other Assets of the Notes to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for further information.
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. InAugust 2022 ,S&P Global Ratings announced a downgrade of our issuer credit rating and senior unsecured debt from BB+ to BB. 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. During the third quarter of 2022, Moody's affirmed both ratings and placed us on a negative outlook. 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. 64
-------------------------------------------------------------------------------- As ofSeptember 30, 2022 , we held$413.1 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
September 30, December 31,
2022 2021
Fair
Cost(1) Value(2) Cost(1) Fair Value(2)
(in millions)
Crypto assets held as investments:
Bitcoin $ 109.8 $ 168.8 $ 87.9 $ 265.8
Ethereum 102.1 172.4 46.1 167.1
Other 77.7 141.9 75.4 263.1
Total crypto assets held as investments 289.6 483.1 209.4 696.0
Crypto assets held for operating purposes:
Bitcoin 10.3 11.1 95.5 97.9
Ethereum 19.0 21.9 58.2 75.4
Other 94.2 112.0 203.4 267.5
Total crypto assets held for operating purposes 123.5 145.0 357.1 440.8
Total crypto assets held $ 413.1 $ 628.1 __________________
(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$5.0 million and$441.2 million of impairment expense on our crypto asset investment portfolio for the three and nine months endedSeptember 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 liabilities on the condensed consolidated balance sheets, at fair value. See Note 8. Customer Assets and Liabilities of the Notes to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q, for further information as ofSeptember 30, 2022 . 65
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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 customer receivables. As ofSeptember 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 ofSeptember 30, 2022 , the total amount of lease payments due is$94.1 million , with$36.8 million due within the next 12 months. With respect to non-cancelable purchase obligations, which consists of committed spend primarily relating to technology and advertising, as ofSeptember 30, 2022 , the total amount due was$611.2 million , with$310.5 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 ofSeptember 30, 2022 . 66 --------------------------------------------------------------------------------
Cash flows
Nine Months Ended September 30,
2022 2021
(in thousands)
Net cash (used in) provided by operating activities $ (4,817,276) $ 7,736,711
Net cash used in investing activities (637,698) (644,415)
Net cash (used in) provided by financing activities (228,625) 3,393,411
Net (decrease) increase in cash, cash equivalents, and restricted cash
$
(5,683,599)
$ (376,261) $ (1,111) Change in customer custodial cash$ (3,935,128) $ 5,193,574 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$4.8 billion for the nine months endedSeptember 30, 2022 , of which$4.0 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$2.1 billion , partially offset by non-cash adjustments of$1.7 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, realized gains on crypto assets driven by net crypto assets received from operating activities and a fair value gain on foreign exchange derivatives. In addition to these changes were changes in operating assets and liabilities, other than customer custodial cash liabilities, of$456.7 million . Net cash provided by operating activities was$7.7 billion for the nine months endedSeptember 30, 2021 , of which$4.9 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$2.8 billion and non-cash adjustments of$39.3 million , which was driven by benefits from deferred income taxes, realized gains on crypto assets driven by net crypto assets received from operating activities and fair value derivative adjustments. This was partially offset by stock-based compensation expense, crypto asset impairment expense, depreciation and amortization expense, and non-cash lease expense. In addition to these changes were changes in operating assets and liabilities, other than customer custodial cash liabilities, of$53.7 million .
Investing activities
Net cash used in investing activities of$637.7 million for the nine months endedSeptember 30, 2022 was due to$445.5 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,$57.7 million in investments of companies and technologies and$47.8 million in capitalized internal-use software development costs. This was partially offset by$101.8 million in net inflow for retail user loans repaid and originated. Net cash used in investing activities of$644.4 million for the nine months endedSeptember 30, 2021 was due to$251.1 million in investments of companies and technologies,$210.3 million in net outflow for the purchase and sale of crypto assets,$102.5 million in net outflow for retail user loans originated and repaid,$39.4 million in net cash paid for acquisitions,$24.0 million related to an asset acquisition of technical talent and$15.5 million in capitalized internal-use software development costs. 67 --------------------------------------------------------------------------------
Financing activities
Net cash used in financing activities of$228.6 million for the nine months endedSeptember 30, 2022 was due to$268.7 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,$41.0 million of proceeds from the issuance of common stock from stock option exercises, net of repurchases, and$16.1 million of proceeds received under our employee stock purchase plan. Net cash provided by financing activities of$3.4 billion for the nine months endedSeptember 30, 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 2026 Convertible Senior Notes, net of issuances costs,$174.9 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$11.5 million of proceeds received under our employee stock purchase plan. This was partially offset by$103.1 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 the 2026 Convertible Senior Notes.
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 our 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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