ROBINHOOD MARKETS, INC.
This section presents management's perspective on our financial condition and
results of operations, including performance metrics that management uses to
assess company performance. The following discussion and analysis is intended to
highlight and supplement data and information presented elsewhere in this
Quarterly Report on Form 10-Q ("Quarterly Report"), and should be read in
conjunction with our interim unaudited condensed consolidated financial
statements and notes elsewhere in this Quarterly Report and our audited
consolidated financial statements and the related notes and the discussion under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in our 2021 Form 10-K. It is also intended to
provide you with information that will assist you in understanding our
consolidated financial statements, the changes in key items in those
consolidated financial statements from year to year, and the primary factors
that accounted for those changes. To the extent that this discussion describes
prior performance, the descriptions relate only to the periods listed, which
might not be indicative of our future financial outcomes. In addition to
historical information, this discussion contains forward-looking statements that
involve risks, uncertainties and assumptions that could cause results to differ
materially from management's expectations. Factors that could cause such
differences are discussed in the sections titled "Cautionary Note Regarding
Forward-Looking Statements" and "Risk Factors."
Data as of and for the three months ended March 31, 2021 and 2022 has been
derived from our unaudited condensed consolidated financial statements appearing
at the beginning of this Quarterly Report. Results for any interim period should
not be construed as an inference of what our results would be for any full
fiscal year or future period.
We refer to our "users" and our "customers" interchangeably throughout this
Quarterly Report to refer to individuals who hold accounts on our platform. The
definition of "customer" under Exchange Act Rule 15c3-3 means any person from
whom or on whose behalf a broker or dealer has received or acquired or holds
funds or securities for the account of that person. However, because we do not
earn consideration from users (other than Robinhood Gold Subscribers and debit
card users), users are not "customers" as defined in ASC 606, Revenue from
Contracts with Customers. Accordingly, our users do not meet the definition of
"customer" for purposes of the accounting rules. See "-Revenue Recognition" in
Note 1 to our audited consolidated financial statements included in our 2021
Form 10-K.
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Overview
Robinhood was founded on the belief that everyone should be welcome to participate in our financial system. We are creating a modern financial services platform for everyone, regardless of their wealth, income, or background.
Our mission is to democratize finance for all. We use mobile phone technology to provide access to the financial system in a way that is simple and convenient for our customers. We believe investing should be familiar and welcoming, with a simple design and an intuitive interface, so that customers are empowered to achieve their goals. We started with a revolutionary, bold brand and design, and the Robinhood app now makes investing approachable for millions. We pioneered commission-free stock trading with no account minimums, which the rest of the industry emulated, and we have continued to build relationships with our customers by introducing new products that further expand access to the financial system. Through these efforts, we believe we have made investing culturally relevant and understandable, and that our platform is enabling our customers to become long-term investors and take greater control of their finances.
Financial Results and Performance
With respect to the three months ended
•we generated total net revenues of
•we incurred a net loss of$392 million , which included$220 million of share-based compensation expense, compared to a net loss of$1.4 billion , which included expense of$1.5 billion associated with the change in fair value of convertible notes and warrants issued inFebruary 2021 ;
•our Adjusted EBITDA was negative
•we had Net Cumulative Funded Accounts of 22.8 million compared to 18.0 million, for year-over-year growth of 27% as we added 7.1 million new funded accounts primarily driven by large customer interest in cryptocurrencies during the second quarter of 2021, and 0.7 million resurrected accounts, partially offset by 3.0 million churned accounts; •we had Monthly Active Users (MAU) of 15.9 million compared to 17.7 million, for a year-over-year decrease of 10%, as we experienced high trading volumes and account sign-ups as well as high market volatility, particularly in certain sectors, during the prior period;
•we had Assets Under Custody (AUC) of
•we had Average Revenues Per User (ARPU) of$53 compared to$137 , for a year-over-year decrease of 62%. The decreases were primarily related to lower transaction-based revenue driven by the current market environment, which had a negative impact on the number of traders and notional trading volumes in all asset classes. For definitions of "Net Cumulative Funded Accounts", "MAU", "AUC" and "ARPU" please see "-Key Performance Metrics." Adjusted EBITDA is a non-GAAP financial measure. For more information about Adjusted EBITDA, including the definition and limitations of such measure, and a reconciliation of net income (loss) to Adjusted EBITDA, please see "-Non-GAAP Financial Measures." 33
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Recent Developments
Pending Acquisition of Ziglu
OnApril 16, 2022 , we entered into a definitive agreement to acquire all outstanding equity of Ziglu, aU.K. -based electronic money institution and crypto-asset firm that allows customers to buy and sell eligible cryptocurrencies, earn yield via its 'Boost' products, pay using a debit card, and move and spend money without fees for approximately$170 million . See Note 14 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information.
Workforce Reduction
Through 2020 and first half of 2021, we went through a period of hyper growth accelerated by several factors including pandemic lockdowns, low interest rates, and fiscal stimulus. From the beginning of 2020 to the end of 2021, we grew net funded accounts from 5.1 million to 22.7 million and revenue from$278 million in 2019 to$1.8 billion in 2021. To meet customer and market demands, we grew our headcount from 700 at the end of 2019 to nearly 3,900 as ofMarch 31, 2022 . This rapid headcount growth led to some duplicate roles and job functions and more layers and complexity than are optimal. As part of our efforts to improve efficiency and operating costs, increase our velocity, and ensure that we are responsive to the changing needs of our customers, we announced a reduction in force onApril 26, 2022 (see Note 14 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information). We also scaled back hiring plans for the remainder of 2022 and we expect headcount at year-end 2022 to be roughly flat compared with the end of 2021, as we continue to grow our workforce at a reduced rate. We will continue to accelerate our product momentum through 2022 and will retain and continue to hire exceptional talent in key roles and provide additional learning and career growth opportunities for our employees.
COVID-19 Update
In the fourth quarter of 2021, we elected to become a "Remote First" company. When this program is fully implemented following the cession of COVID-19 exemptions, a large segment of our employees will have no assigned location or regular in-office requirement, some teams will need to live within a commutable distance to an office location for regulatory and business reasons, and a small segment of our workforce will still need to come into the office. All employees will have access to our offices throughout the country and, as vaccination rates among the population have increased, we have opened our corporate offices to provide all employees with the option of voluntarily returning to an office. The timing of any full return for those employees who will eventually be required to come into the office has not been determined and will be impacted by developments related to the pandemic, such as the severity and transmission rate of the virus and its variants. Following theMarch 2020 onset of the COVID-19 pandemic, we saw substantial growth in our user base, retention, engagement, and trading activity metrics, and over the course of the pandemic we saw periodic all-time highs achieved by the equity markets generally. During this period, market volatility, stay-at-home orders, and increased interest in investing and personal finance, coupled with low interest rates and a positive market environment, especially in theU.S. equity and cryptocurrency markets, helped foster an environment that encouraged an unprecedented number of first-time retail investors to become our users and begin trading on our platform. However, we have seen the growth of our user base in recent periods slow compared to the accelerated growth we experienced in 2020 and the first half of 2021. Additionally, to the extent that government stimulus measures enacted in response to the pandemic contributed to an increase in customer engagement, that benefit may not have continued as those stimulus measures have expired.
The COVID-19 pandemic has resulted, in part, in inefficiencies and delays in our business, operational challenges, additional costs related to business continuity initiatives as our workforce continues to work remotely, and increased vulnerability to cybersecurity attacks or other privacy or data
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security incidents. The extent of the continuing impact of COVID-19 on our business, financial condition, and results of operations will depend largely on future developments, including the duration of the pandemic, actions taken to contain COVID-19 or address its impact, our ability to adapt to the long-term distributed Remote First workforce model we have adopted, the impact on capital and financial markets, and the related impact on the financial circumstances of our customers, all of which are highly uncertain and difficult to predict.
Key Performance Metrics
In addition to the measures presented in our unaudited condensed consolidated
financial statements, we use the following key performance metrics to help us
evaluate our business, identify trends affecting our business, formulate
business plans, and make strategic decisions:
Three Months Ended
March 31,
2021 2022
Net Cumulative Funded Accounts(1) (in millions) 18.0 22.8
Monthly Active Users (MAU)(2) (in millions) 17.7
15.9
Assets Under Custody (AUC)(3) (in billions)$ 80.9 $ 93.1 Average Revenues Per User (ARPU)(4)$ 137 $ 53 ________________ (1)A Robinhood account is designed to provide a user with access to any and all of the products offered on our platform. We define "Net Cumulative Funded Accounts" as New Funded Accounts less Churned Accounts plus Resurrected Accounts (each as defined below). A "New Funded Account" is a Robinhood account into which the account user makes an initial deposit or money or asset transfer, of any amount, during the relevant period. An account is considered "Churned" if it was ever a New Funded Account and its balance (measured as the fair value of assets in the account less any amount due from the user and excluding certain Company-initiated credits) drops to or below zero for at least 45 consecutive calendar days. Negative balances typically result from Fraudulent Deposit Transactions (as defined in Note 4 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information) and, less often, from margin loans. An account is considered "Resurrected" in a stated period if it was a Churned Account as of the end of the immediately preceding period and its balance (excluding certain Company-initiated credits) rises above zero. Examples of credits excluded for purposes of identifying Churned Accounts and Resurrected Accounts are price correction credits, related interest adjustments, and fee adjustments. Three Months Ended March 31, (in millions) 2021 2022 Beginning Net Cumulative Funded Accounts 12.5 22.7 New funded accounts 5.7 0.5 Resurrected accounts 0.4 0.1 Churned accounts (0.6) (0.5) Ending Net Cumulative Funded Accounts 18.0 22.8 (2)We define MAU as the number of Monthly Active Users during a specified calendar month. A "Monthly Active User" is a unique user who makes a debit card transaction, or who transitions between two different screens on a mobile device or loads a page in a web browser while logged into their account, at any point during the relevant month. A user need not satisfy these conditions on a recurring monthly basis or have a Funded Account to be included in MAU. Figures in the table reflect MAU for the last month of each period presented. We utilize MAU to measure how many customers interact with our products and services during a given month. MAU does not measure the frequency or duration of the interaction, but we consider it a useful indicator for engagement. Additionally, MAUs are positively correlated with, but are not indicative of, the performance of revenue and other key performance indicators. (3)We define AUC as the sum of the fair value of all equities, options, cryptocurrency and cash held by users in their accounts, net of receivables from users, as of a stated date or period end on a trade date basis. The following table sets out the components of AUC by type of asset: 35
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Three Months Ended
March 31,
(in billions) 2021 2022
Equities $ 65.1 $ 68.5
Options 2.0 1.1
Cryptocurrencies 11.6 19.7
Cash held by users 7.6 9.2
Receivables from users (5.4) (5.4)
Assets Under Custody (AUC) $ 80.9 $ 93.1
Net Deposits and net market gains drive the change in AUC in any given period.
We define "Net Deposits" as all cash deposits and asset transfers received from
customers, net of reversals, customer cash withdrawals, and other assets
transferred out of our platform (assets transferred in or out include debit card
transactions, ACATS transfers, and custodial crypto wallet transfers) for a
stated period. The following table describes the changes within Assets Under
Custody:
Three Months Ended
March 31,
(in billions) 2021 2022
Beginning AUC $ 63.0 $ 98.0
Net Deposits 10.6 5.7
Net market gains (losses) 7.3 (10.6)
Ending AUC $ 80.9 $ 93.1
(4)We define ARPU as total revenue for a given period divided by the average of
Net Cumulative Funded Accounts on the last day of that period and the last day
of the immediately preceding period. Figures presented above represent
annualized ARPU for each three-month period presented.
Non-GAAP Financial Measures
Adjusted EBITDA
We collect and analyze operating and financial data to evaluate the health of
our business, allocate our resources and assess our performance. In addition to
total net revenues, net income (loss), and other results under GAAP, we utilize
non-GAAP calculations of adjusted earnings before interest, taxes, depreciation,
and amortization ("Adjusted EBITDA"). Adjusted EBITDA is defined as net income
(loss), excluding (i) interest expenses related to credit facilities, (ii)
provision for (benefit from) income taxes, (iii) depreciation and amortization,
(iv) share-based compensation, (v) change in fair value of convertible notes and
warrant liability, (vi) significant legal and tax settlements and reserves, and
(vii) other significant gains, losses, and expenses (such as impairments,
restructuring charges, and business acquisition- or disposition-related
expenses) that we believe are not indicative of our ongoing results. This
non-GAAP financial information is presented for supplemental informational
purposes only, should not be considered a substitute for or superior to
financial information presented in accordance with GAAP, and may be different
from similarly titled non-GAAP measures used by other companies.
The above items are excluded from our Adjusted EBITDA measure because these
items are non-cash in nature, or because the amount and timing of these items
are unpredictable, are not driven by core results of operations, and render
comparisons with prior periods and competitors less meaningful. We believe
Adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our results of operations, as well as providing a
useful measure for period-to-period comparisons of our business performance.
Moreover, Adjusted EBITDA is a key measurement used by our management internally
to make operating decisions, including those related to operating expenses,
evaluate performance, and perform strategic planning and annual budgeting. The
following table presents
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a reconciliation of net income (loss), which is the most directly comparable GAAP measure, to Adjusted EBITDA:
Three Months
Ended
March 31,
(in millions) 2021 2022
Net loss $ (1,445) $ (392)
Add:
Interest expenses related to credit facilities 3 6
Provision for income taxes 12 1
Depreciation and amortization 4 12
EBITDA (non-GAAP) (1,426) (373)
Share-based compensation 9 220
Change in fair value of convertible notes and warrant liability 1,492 -
Significant legal and tax settlements and reserves 40 10
Adjusted EBITDA (non-GAAP) $ 115 $ (143)
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Results of Operations
The following table summarizes our unaudited condensed consolidated statements
of operations data:
Three Months Ended
March 31,
(in millions) 2021 2022
Revenues:
Transaction-based revenues $ 420 $ 218
Net interest revenues 62 55
Other revenues 40 26
Total net revenues 522 299
Operating expenses:(1)
Brokerage and transaction 41 31
Technology and development 117 266
Operations 67 91
Marketing 102 34
General and administrative 137 268
Total operating expenses 464 690
Change in fair value of convertible notes and warrant liability 1,492 -
Other income, net (1) -
Loss before income taxes (1,433) (391)
Provision for income taxes 12 1
Net loss $ (1,445) $ (392)
_______________(1)Includes share-based compensation expense as follows:
Three Months Ended
March 31,
(in millions) 2021 2022
Brokerage and transaction $ - $ 1
Technology and development 1 82
Operations - 4
Marketing - 5
General and administrative 8 128
Total share-based compensation expense $ 9 $ 220
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Comparison of the Three Months Ended
Revenues
Transaction-Based Revenues
Three Months Ended
March 31,
(in millions, except for percentages) 2021 2022 % Change
Transaction-based revenues
Options $ 198 $ 127 (36) %
Cryptocurrencies 88 54 (39) %
Equities 133 36 (73) %
Other 1 1 - %
Total transaction-based revenues $ 420 $ 218 (48) %
Transaction-based revenues as a % of total net revenues:
Options 38% 42%
Cryptocurrencies 17% 18%
Equities 26% 12%
Other -% -%
Total transaction-based revenues 81% 72%
Transaction-based revenues decreased by $202 million primarily driven by the
market environment which had a negative impact on the number of traders and
notional trading volumes in all asset classes. We define "daily average revenue
trades" for any asset class as the total number of revenue generating trades for
such asset class executed during a given period divided by the number of trading
days for such asset class in that period.
Our daily average revenue trades for equities decreased by 65% from 5.1 million
to 1.8 million. The number of users placing equity trades decreased 46% and the
average notional volume traded per trader was down 24%.
Our daily average revenue trades for options decreased by 40% from 1.1 million
to 0.7 million. The number of users placing option trades decreased 44% while
the average number of contracts traded per trader was up 33%.
While cryptocurrencies revenue benefited from a higher rebate rate from crypto
market makers effective in late December 2021 , it was offset by lower trading
volumes. Our daily average revenue trades for cryptocurrencies decreased by 76%
from 1.4 million to 0.3 million. The number of users placing cryptocurrency
trades decreased 61% and the average notional volume traded per trader was down
22%.
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Net Interest Revenues
Three Months Ended
March 31,
(in millions, except for percentages) 2021 2022 % Change
Net interest revenues:
Margin interest $ 28 $ 35 25 %
Securities lending 35 24 (31) %
Interest on segregated cash and securities 1 1 - %
Other interest revenue 1 1 - %
Interest expenses related to credit facilities (3) (6) 100 %
Total net interest revenues $ 62 $ 55 (11) %
Net interest revenues as a % of total net revenues: Margin interest
5% 12%
Securities lending 7% 8%
Interest on segregated cash and securities 1% -%
Other interest revenue -% -%
Interest expenses related to credit facilities (1)% (2)%
Total net interest revenues 12% 18%
Net interest revenues decreased by $7 million primarily due to lower interest
revenues earned through securities lending activities and increased interest
expense related to our revolving credit facilities, partially offset by higher
interest revenue earned on margin borrowings.
Net interest revenues earned from securities lending transactions decreased $11
million mainly driven by lower demand in hard-to-borrow securities. Interest
expense increased $3 million as a result of commitment and unused fees related
to the April 2021 Credit Facility (see Note 8 to our unaudited condensed
consolidated financial statements in this Quarterly Report for further
information). These decreases were partially offset by higher interest revenue
earned on margin borrowings of $7 million due to an increase in both the average
per-user margin balance and the average number of margin borrowers. Average
margin receivables outstanding increased from $4.9 billion due from 218 thousand
average users to $5.9 billion due from 244 thousand average users. Robinhood
users must be Robinhood Gold subscribers in order to enable margin borrowing in
their accounts. The first $1,000 in margin borrowed by each user is not charged
interest. In late March 2022 , we increased our margin rates to 3% from 2.5%, and
will increase the rate to 3.5% in May. We anticipate floating this rate along
with the Federal Rate changes moving forward.
Other Revenues
Three Months Ended
March 31,
(in millions, except for percentages) 2021 2022 % Change
Other revenues $ 40 $ 26 (35) %
Other revenues as a % of total net revenues 7% 9%
Other revenues decreased by$14 million which was substantially all due to a decrease relating to ACATS fees charged to users for facilitating the transfer of their account to another broker-dealer. 40
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Operating Expenses
Three Months Ended
March 31,
(in millions, except for percentages) 2021 2022 % Change
Operating expenses:
Brokerage and transaction $ 41 $ 31 (24) %
Technology and development 117 266 127 %
Operations 67 91 36 %
Marketing 102 34 (67) %
General and administrative 137 268 96 %
Total operating expenses $ 464 $ 690 49 %
Percent of net revenues:
Brokerage and transaction 8 % 10 %
Technology and development 22 % 89 %
Operations 13 % 30 %
Marketing 20 % 11 %
General and administrative 26 % 90 %
Total operating expenses 89 % 230 %
Brokerage and Transaction
Three Months Ended
March 31,
(in millions) 2021 2022 $ Change
Broker-dealer transaction expenses $ 16 $ 9 (44)%
Market data expenses 8 7 (13)%
Employee compensation, benefits, and overhead, excluding share-based compensation
3 5 67%
Cash management transaction expenses 2 2 -%
Share-based compensation - 1 NM
Other 12 7 (42)%
Total $ 41 $ 31 (24)%
Brokerage and transaction costs decreased by $10 million primarily due to
decreases in broker-dealer transaction expenses of $4 million , driven by a
decrease in market price fluctuations that impacted fractional shares
transactions, and $2 million in regulatory fees, as well as a decrease in bank
charges, included in other brokerage and transaction costs, of $5 million as a
result of more favorable pricing from one of our banking counterparties. These
decreases were partially offset by an increase in other employee compensation,
benefits, and overhead of $2 million as our brokerage teams have grown to
support the growth of our user base and platform and an increase in share-based
compensation expense of $1 million as vesting conditions were met upon our IPO
in 2021.
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Technology and Development
Three Months Ended
March 31,
(in millions) 2021 2022 % Change
Employee compensation, benefits, and overhead, excluding
share-based compensation $ 51 $ 102 100 %
Share-based compensation 1 82 NM
Cloud infrastructure services 54 56 4 %
Software and tools 10 21 110 %
Other 1 5 400 %
Total $ 117 $ 266 127 %
Technology and development costs increased by $149 million primarily due to an
increase in share-based compensation expense of $81 million as vesting
conditions were met upon our IPO in 2021 and an increase in other employee
compensation, benefits, and overhead of $51 million as our engineering, data
science, and design teams have grown to support the growth of our user base and
develop new products. Additionally, we experienced an increase of $11 million in
costs for other software services utilized in delivering our products.
Operations
Three Months Ended
March 31,
(in millions) 2021 2022 % Change
Employee compensation, benefits, and overhead,
excluding share-based compensation $ 22 $ 43 95%
Customer experience 16 30 88%
Provision for credit losses and fraud 18 11 (39)%
Share-based compensation - 4 NM
Other 11 3 (73)%
Total $ 67 $ 91 36%
Operations costs increased by $24 million primarily due to an increase in other
employee compensation, benefits, and overhead for customer support and other
operations employees of $21 million as we increased the number of our dedicated
customer support professionals. Additionally, costs related to third-party
customer support vendors increased $14 million as we continued to make
investments to support our larger user base. These increases were partially
offset by a decrease in other operations of $8 million and a decrease in
provision for credit losses and fraud of $7 million primarily related to
Fraudulent Deposit Transactions as the number of accounts making Fraudulent
Deposit Transactions and loss incurred per account both decreased.
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Marketing
Three Months Ended
March 31,
(in millions) 2021 2022 % Change
Employee compensation, benefits, and overhead, excluding
share-based compensation $ 7 $ 11 57 %
Digital marketing 16 6 (63) %
Share-based compensation - 5 NM
Marketing incentives 54 4 (93) %
Creative services 3 3 - %
Brand marketing 11 1 (91) %
Other 11 4 (64) %
Total $ 102 $ 34 (67) %
Included in marketing incentives are costs associated with the Robinhood
Referral Program, which are comprised of the fair value of awards earned in the
current period, changes in estimate of unclaimed awards earned in the current
and prior periods, fair value adjustments of shares held to support the program,
and reversals related to awards that expire unclaimed. The fair value
adjustments of shares held to support the program were immaterial for the
periods presented. The following table summarizes the Robinhood Referral Program
liability activity for the periods indicated:
March 31,
(in millions) 2021 2022
Beginning balance, January 1 $ 1 $ -
Fair value of current period awards 62 4
Changes in estimate of unclaimed awards for current and prior periods
(2) -
Reversals related to unclaimed, expired awards (2) -
Claimed awards (54) (4)
Ending balance, March 31 $ 5 $ -
Marketing costs decreased by $68 million primarily due to a decrease in market
incentives of $50 million , substantially all of which was due to lower costs
associated with the Robinhood Referral Program. We have seen the growth of our
user base in recent periods slow compared to the accelerated growth we
experienced in the first half of 2021. For example, our new funded accounts
decreased by 92% from 5.7 million as of March 31, 2021 to 0.5 million as of
March 31, 2022 .
Additionally, brand marketing and digital marketing decreased by $10 million
each. During the first half of 2021, we invested significantly in marketing
costs to raise brand awareness due to the growth of our business. As we
established our brand, we switched to a more disciplined strategy in our
marketing spending. These decreases were partially offset by an increase in
share-based compensation expense of $5 million as vesting conditions were met
upon our IPO in 2021 and an increase in other employee compensation, benefits,
and overhead of $4 million as we previously increased our marketing personnel to
support the growth of our business.
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General and Administrative
Three Months
Ended
March 31,
(in millions) 2021 2022 % Change
Share-based compensation $ 8 $ 128 NM
Employee compensation, benefits, and overhead, excluding
share-based compensation 34 64 88 %
Legal expenses 30 27 (10) %
Other professional fees 12 16 33 %
Settlements and penalties 42 12 (71) %
Business insurance 2 11 450 %
Other 9 10 11 %
Total $ 137 $ 268 96 %
General and administrative costs increased by $131 million primarily due to an
increase in share-based compensation recognized of $120 million as vesting
conditions were met upon our IPO in 2021, including $84 million related to
executive compensation arrangements (see Note 9 to our unaudited condensed
consolidated financial statements in this Quarterly Report for further
information). Additionally, to support the growth of our business, other
employee compensation, benefits, and overhead also increased by $30 million as
we continued to increase our general and administrative personnel and business
insurance increased by $9 million , which was primarily attributable to
additional costs of being a public company. These increases were partially
offset by a decrease of $30 million in costs associated with legal settlements.
Refer to Note 13 of our unaudited condensed consolidated financial statements in
this Quarterly Report for further information.
Change in Fair Value of Convertible Notes and Warrant Liability
Three Months
Ended
March 31,
(in millions) 2021 2022 $ ChangeChange in fair value of convertible notes and warrant liability
$
1,492 $ -
Change in fair value of convertible notes and warrant liability was due to the mark-to-market adjustment of the convertible notes and warrants we issued inFebruary 2021 . Upon completion of our IPO, the aggregate outstanding principal and accrued interest of the convertible notes converted into Class A common stock and the warrants became equity-classified, which resulted in the warrant liability being reclassified to additional paid-in capital. There will be no additional mark-to-market adjustments related to the convertible notes or warrant liability. See Note 8 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information.
Provision for (Benefit from) Income Taxes
Three Months Ended
March 31,
(in millions) 2021 2022 $ Change
Provision for income taxes $ 12 $ 1 $ (11) Provision for income taxes decreased by
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Liquidity and Capital Resources
Source and Uses of Funds
We expect to use our available cash, cash equivalents, and investments, including potential future borrowings under our revolving lines of credit and potential issuance of new debt or equity, to support and invest in our core business, including investing in new ways to serve our customers, potentially seeking strategic acquisitions to leverage existing capabilities and further build our business, and for general capital needs (including capital requirements imposed by regulators and SROs and cash deposit and collateral requirements under the rules of theDepository Trust Company ("DTC"),NSCC , and theOptions Clearing Corporation ("OCC")). Based on our current level of operations, we believe our available cash, available lines of credit, and cash provided by operations will be adequate to meet our liquidity needs for the next 12 months.
Cash, Cash Equivalents, and Investments
Our cash, cash equivalents, and investments were$6.3 billion and$6.2 billion as ofDecember 31, 2021 andMarch 31, 2022 . Our investment portfolio comprises highly liquid available-for-sale securities, including asset-backed securities, commercial paper, corporate bonds, and government bonds.
Revolving Lines of Credit
As ofMarch 31, 2022 , we had a total of$2.81 billion in committed revolving lines of credit. See Note 8 to our unaudited condensed consolidated financial statements in this Quarterly Report for further information.
The following table summarizes our short- and long-term material cash
requirements as of
Payments Due by Period
Remainder of
(in millions) Total 2022 2023-2024 2025-2026 Thereafter
Operating lease commitments $ 262 $ 26
235 517 455 1
Total $ 1,470 $ 261 $ 588 $ 514 $ 107 (1)Non-cancelable purchase commitments are determined based on the non-cancelable quantities or termination amounts to which we are contractually obligated. They are primarily commitments for cloud infrastructure and data services, business insurance and tenant improvements.
In addition to lease and purchase commitments, we have two committed financing agreements: one with a contractual term of 30 days and a daily minimum commitment of$25 million and another with a contractual term of 21 days with a daily minimum commitment of$35 million . 45
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Cash Flows
The following table summarizes our cash flow activities:
Three Months Ended
March 31,
(in millions) 2021 2022
Cash provided by (used in):
Operating activities $ (1,882) $ 437
Investing activities (11) (34)
Financing activities 3,558 -
Cash provided by and used in operating activities consisted of net loss adjusted
for certain non-cash items including change in fair value of convertible notes
and warrant liability, share-based compensation expense, depreciation and
amortization, provision for credit losses, as well as the effect of changes in
operating assets and liabilities. Net operating assets and liabilities at any
specific point in time are subject to many variables, including variability in
user activity, the timing of cash receipts and payments, and vendor payment
terms.
For the three months ended March 31, 2022 , cash provided by operating activities
was $437 million , primarily due to a net loss of $392 million , adjusted for the
add back of non-cash expenses of $240 million , consisting primarily of
share-based compensation expense of $220 million , depreciation and amortization
of $12 million , and provision for credit losses of $8 million . Additionally,
there was a cash inflow due to changes in operating assets and liabilities of
$589 million , primarily due to a decrease in receivables from users, net, of
$1.4 billion , driven by an decrease in margin borrowing from users and an
increase in payables to users of $673 million driven by an increase in customer
cash held in line with the increase in net deposits, offset by a decrease of
$1.5 billion in collateral held for securities loaned.
For the three months ended March 31, 2021 , cash used in operating activities was
$1.9 billion , partially due to a net loss of $1.4 billion , adjusted for the add
back of non-cash expenses of $1.5 billion consisting primarily of changes in
fair value of convertible notes and warrant liability of $1.5 billion , provision
for credit losses of $16 million , share-based compensation expense of
$9 million , and depreciation and amortization of $4 million . Additionally, the
cash generated from operating activities decreased due to a net outflow from
changes in operating assets and liabilities of $2.0 billion , primarily due to an
increase in receivables from users, net of $2.0 billion driven by an increase in
margin receivables due to the growth in our user base and a decrease in our
margin interest rate.
For the three months ended March 31, 2022 , cash used in investing activities was
$34 million , which primarily consisted of $14 million used for the purchase of
investments, $13 million in purchases of property, software, and equipment and
$8 million in capitalization of internally developed software. For the three
months ended March 31, 2021 cash used in investing activities was $11 million ,
which primarily consisted of $9 million in purchases of property, software and
equipment and $2 million in capitalization of internally developed software.
For the three months ended March 31, 2021 , cash provided by financing activities
was $3.6 billion , which primarily consisted of the proceeds from issuance of
redeemable convertible preferred stock, net of issuance costs of $3.6 billion .
46
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Table of Con tents
Regulatory Capital Requirements
Our broker-dealer subsidiaries (RHF and RHS) are subject to the SEC Uniform Net Capital Rule, administered by theSEC andFINRA , which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirements may fluctuate on a daily basis. RHS and RHF compute net capital under the alternative method as permitted by the SEC Uniform Net Capital Rule.
The tables below summarize the net capital, capital requirements and excess net capital of RHS and RHF as of periods presented:
March 31, 2022
Net Capital in
Required Net Excess of Required
(in millions) Net Capital Capital Net Capital
RHS $ 2,851 $ 107 $ 2,744
RHF $ 142 $ 0.25 $ 142
As of
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingent assets and liabilities on our unaudited condensed consolidated financial statements. We base our estimates on historical experience and other assumptions we believe to be reasonable under the circumstances, which together form the basis for making judgments about the carrying values of assets and liabilities. We regularly assess these estimates; however, actual amounts could differ from those estimates. There have been no material changes to our critical accounting policies and estimates during the three months endedMarch 31, 2022 , as compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our 2021 Form 10-K.
Recent Accounting Pronouncements
See Item 1 of Part I, "Unaudited Financial Statements - Note 2 - Recent Accounting Pronouncements."
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