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 the consolidated financial statements and the accompanying notes thereto included in our final prospectus, or Prospectus, filed with theU.S. Securities and Exchange Commission , or theSEC , pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, onApril 14, 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 Prospectus. 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. Q2 2021 was a strong quarter for Coinbase with growth and diversification across our platform. Retail Monthly Transacting Users (MTUs) grew to 8.8 million, up 44% from Q1 2021. Verified Users were 68 million. We now have over 9,000 institutions who continue to deepen and broaden their activities in the cryptoeconomy and more than 160,000 ecosystem partners who are using our crypto tools and services to engage with their own customers. We generated$2.0 billion in net revenue, including$1.9 billion in transaction revenue and over$100 million in subscription & services revenue. Net income was$1.6 billion and Adjusted EBITDA was$1.1 billion . Q2 2021 illustrated the volatility we have anticipated in these still-early days in the cryptoeconomy. In Q2, we saw many crypto asset prices reach new all time highs. For example, the price of Bitcoin surpassed$64,000 in April, while Ethereum prices more than doubled during the quarter to over$4,200 in May. Later in the quarter, we saw a steep decline in crypto asset prices with Bitcoin and Ethereum falling over 45% each to~$30,000 and~$1,700 , respectively, resulting in exceptionally high levels of volatility. As volatility and crypto asset prices are highly correlated with trading revenue, the crypto market environment heavily influenced our Q2 financial results. Across the industry we see immense innovation with new crypto projects addressing a broad range of issues from scaling (to improve transaction speed and lower cost) to developing novel ways for borrowing and lending. New market entrants are joining the cryptoeconomy from all corners, as we saw with the first Sotheby's auction settled in crypto this quarter. Most recently, crypto has arrived on theU.S. regulatory agenda. We are proud of the broad crypto community for coming together in an incredibly powerful way to inform debate in theU.S. Senate surrounding the crypto reporting provisions in the infrastructure bill. While the legislation has not yet been enacted, and the implementation of these provisions by theU.S. Treasury is still ahead of us, this moment highlights the power of the voice of crypto users, who we believe will have an increasing voice in crypto policymaking in years to come. It also underscores the importance ofCoinbase and our users engaging with policymakers to help them understand crypto and its potential uses and benefits for society. 40 -------------------------------------------------------------------------------- Against this dynamic industry backdrop, we remain focused on our mission to increase economic freedom in the world with a goal to bring 1 billion people into the cryptoeconomy. We are investing heavily towards this future by adding more users, more assets, and more products to our platform while keeping our focus on being the most trusted and easiest to use. User Growth Q2 2021 MTU growth was driven by the crypto market environment, product launches, our marketing efforts, and the growing number of crypto assets we support. Overall, we are seeing that retail users are deepening their engagement with our platform, both in terms of the assets in which they invest and trade, and the products they use. Approximately 27% of our Q2 retail MTUs, or 2.4 million individuals, both invested and engaged with at least one other non-investing product. This is up from 25% of our Q1 retail MTUs, or 1.5 million individuals. These incremental 0.9 million retail MTUs are predominantly using Staking or Earn which allows them to earn rewards or a yield on their crypto assets. On the institutional side, we now have over 9,000 financial institutions usingCoinbase . Several important themes have developed with our institutional business. •First, adoption continued at a rapid pace throughout the quarter despite market volatility. We are encouraged by the progress we made over the past year as we build our institutional suite of products and service offerings. As an example, 10% of the top 100 largest hedge funds by reported assets under management have chosen to onboard withCoinbase , with many clients selecting us as their exclusive partner. In addition, in recent months, we have formed partnerships with industry leaders includingElon Musk , PNC Bank,SpaceX , Tesla,Third Point LLC , and WisdomTree Investments. •Second, institutions are becoming more sophisticated and are seeking to do much more than buy, sell, and store Bitcoin. Increasingly, our institutional customers seeCoinbase as a one-stop shop for the services they need including trading, custody, lending, yield generation, data, and more across a broad spectrum of crypto assets. Institutions are choosingCoinbase for the deep pools of liquidity we offer, our sophisticated algorithmic order execution, as well as the trust that comes with being a public company. Furthermore, we have enabled access to all our order books and our global fiat payment networks, allowing our institutional exchange customers to reach new currencies and markets and improving their access to global liquidity pools. •Third, we are seeing a growing number of customers leveraging our infrastructure as they create their own crypto offerings. These include traditional banks, asset managers, and fintechs that are seeking best in class capabilities in custody with a crypto-native partner that offers strong security and a trusted brand. Overall, we are excited by our increasing momentum with institutions and the opportunity to grow our presence with this community over time. 41 -------------------------------------------------------------------------------- International expansion is also an important leg of our user growth strategy. Consistent with our vision that the cryptoeconomy can unlock economic freedom around the world, we remain focused on making the long-term investments necessary to driveCoinbase's expansion into international markets, including diligently pursuing approvals and licenses from regulators around the world where needed. In Q2, we obtained two key licenses which we believe will accelerate our entry intoJapan andGermany . •In Japan, we have successfully registered with the local regulator JFSA (Financial Services Agency of Japan ) as a crypto asset exchange service provider. This registration will enable us to actively solicit customers inJapan and provide them a range of crypto services. We see huge long-term potential inJapan , the third largest economy in the world, with an active and mature crypto customer base. •In Germany, our subsidiaryCoinbase Germany GmbH was awarded a license for crypto custody and trading from theGerman Federal Financial Authority ("BaFin"). The BaFin licensing framework is the first of its kind in theEuropean Union , and Coinbase Germany is the first company to be issued such a license.Germany is an exciting market for crypto, ranking as the second largest country in the world in terms of the number of Bitcoin nodes being run. Listing More Assets and Trading Pairs The cryptoeconomy is still in its early stages, but it is clear that every year more and more economic activity will take place on crypto rails. We are seeing crypto quickly mature from its initial use case of trading bitcoin to the trading of thousands of new assets, and the adoption of new use cases like decentralized finance ("DeFi"), non-fungible tokens ("NFTs"), smart contracts, decentralized autonomous organizations ("DAOs"), and more. With all of this new innovation coming to crypto, we have a massive opportunity to give our customers access to these new products and features. Bringing more assets toCoinbase , faster, safer and ultimately listing all legal assets is one way we will tackle this opportunity. Throughout Q2, we continued to enhance the depth and breadth of the assets we support. We want to treat asset issuers as the important customers they are and empower our users to make their own risk-adjusted decisions. Overall, we executed well against this goal as we added 29 new assets for trading and 39 new assets for custody during the first six months of 2021. In Q2 alone, we added more assets for trading than we added in all of 2020. We currently support 83 assets for trading and 142 for custody. The addition of more assets is helping to drive diversification in the assets our customers are transacting in. In June, we outlined steps we are taking to improve our asset addition process. First, we are simplifying our legal review to focus specifically at what raises the most concerns under the law. Second, we need to create an "experimental" zone for new assets where we can appropriately disclose risks to customers and enable them to make educated decisions. Lastly, we recognize we may not be able to trade every asset on our centralized exchange for regulatory reasons, but we believe we can enable access to most assets for basic wallet functionality. 42 -------------------------------------------------------------------------------- Building Innovative Products We continue to invest in innovative products that attract new customers and deepen relationships with existing ones. Our products are built to be safe, trusted, and easy to use for both retail and institutional users. For retail users, we aim to serve as their primary financial account in the cryptoeconomy to invest, store, spend, earn, and use crypto assets. For businesses, we offer a diverse and growing range of products, services, and APIs - whether they are institutions or ecosystem partners. Throughout Q2, we continued to invest in building the cryptoeconomy and positioningCoinbase for long-term growth. Key investments include: Retail: Individuals •Blockchain rewards:Coinbase now offers reward opportunities across six tokens including three proof-of-stake protocols. In April, we launched ETH2 staking which drove staking adoption and we ended Q2 with 1.7 million customers earning yield on their crypto assets withCoinbase . With Ethereum being the second largest crypto asset by market capitalization, our ETH2 staking product drove our Blockchain rewards - primarily comprised of staking - to increase more than 300% in Q2 compared to Q1. One of our priorities is to continue to add proof-of-stake protocols and other reward-generating assets to our platform to expand reward opportunities for our users. •Education: In addition to Coinbase Learn (coinbase.com/learn) which we launched in Q1, we have developed several ways to help better educate our users about crypto. For example, we introduced our newsletter Coinbase Bytes which now reaches approximately 10 million people each week. Our users continue to learn about new crypto assets via our Earn campaigns as well. We had 2.3 million users engage with one of our nine active campaigns during the quarter, five of which were new campaigns launched in Q2. •Coinbase Card: As part of our goal to become our users' primary financial account, we started invitingU.S. -based users to apply for the Coinbase Card in Q2. Coinbase Card allowsU.S. users to convert and spend crypto from their Coinbase account at more than 70 million merchants where Visa® debit cards are accepted worldwide, and earn crypto rewards from our partners on their spending. Card is seeing healthy early traction and user satisfaction, and we are excited to offer users more ways to make crypto part of their everyday lives. Institutional: Businesses We launched the beta of Coinbase Prime, our prime brokerage, an integrated solution that includes trading, secure custody, financing, yield generation, data, and more for our institutional clients. We are continuing to onboard customers and plan to expand our offering in coming months. •Custody: Custodial fee revenues grew to$31.7 million in Q2, up 35% compared to Q1. Our track record of keeping assets safe while operating at scale has been enabled by a multi-year investment in segregated cold storage that is built on a principled approach to security. Our product was also designed to meet regulatory and compliance requirements - a key decision criteria for many of our clients - while still offering an intuitive experience that supports institutional workflows. •Institutional Data: In May,Coinbase acquiredSkew LTD (Skew), a leading institutional data and analytics platform. Skew serves as the foundation for a superior intelligence offering for our users, arming professional traders with dynamic, aggregated market data, presented in a highly actionable format. •Financing: We have begun building out a robust financing business, offering bilateral lending and post-trade credit to our institutional clients. Our retail-focused Borrow product has also seen growth, with customers now able to borrow up to$100,000 against their existing crypto holdings. 43 -------------------------------------------------------------------------------- Ecosystem: Developers Our Ecosystem products are designed to help developers and businesses access, interact, and build upon the broader crypto ecosystem. We are building a platform that will enable any asset issuer, developer, or merchant to build robust, secure, and scalable crypto solutions. Our team is making a series of foundational investments that we believe have long-term potential. •Coinbase Cloud: We have integrated Bison Trails as the backbone forCoinbase Cloud, which serves as a universal platform for developers to build on, analyze, and integrate with blockchains. We are building a single platform experience that enables developers, token holders, and companies to interact with and build blockchain products and services. In Q2, through our Cloud offering, we broadened staking support and began investing more deeply in theCoinbase developer platform. •USDC: Our USDC stablecoin, issued via our partnership with Centre, experienced rapid growth in Q2. USDC market cap is currently over$27 billion , roughly 6x higher compared to the start of the year and over 26x higher year-over-year. Stablecoins like USDC are increasingly a key component of the DeFi ecosystem and have emerging applications in areas such as payments. Looking Ahead The cryptoeconomy continues to innovate at a blistering rate and we see significant opportunities for growth and investment as we execute on our goal of getting 1 billion people into crypto. First, ensuring we are scaling to match industry growth will be an ongoing area of investment. We must continue to deliver consistent platform performance even at the highest levels of volatility in order to maintain high quality customer service and efficient customer onboarding. Second, the cryptoeconomy continues to evolve rapidly - including the proliferation of thousands of assets, new use cases like DeFi, NFTs, DAOs, and more. Despite being in early stages of development, we believe these areas represent the future of the cryptoeconomy. Similar to howCoinbase helped people access Bitcoin for the first time in a safe, trusted, and easy to use way, we need to do the same for the decentralized economy. As we outlined in June, as we look to the future, we plan to: •Bring more assets toCoinbase , faster •Ship more products in international markets •Integrate with third-party interfaces and self-custody so that any decentralized app will be accessible toCoinbase users. Finally, regulatory conversations are expanding and we fully support smart regulations that promote innovation. Recently lawmakers and regulators at all levels have all increased their focus on the cryptoeconomy across the board -- stablecoins, risk mitigation of crypto assets, tax reporting, and securities registration to name a few -- however, we believe regulatory clarity remains slow to come. The recent crypto debate in the infrastructure bill highlights that we cannot wait for policymakers to propose regulations and expect them to get it right the first time regarding this complex technology. We need to ensure thatU.S. and indeed global regulation is purpose built for crypto technology, and that it fosters, not stifles, innovation.Coinbase has leaned into regulation and compliance since our founding and we are committed to active engagement and education. In the near future, we will work to propose frameworks that regulators should consider as we continue to encourage smart regulations. 44 -------------------------------------------------------------------------------- Key Business Metrics In addition to the measures presented in our interim 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, % 2021 2020 Change 2021 2020 Change Verified Users (in millions) 68 36 89 % 68 36 89 % MTUs (in millions) 8.8 1.5 487 % 7.5 1.4 436 % Assets on Platform (in billions)$ 180 $ 26 592 %$ 180 $ 26 592 % Trading Volume (in billions)$ 462 $ 28 1,550 %$ 796 $ 59 1,249 % Net income (in millions)$ 1,606 $ 32 4,919 %$ 2,378 $ 64 3,616 % Adjusted EBITDA(1) (in millions)$ 1,150 $ 61 1,785 %$ 2,267 $ 116 1,854 %
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(1)Please see the section titled Non-GAAP Financial Measure for a reconciliation of net income to Adjusted EBITDA and an explanation for why we consider Adjusted EBITDA to be a helpful metric for investors. Verified Users We define Verified Users as all retail users, institutions, and ecosystem partners that have registered an account on our platform and confirmed either their email address or phone number, or that have established an account with a username on our non-custodial wallet application, as of the date of measurement. Verified Users are an indication of our scale and represent a potential revenue opportunity for us. These customers have demonstrated an interest in our platform or direct intent to transact with crypto assets. Verified Users represent the top level of our customer acquisition funnel. We believe we have an opportunity to engage Verified Users and convert them to MTUs by marketing our growing suite of products and services. Verified Users may overstate the number of unique customers who have registered an account on our platform as one customer may register for, and use, multiple accounts with different email addresses, phone numbers, or usernames. 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. Revenue generating transactions include active transactions, such as buying or selling crypto assets through our Invest product and spending on the Coinbase Card, or passive transactions such as earning a staking or savings reward. MTUs also engage in transactions that are non-revenue generating such as Send and Receive. MTUs engage in transactions that drive both transaction revenue and subscription and services revenue. 45 -------------------------------------------------------------------------------- Assets on Platform We define Assets on Platform as the totalU.S. dollar equivalent value of both fiat currency and crypto assets held or managed in digital wallets on our platform, including our custody services, calculated based on the market price on the date of measurement. Assets on Platform demonstrates the scale of balances held across our suite of products and services, the trust customers place in us to securely store their assets, and the underlying growth of the cryptoeconomy. Assets on Platform also represent our monetization opportunity for subscription products and services, including current products such as Store, Stake, Save, 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 and changes in the price and quantity, particularly for Bitcoin and Ethereum, or type of crypto asset held on our platform can result in the growth or decline in Assets on Platform in a particular period. As ofJune 30, 2021 , Bitcoin, Ethereum, and other crypto assets represented 47%, 24%, and 25% of Assets on Platform, respectively. As ofJune 30, 2020 , Bitcoin, Ethereum, and other crypto assets represented 64%, 12%, and 18% of Assets on Platform, respectively, For each period, the remaining balance consisted of fiat currencies held on behalf of our customers. Trading Volume We define Trading Volume as the totalU.S. dollar equivalent value of matched trades transacted between a buyer and seller through our platform during the period of measurement. Trading Volume represents the product of the quantity of asset transacted and the trade price at the time the transaction was executed. As trading activity directly impacts transaction revenue, we believe this measure is a reflection of liquidity on our order books, trading health, and the underlying growth of the cryptoeconomy. Trading Volume on our platform is influenced by the price of Bitcoin and Crypto Asset Volatility1. In periods of high crypto asset prices and/or Crypto Asset Volatility, we have experienced correspondingly high levels of Trading Volume on our platform. 1 Crypto Asset Volatility represents our internal measure of crypto volatility in the market relative to prior periods. The volatility of crypto assets is measured on an hourly basis (using 10 minute price intervals within each hour) for each crypto asset supported for trading onCoinbase , averaged over the applicable time period (quarterly), then weighted by each crypto asset's share of total trading volume during the same time period across a select set of trading platforms, in addition to theCoinbase platform, that operate in similar markets including itBit, Bitfinex,Bitstamp , bitFlyer, Binance.US, Binance, Kraken, Gemini, Bittrex, and Poloniex. 46 --------------------------------------------------------------------------------
Our Trading Volume and transaction revenue continues to be concentrated primarily in Bitcoin and Ethereum.
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Trading Volume by crypto asset: Bitcoin 24 % 57 % 31 % 53 % Ethereum 26 % 15 % 24 % 15 % Other crypto assets 50 % 28 % 45 % 32 % Total 100 % 100 % 100 % 100 % Trading Volume - Retail & Institutional ($, in billions): Trading Volume - Retail 145 11 265 23 Trading Volume - Institutional 317 17 531 36 Transaction revenue by crypto asset: Bitcoin 26 % 57 % 33 % 54 % Ethereum 26 % 11 % 23 % 12 % Other crypto assets 48 % 32 % 44 % 34 % Total 100 % 100 % 100 % 100 % During the three and six months endedJune 30, 2021 andJune 30, 2020 , no asset other than Bitcoin and Ethereum individually represented more than 10% of our Trading Volume or transaction revenue, respectively. Concentration in Trading Volume can vary widely between periods. Crypto assets other than Bitcoin and Ethereum continue to contribute a greater share of Trading Volume. During the three and six months endedJune 30, 2021 , we have added trading support for 22 and 29 crypto assets respectively, which we expect will diversify Trading Volume away from Bitcoin and Ethereum. We expect greater diversification of Trading Volume and transaction revenue by crypto asset in the future as we continue to expand the breadth of assets available through our platform and as other crypto assets gain broader adoption. However, should the availability of one or more crypto assets on our platform change, it may have an adverse effect on our operating performance. During the three months endedJune 30, 2021 , our total Trading Volume continued to diversify beyond Bitcoin into Ethereum and other crypto assets. Approximately 24% of our Q2 2021 total trading volume was concentrated in Bitcoin, down from 39% in Q1 2021. We believe this mix shift is influenced by several drivers. First, a modest decline in our Bitcoin trading volume between Q1 2021 and Q2 2021 as total Bitcoin volume decreased as a percentage of global exchange spot volume in Q2 2021 compared to Q1 2021. Second, meaningful growth in Ethereum trading volumes, surpassing Bitcoin trading volumes onCoinbase for the first time, driven by growth in the DeFi and NFT ecosystems (where Ethereum is an important underlying blockchain), and increased demand driven by our ETH2 staking product. Third, adding new assets to theCoinbase platform and increased trading volume in other crypto assets contributed to the mix shift we observed Q2 2021. 47 -------------------------------------------------------------------------------- Components of Results of Operations Net revenue Transaction revenue We generate substantially all of our net revenue from transaction fees from trades that occur on our platform. The transaction fee earned is based on the price and quantity of the crypto asset that is bought, sold, or withdrawn. Transaction revenue is recognized at the time the transaction is processed and is directly correlated with Trading Volume on our platform. Subscription and services revenue Subscription and services revenue primarily consists of: •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 in our Store product is driven by the same factors as Assets on Platform - the quantity, price, and type of crypto asset. •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. We believe blockchain rewards better represents the various monetization opportunities available to us through blockchains and protocols. •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 early stage services being offered, such as subscription license revenue. 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. Transactions involving our sale of crypto assets represented less than 10% of our total revenue for the three and six months endedJune 30, 2021 . 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. 48 -------------------------------------------------------------------------------- Operating expenses Operating expenses consist of transaction, technology and development, sales and marketing, general and administrative, restructuring expenses, and other operating expense. Transaction expense Transaction expense includes costs incurred to operate our platform, process crypto asset trades, and perform wallet services. These costs include account verification fees, miner fees to process transactions on blockchain networks, fees paid to payment processors and other financial institutions for customer transaction activity, and crypto asset losses due to transaction reversals. Transaction expense also includes rewards paid to users for blockchain activities conducted by us, such as staking. Fixed-fee costs are expensed over the term of the contract and transaction-level costs are expensed as incurred. Technology and development Technology and development expenses include costs incurred in operating, maintaining, and enhancing our platform, including network, website hosting, and infrastructure costs. Technology and development expenses also include costs incurred in developing new products and services, personnel-related expenses, and the amortization of acquired developed technology. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation. 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 costs incurred to support our business, including legal, finance, compliance, human resources, customer support, executive, and other support operations. General and administrative expenses also include personnel related expenses, software subscriptions for support services, facilities and equipment costs, depreciation, amortization of acquired customer relationship intangible assets, sales and property taxes, gains and losses on disposal of fixed assets, legal reserves and settlements, and other general overhead. General and administrative costs are expensed as incurred. Other operating expense (income), net Other operating expense (income), net includes cost of our crypto assets used to fulfill customer accommodation transactions. Periodically, as an accommodation to customers, we may fulfill customer transactions using our own crypto assets. We have custody and control of the crypto assets prior to the sale to the customer. Accordingly, we record the total value of the sale in other revenue and the cost of the crypto asset in other operating expense. Other operating expense (income), net also includes impairment and realized gains on the sale of crypto assets, realized gains and losses resulting from the settlement of derivative instruments, and fair value gains and losses related to derivatives and derivatives designated in qualifying fair value hedge accounting relationships. Other expense (income), net Other expense (income), net includes the following items: •gain and losses on investments, net, which consists primarily of unrealized gains and losses from investment fair value adjustments; and 49 -------------------------------------------------------------------------------- •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. Provision for (benefit from) income taxes Provision for (benefit from) income taxes includes income taxes related to foreign jurisdictions andU.S. federal and state income taxes. 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, 2021 2020 2021 2020 (in thousands) Revenue: Net revenue$ 2,033,011 $ 178,331 $ 3,629,991 $ 357,413 Other revenue 194,951 8,051 399,082 19,599 Total revenue 2,227,962 186,382 4,029,073 377,012 Operating expenses: Transaction expense 335,426 23,395 569,492 48,802 Technology and development 291,461 60,777 475,686 107,915 Sales and marketing 195,733 11,383 313,722 21,304 General and administrative 248,195 51,988 369,426 110,946 Other operating expense (income), net 282,422 (3,247) 438,309 7,184 Total operating expenses 1,353,237 144,296 2,166,635 296,151 Operating income 874,725 42,086 1,862,438 80,861 Other expense (income), net 5,844 3,280 (3,109) 7,146 Income before provision for income taxes 868,881 38,806 1,865,547 73,715 (Benefit from) provision for income taxes (737,468) 6,546 (512,265) 9,482 Net income$ 1,606,349 $ 32,260 $ 2,377,812 $ 64,233 50
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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, 2021 2020 2021 2020 (as a % of total revenue) Total revenue 100 % 100 % 100 % 100 % Operating expenses: Transaction expense 15 13 14 13 Technology and development 13 33 12 29 Sales and marketing 9 6 8 6 General and administrative 11 28 9 29 Other operating expense (income), net 13 (2) 11 2 Total operating expenses 61 77 54 79 Operating income 39 23 46 21 Other expense (income), net - 2 - 2 Income before provision for income taxes 39 21 46 20 (Benefit from) provision for income taxes (33) 4 (13) 3 Net income 72 % 17 % 59 % 17 % Comparison of the three and six months endedJune 30, 2021 and 2020 Revenue Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change 2021 2020 % Change (in thousands) (in thousands) Transaction revenue$ 1,930,382 $ 171,864 1,023 %$ 3,470,961 $ 343,855 909 % Subscription and services revenue 102,629 6,467 1,487 159,030 13,558 1,073 Other revenue 194,951 8,051 2,321 399,082 19,599 1,936 Total revenue$ 2,227,962 $ 186,382 1,095$ 4,029,073 $ 377,012 969 Transaction revenue for the three and six months endedJune 30, 2021 increased by$1.8 billion and$3.1 billion compared to the same periods of the prior year, respectively, primarily due to the following: •an increase in retail Trading Volume of 1,173% and 1,052% for the three and six months endedJune 30, 2021 , respectively, due to an increase in retail MTUs and the average price of Bitcoin and Ethereum which continue to represent the highest concentration of Trading Volume on our platform; and •crypto volatility of 13.7 and 13.0 for the three and six months endedJune 30, 2021 , respectively, representing an increase of 132% and 73% over the same periods of the prior year. Higher crypto asset price volatility has correlated with periods of higher Trading Volume on our platform. There are a number of factors that contribute to changes in both Bitcoin and Ethereum price, 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. 51 -------------------------------------------------------------------------------- Subscription and services revenue for the three and six months endedJune 30, 2021 increased$96.2 million and$145.5 million compared to the same periods of the prior year, respectively, predominantly due to the following: •an increase in custodial fee revenue of$28.6 million and$49.4 million for the three and six months endedJune 30, 2021 , respectively, due to an increase in the average assets under custody of$93 billion and$86 billion over the same periods. The growth in assets under custody was driven by new and existing customers, increase in assets supported for custody, and increase in average crypto asset prices; •an increase in blockchain rewards of$38.4 million and$47.5 million for the three and six months endedJune 30, 2021 , respectively, mainly as a result of increased user participation in reward generating activities, predominantly staking activities including ETH 2.0 staking which was launched in the quarter; and •an increase in earn campaign revenue of$16.6 million and$27.7 million for the three and six months endedJune 30, 2021 , respectively, driven by nine and thirteen crypto asset earn campaigns running during the respective periods. Other revenue for the three and six months endedJune 30, 2021 increased by$186.9 million and$379.5 million compared to the same periods of the prior year, respectively, due to an increase in crypto assets sales of$186.8 million and$380.8 million over the same periods. We generate revenue from crypto asset sales where the transactions were fulfilled with our crypto assets to accommodate customers, largely as a result of unanticipated system disruptions. For the three months endedJune 30, 2021 , we experienced four unanticipated system disruptions which resulted in$134.6 million of other revenue, or 69% of revenue from crypto asset sales to customers, compared to two unanticipated system disruptions which resulted in$2.8 million of other revenue, or 37% of revenue from crypto asset sales to customers for the three months endedJune 30, 2020 . For the six months endedJune 30, 2021 , we experienced nine unanticipated system disruptions which resulted in$240.1 million of other revenue, or 60% of revenue from crypto asset sales to customers, compared to three unanticipated system disruptions which resulted in$9.1 million of other revenue, or 52% of revenue from crypto asset sales to customers for the six months endedJune 30, 2020 . A system disruption which occurred onMay 19, 2021 as a result of unprecedented short term spike in Trading Volume was primarily responsible for the increase in crypto assets sales during the three and six months endedJune 30, 2021 . Unanticipated system disruptions are different from system outages, which are a suspension of services where no crypto asset sales can be processed. We are making significant investments in database and network infrastructure to support heightened trading volumes and user activity on our platform in order to reduce unanticipated system disruptions. 52 --------------------------------------------------------------------------------
Operating expenses Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change 2021 2020 % Change (in thousands) (in thousands) Transaction expense$ 335,426 $ 23,395 1334 %$ 569,492 $ 48,802 1067 % Technology and development 291,461 60,777 380 475,686 107,915 341 Sales and marketing 195,733 11,383 1,620 313,722 21,304 1,373 General and administrative 248,195 51,988 377 369,426 110,946 233 Other operating expense (income), net 282,422 (3,247) (8,798) 438,309 7,184 6,001 Total operating expenses$ 1,353,237 $ 144,296 838$ 2,166,635 $ 296,151 632 Transaction expense for the three and six months endedJune 30, 2021 increased by$312.0 million and$520.7 million compared to the same periods of the prior year, respectively, primarily driven by an increase in Trading Volume. While our transaction expense grew over this period, it was correlated with, and increased proportionately to, our net revenues. Transaction expense as a percentage of net revenue was 16.5% and 13.1% during the three months endedJune 30, 2021 andJune 30, 2020 , respectively, and 15.7% and 13.7% during the six months endedJune 30, 2021 andJune 30, 2020 , respectively. The increase in transaction expense for the three and six months endedJune 30, 2021 , compared to the same periods of the prior year, were predominantly due to the following: •an increase of$151.0 million and$276.0 million for the three and six months endedJune 30, 2021 , respectively, related to miner fees. This increase was driven by an increase in crypto assets required to pay blockchain network fees such as Ethereum gas prices and an increase in crypto asset prices. Ethereum gas prices rose substantially due to congestion on the network as we saw a surge in DeFi volume. We expect this congestion to stabilize and improve as the Ethereum network implements solutions to help reduce transaction congestion; •an increase of$55.2 million and$77.0 million in transaction reversal losses for the three and six months endedJune 30, 2021 , respectively, due to higher payment volume; •an increase of$36.5 million and$58.1 million in payment processing fees for the three and six months endedJune 30, 2021 , respectively, due to higher settled Trading Volume; •an increase of$30.8 million and$59.6 million in account verification fees for the three and six months endedJune 30, 2021 , respectively, due to a significant increase in new user sign-ups; and •an increase of$19.5 million and$24.5 million for the three and six months endedJune 30, 2021 , respectively, related to rewards paid to users from blockchain activities such as staking. Technology and development expenses for the three and six months endedJune 30, 2021 increased by$230.7 million and$367.8 million compared to the same periods of the prior year, respectively, predominantly due to the following: •an increase of$123.3 million and$192.4 million in stock-based compensation expense for the three and six months endedJune 30, 2021 , respectively, related to an increase in the issuance of restricted stock units, or RSUs, due to headcount growth, and an increase in the fair value of our Class A common stock; 53 -------------------------------------------------------------------------------- •an increase of$64.7 million and$98.7 million in personnel-related costs for the three and six months endedJune 30, 2021 , respectively, due to an increase in technical headcount and higher payroll taxes upon the exercise of stock options as a result of the Direct Listing; and •an increase of$36.1 million and$54.6 million in software and service costs for the three and six months endedJune 30, 2021 , respectively, driven by an increase in MTUs and volume-based usage to meet expanding user and platform activity. Sales and marketing expenses for the three and six months endedJune 30, 2021 increased by$184.3 million and$292.4 million compared to the same periods of the prior year, respectively. While our expenses grew over these periods, it was correlated with our net revenues. Sales and marketing as a percentage of net revenue was 9.6% and 6.4% during the three months endedJune 30, 2021 andJune 30, 2020 , respectively, and 8.6% and 6.0% during the six months endedJune 30, 2021 andJune 30, 2020 , respectively. The increase in sales and marketing for the three and six months endedJune 30, 2021 , compared to the same periods of the prior year, were predominantly driven by the following: •an increase of$138.6 million and$219.3 million in digital advertising spend for the three and six months endedJune 30, 2021 , respectively; •an increase of$20.7 million and$34.2 million in customer referral and promotion fees for the three and six months endedJune 30, 2021 , respectively, largely due to new user incentive bonuses; and •an increase of$16.6 million and$27.4 million in personnel-related costs for the three and six months endedJune 30, 2021 , due to an increase in headcount. General and administrative expenses for the three and six months endedJune 30, 2021 , increased by$196.3 million and$258.6 million compared to the same periods of the prior year, respectively, predominantly driven by the following: •an increase of$43.8 million and$67.5 million in stock-based compensation expense for the three and six months endedJune 30, 2021 , respectively, related to an increase in the issuance of restricted stock units, or RSUs, due to headcount growth, and an increase in the fair value of our Class A common stock; •an increase of$47.1 million and$61.1 million in personnel-related costs for the three and six months endedJune 30, 2021 , respectively, due to an increase in headcount and higher payroll taxes upon the exercise of stock options as a result of the Direct Listing; •an increase of$21.2 million and$29.7 million in customer support costs for the three and six months endedJune 30, 2021 , respectively, in order to meet a significant increase in customer inquiries during periods of high Trading Volume; and •$39.2 million of direct listing costs associated with our direct public listing onApril 14, 2021 . Other operating expense (income), net for the three and six months endedJune 30, 2021 , increased by$285.7 million and$431.1 million compared to the same periods of the prior year, respectively, predominantly driven by the following: •an increase of$170.9 million and$347.0 million for the three and six months endedJune 30, 2021 , respectively, attributed to crypto assets sold in order to fulfill customer accommodation transactions due to an increase in exchange incidents; •$57.3 million and$58.2 million , respectively, of crypto assets decreasing below the carrying value of our crypto assets held during the period; and 54 -------------------------------------------------------------------------------- •The remaining increase was related to other crypto asset expenses, offset by$22.4 million and$25.2 million net gains on fair value adjustments related to warrants and crypto asset borrowings for the three and six months endedJune 30, 2021 , respectively, Other income (expense), net Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change 2021 2020 % Change (in thousands) (in thousands) Other expense (income), net$ 5,844 $ 3,280 78 %$ (3,109) $ 7,146 (144) % In the three months endedJune 30, 2021 , we had other expense (income), net of$5.8 million loss compared to$3.3 million loss for the same period of the prior year. The change of$2.6 million in losses is driven by the unrealized losses from foreign exchange. In the six months endedJune 30, 2021 , we had other expense (income), net of$3.1 million gain compared to$7.1 million loss for the same period of the prior year. The change of$10.2 million in gain is driven by the realized gains on investments. Provision for income taxes Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change 2021 2020 % Change (in thousands) (in thousands) (Benefit from) provision for income taxes$ (737,468) $ 6,546 **$ (512,265) $ 9,482 ** ** Percentage not meaningful. The (benefit from) provision for income tax decreased by$744.0 million and$521.7 million for the three months and six months endedJune 30, 2021 compared to the same period of the prior year driven by the tax effect of compensation expense on deductible stock option exercises at a fair market value offset by non-deductible officer compensation. u 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. 55 -------------------------------------------------------------------------------- We calculate Adjusted EBITDA as net income, adjusted to exclude interest expense, (benefit from) provision for income taxes, depreciation and amortization, stock-based compensation expense, impairment of goodwill, acquired intangibles and crypto assets, non-recurring Direct Listing expenses, unrealized loss on foreign exchange, fair value adjustments on derivatives, and non-recurring legal reserves and related costs. The following table provides a reconciliation of net income to Adjusted EBITDA: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Net Income$ 1,606,349 $ 32,260 $ 2,377,812 $ 64,233 Adjusted to exclude the following: (Benefit from) provision for income taxes (737,468) 6,546 (512,265) 9,482 Depreciation and amortization 12,612 7,484 23,534 14,378 Amortization of debt discount and issuance costs 748 - 748 - Interest expense 2,925 - 7,198 - Stock-based compensation 189,335 12,647 293,963 21,419 Impairment, net(1) 57,343 - 58,184 268 Non-recurring Direct Listing expenses 35,000 - 39,160 - Unrealized loss on foreign exchange 5,261 2,260 2,392 6,669 Fair value (gain) on derivatives (22,415) - (25,215) - Legal reserves and related costs - - 1,500 - Adjusted EBITDA$ 1,149,690 $ 61,197 $ 2,267,011 $ 116,449 __________________ (1)Impairment, net represents impairment on crypto assets still held as ofJune 30, 2021 andJune 30, 2020 . Liquidity and Capital Resources Since our inception, we have financed our operations primarily with cash from operating activities and net proceeds from the sale of convertible preferred stock. As ofJune 30, 2021 , we had cash and cash equivalents of$4.4 billion , exclusive of restricted cash and customer custodial funds. Cash equivalents consisted primarily of cash deposits and money market funds denominated inU.S. dollars. As ofJune 30, 2021 , we had restricted cash of$30.8 million which consisted primarily of amounts held in restricted bank accounts at certain third-party banks as security deposits or pledged as collateral to secure letters of credit. As ofJune 30, 2021 , we had customer custodial funds of$9.0 billion which consisted of amounts held at certain third-party banks for the exclusive benefit of customers. Crypto asset trading on our platform occurs 24 hours a day. We restrict the use of the assets underlying the customer custodial funds to meet regulatory requirements based on their purpose and availability to fulfill our direct obligation under custodial funds due to customers. 56 -------------------------------------------------------------------------------- InMay 2021 , we issued an aggregate of$1.44 billion of the 2026 Notes pursuant to an indenture, datedMay 18, 2021 , betweenU.S. Bank National Association , as trustee, and us. The 2026 Notes were offered and sold in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The 2026 Notes are senior unsecured obligations and bear interest at a rate of 0.50% per year payable semi-annually in arrears onJune 1 andDecember 1 of each year, beginning onDecember 1, 2021 . The 2026 Notes mature onJune 1, 2026 , unless earlier converted, redeemed or repurchased. See Note 9. Convertible Senior Notes, of the Notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details on this transaction. Certain jurisdictions where we operate require us to hold eligible liquid assets, as defined by applicable regulatory requirements and commercial law in these jurisdictions, equal to at least 100% of the aggregate amount of all custodial funds due to customers. Depending on the jurisdiction, eligible liquid assets can include cash and cash equivalents, customer custodial funds, and in-transit funds receivable. As ofJune 30, 2021 andDecember 31, 2020 , our eligible liquid assets were greater than the aggregate amount of custodial funds due to customers. We have purchased, and intend in the future to continue to purchase, digital assets for investment and operational purposes. As ofJune 30, 2021 , we had$145.0 million of USDC, a stablecoin which can be redeemed one USDC forone U.S. dollar on demand. While not accounted for as cash or cash equivalent, we believe our USDC holdings to be an important liquidity resource. In addition to USDC, as ofJune 30, 2021 , we held$222.7 million of crypto assets for investment and operational purposes at cost, excluding crypto assets borrowed. Our future earnings and cash flows will be impacted when we choose to monetize our crypto assets and the variability of our earnings will be dependent on the future fair value of such crypto assets. We have limited ability to predict whether the sale of crypto assets received from airdrops or forks will be material to our future earnings, which is dependent on the future market viability and fair value of such crypto assets. Our current policy is not to monetize unsupported forks or airdrops held on our platform. Crypto assets received through airdrops and forks, at the time of the airdrop or fork and at the end of the periods presented, are not material to our financial statements. As ofJune 30, 2021 andDecember 31, 2020 , the cost basis and fair value of our crypto assets held, excluding crypto asset borrowings, was as follows: June 30, December 31, 2021 2020 Cost Fair value Cost Fair value (in millions) Bitcoin$ 105.4 $ 221.9 $ 39.4 $ 130.1 Ethereum (1) 29.3 99.6 5.1 23.8 Other 88.0 158.7 17.8 34.0 Total$ 222.7 $ 480.2 $ 62.3 $ 187.9 __________________ (1)Includes cost of$10.4 million and$0 and fair value of$12.5 million and$0 related to ETH2 payable to customers as ofJune 30, 2021 andDecember 31, 2020 , respectively. The fair value is primarily based on the closing quoted market prices on our platform as of the end of the period. 57 -------------------------------------------------------------------------------- We view our crypto asset investments as long term holdings and we do not plan to engage in regular trading of crypto assets. Therefore, we do not anticipate material variability to our earnings or cash flows from the monetization of these investments. During times of instability in the market of crypto assets, we may not be able to sell our crypto assets at reasonable prices or at all. As a result, our crypto assets are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. Customer accommodations are fulfilled with crypto assets held for operational purposes and we do not expect material variability in our earnings from these crypto assets. Our cash flow from operating activities may materially fluctuate from period-to-period based on movement within our custodial funds due to customer liability. Since our customer custodial funds are included in cash and cash equivalents, any large fluctuations in the related liability will directly impact our cash flow from operating activities. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital 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 products and services, the introduction of new subscription products and services on our platform, expansion of sales and marketing activities, and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and 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 debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. In the event that additional financing is required from outside sources, there is a possibility we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected. Cash flows Six Months Ended June 30, 2021 2020 (in thousands) Net cash provided by operating activities$ 7,394,664 $ 637,638 Net cash (used in) provided by investing activities (337,748) 554 Net cash provided by (used in) financing activities 1,434,676 (1,235)
Net increase in cash, cash equivalents, and restricted cash
$ 636,957 Change in customer custodial funds$ 5,198,420 $ 488,345 Operating activities We assess our cash flow from operating activities by adjusting for the change in customer custodial funds. We use this as a more accurate indicator of our cash growth and our ability to invest in our infrastructure and people to achieve our strategic objectives. Net cash provided by operating activities was$7.4 billion for the six months endedJune 30, 2021 , of which$5.1 billion related to cash from the change in custodial funds due to customers. Our net cash provided by operating activities 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 custodial funds due to customers, of$331.5 million . 58 -------------------------------------------------------------------------------- Net cash provided by operating activities was$637.6 million for the six months endedJune 30, 2020 , of which$513.3 million related to cash from the change in custodial funds due to customers. Our net cash provided by operating activities reflected net income of$64.2 million , non-cash adjustments of$54.3 million , which was predominately due to stock-based compensation expense, depreciation and amortization expense, and deferred income taxes, and changes in operating assets and liabilities, other than custodial funds due to customers, of$5.8 million . Investing activities 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. Net cash provided by investing activities of$0.6 million for the six months endedJune 30, 2020 primarily related to net proceeds from the sale of crypto assets of$10.4 million , offset by capitalized internal-use software development costs of$3.6 million ,$3.2 million for leasehold and real estate expenditures to support our increased headcount, and investments in companies and technologies of$3.2 million . Financing activities 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. Net cash used in financing activities of$1.2 million for the six months endedJune 30, 2020 was primarily due to cash paid to repurchase equity awards. Contractual Obligations and Commitments InMay 2021 , we issued an aggregate of$1.44 billion of the 2026 Notes pursuant to an indenture, datedMay 18, 2021 , betweenU.S. Bank National Association , as trustee, and us. The 2026 Notes were offered and sold in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The 2026 Notes are senior unsecured obligations and bear interest at a rate of 0.50% per year payable semi-annually in arrears onJune 1 andDecember 1 of each year, beginning onDecember 1, 2021 . The 2026 Notes mature onJune 1, 2026 , unless earlier converted, redeemed or repurchased. Discounts on the 2026 Notes reflect a 1% original issue discount of$14.4 million and debt issuance costs related to the 2026 Notes of$16.9 million , which include commissions payable to the underwriters and third-party offering costs. We used approximately$90.1 million of the net proceeds from the offering to pay the cost of the capped call transactions. We intend to use the remainder of the net proceeds from the offering for general corporate purposes, which may include working capital, capital expenditures, and investments in and acquisitions of other companies, products or technologies that we may identify in the future. See Note 9. Convertible Senior Notes, of the Notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more details on this transaction. With the exception of the 2026 Notes, there were no material changes in our contractual obligations and commitments during the three months endedJune 30, 2021 from the obligations and commitments disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in the Prospectus. 59 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 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. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include those 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 and in the Prospectus. 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 the Prospectus. Prior to our Direct Listing, our Class A common stock was not publicly traded. Therefore, we estimated the fair value of our common stock as discussed in the Prospectus. Following our Direct Listing, the closing sale price per share of our Class A common stock as reported on the Nasdaq Global Select Market on the date of grant is used to determine the fair value of our common stock. Our significant accounting policies are discussed in Note 2. 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 and in the Prospectus. Recent Accounting Pronouncements See Note 2. Significant Accounting Policies, of the Notes to the condensed consolidated financial statements in the section titled 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. 60
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